Newsletter 4th March 2024
Not only is it a new week, but also a new month. Yes, March is finally here and with the prospect of lighter nights and mornings along with the flurry of activity in the garden as the daffodils burst through just in time for Easter at the end of the month, it feels like there is so much to look forward too.
And if you have any interest in Tax you also have the Budget to look forward to on Wednesday 6th, what will the Chancellor have to say and how will it affect you? This could be the last opportunity for the government to tinker with the tax system before the next election unless they call it late and present an Autumn Statement beforehand, all bets are on.
What to expect in this week’s edition –
What will the Chancellor Jeremey Hunt announce this Wednesday?
Did you know there is one rule for them and one rule for us? Some taxpayers get special treatment from HMRC.
Capital Gains Tax, the rules keep changing and what could happen next?
The Two-Tier system
A recent exposé has ignited a debate about fairness and accessibility within the UK's tax system. It has been revealed that high-profile taxpayers, including government officials and high earners, benefit from significantly faster service from HMRC through a dedicated "VIP" helpline called Public Department 1 (PD1). This exclusive service boasts average wait times of under 3 minutes, forming a stark contrast to the over 22-minute wait times faced by the general public on the standard HMRC helpline.
This significant discrepancy has understandably caused widespread frustration and raised concerns about equal access to essential government services. Critics vehemently argue that the existence of the PD1 service creates a two-tier system, potentially hindering the fundamental tenet of fair treatment for all taxpayers regardless of their income or status. While HMRC defends the PD1 service, citing the separate storage of tax records for security reasons, this explanation fails to adequately address the core concerns of unequal access and potential preferential treatment.
Furthermore, HMRC's encouragement to utilize online services as an alternative solution might not be a universally viable option. While it undoubtedly offers a quicker and more convenient option for some, it raises concerns about existing digital literacy and internet access disparities. Not all taxpayers possess the necessary digital skills or reliable internet access, potentially creating another barrier for accessing essential services. This highlights the potential for digital exclusion, further widening the gap between those who can readily access HMRC services and those who struggle to do so.
The existence of the PD1 helpline, coupled with the extended wait times for the standard service, underscores the urgent need for HMRC to address both the immediate issue of unequal access and the long-term goal of ensuring inclusive and efficient service delivery for all taxpayers. This may involve exploring alternative solutions that bridge the digital divide, such as offering more in-person support or implementing a tiered phone system that prioritizes vulnerable or time-sensitive cases. Additionally, investing in increased resources for phone lines and personnel, alongside a reassessment of the criteria and justifications surrounding the PD1 service, could be crucial steps towards achieving a more equitable system. Ultimately, ensuring fair and efficient access to tax services for everyone remains a critical objective for HMRC, and addressing the concerns raised by the PD1's existence is a necessary step in this direction.
Spring Budget Spotlight: Tax Cuts, Tweaks, and the Election Countdown
With the next general election looming, the upcoming Spring Budget, scheduled for March 6th, is set to be the final major fiscal event before voters head to the polls. This puts the spotlight firmly on the Chancellor, who is widely expected to prioritize measures that could potentially win votes. While the government's narrative emphasizes economic growth, this might take a back seat as personal tax cuts take centre stage.
The Green Light for Tax Cuts?
Lower-than-anticipated public borrowing and an economic recovery projected for later in the year could provide some breathing room for the Chancellor to implement further tax cuts. However, the size and scope of these cuts will depend heavily on revisions to the Office for Budget Responsibility's (OBR) economic forecasts. While lower inflation, interest rates, and a stronger growth outlook could pave the way for tax cuts, a potential downgrade in the OBR's productivity growth forecast could cast a shadow on the Chancellor's plans.
Despite this uncertainty, it's unlikely that forecast revisions will completely deter Mr. Hunt from pursuing tax cuts. To meet his primary goal of reducing the debt-to-GDP ratio within five years, he might simply project unspecified spending cuts for the next parliament. However, the Chancellor's primary concern might lie with the potential reactions of the Monetary Policy Committee (MPC) and the financial markets.
Recent dips in mortgage rates and the MPC's signal of potential interest rate cuts later this year could lead the Chancellor to be cautious with implementing expensive tax cuts. He would likely be hesitant to risk rising interest rates, which could undo any popularity gained through tax cuts. Therefore, we can expect a tax-cutting package similar in size to the one announced in the Autumn Statement, but with a stronger focus on reducing the personal tax burden. This approach would create a noticeable impact without triggering drastic reactions from the MPC or spooking the financial markets.
Tax Cuts for Individuals: A Closer Look
Income tax cuts are highly likely, potentially taking the form of increases to the personal allowance, basic rate tax band, or a reduction in the basic rate itself. Alternatively, the Chancellor might follow his previous strategy and further reduce National Insurance (NI) contributions.
An increase in the personal allowance would primarily benefit lower-income earners by reducing the amount of income subject to tax. However, it would offer no benefit to higher earners who are not eligible for this allowance. Conversely, a reduced basic rate or increased basic rate band would provide greater benefits to higher earners. Additionally, any changes to income tax thresholds would likely be reflected in NI thresholds, which have been aligned since April 2022.
Beyond Income Tax: Potential Tweaks and Reforms
While income tax takes centre stage, other areas might also see some adjustments:
Inheritance Tax (IHT): Given the low percentage of UK estates affected by IHT, coupled with the Chancellor's silence on the matter in the Autumn Statement, significant IHT cuts seem unlikely. Instead, the focus might shift towards smaller changes like increased allowances. However, a pledge to reform or even abolish IHT after the election could be made.
Business Taxes: As business tax changes don't directly impact most voters, and with significant capital allowances and R&D tax relief adjustments already implemented last autumn, I anticipate a relatively quiet budget for businesses. While calls for a major corporation tax rate reduction exist, the current focus seems to be on prioritising taxes directly impacting individuals. Nevertheless, updates on the government's investment zones, the OECD's global minimum tax plan, and technical adjustments to existing tax schemes are likely.
Property Taxes: To encourage individuals, particularly first-time buyers, to enter the property market, extensions of Stamp Duty Land Tax (SDLT) relief and financial support are a possibility. Additionally, reforms to SDLT reliefs on specific transactions might be introduced to reduce the scope for misuse, potentially paving the way for future SDLT cuts, although this could also contribute to rising house prices.
Individual Savings Accounts (ISAs): Following the modest simplification reforms announced in the Autumn Statement, the Chancellor might respond to calls for further changes to better meet the needs of savers and investors. This could include adjustments to the Lifetime ISA threshold for first-time property buyers to account for rising house prices and potentially reduce the impact of the associated withdrawal penalty.
Employment Taxes: Outlining the next steps and proposals for simplifying various aspects of employment taxes, including employee share schemes, healthcare benefits, and expense regulations, is anticipated.
High income child benefit charge (HICBC): Acknowledging its unfairness towards single-earner households, the Chancellor may implement changes to the HICBC, which currently assesses taxes based on individual income rather than household income. This could involve a complete overhaul of the system or simply an increase in the income threshold at which the charge applies.
The issue of non-domiciled individuals, also known as "non-doms," may be addressed in the Spring Budget if the Chancellor seeks to raise additional revenue. Non-doms are individuals who have a permanent home outside the UK but reside in the country. They currently benefit from a more favourable tax regime on offshore income and gains compared to regular UK residents.
Given the Labour Party’s proposed review and potential abolition of the non-dom tax regime, if they win the election, the current government might implement "tactical tweaks" to this system. These tweaks could involve increasing the tax rate for non-doms or extending the existing surcharge on non-resident Stamp Duty Land Tax (SDLT) to include commercial properties. However, any changes will need to be carefully balanced to avoid discouraging foreign investment and jeopardising the government's economic growth objectives.
Half the fun of a Budget is the speculation, and then its about what was actually said, I am sure I will have plenty to say next week.
Capital Gains Tax in the UK: A Historical Perspective and Future Considerations
The recent disclosure of Chancellor Rishi Sunak's capital gains tax (CGT) payments has reignited the debate on the appropriate rate for CGT compared to income tax. Let’s take a look at the history of CGT in the UK, offering insights into the evolution of the policy and potential future directions.
From Untaxed Gains to Comprehensive CGT: The Early Years (1960s & 1970s)
Prior to the 1960s, capital gains, unlike income, were not subject to taxation. This created a significant incentive for individuals to "convert" income into gains to avoid higher tax burdens. This practice became particularly prevalent during a period when income tax and surtaxes reached staggering rates of 90%.
The first step towards taxing gains came in 1962, targeting short-term profits on the sale of land and shares held for less than three years. This was followed in 1965 by the introduction of the first comprehensive CGT regime under Labour Chancellor James Callaghan. This regime applied a flat rate of 30% to most taxable gains, with short-term gains held for less than twelve months subject to income tax rates.
Addressing Inflation and Aligning Rates: The 1980s
By the 1980s, high inflation meant individuals were effectively paying tax on purely inflationary increases in asset values rather than "real" gains. Recognising this issue, the Conservative government under Chancellor Nigel Lawson took several measures to address the situation. In 1988, Lawson's budget aimed to simplify CGT and address the unfairness of taxing inflationary gains. He rebased asset values to 1982, eliminating gains before that date, and introduced indexation to account for inflation going forward. Additionally, Lawson saw no justification for maintaining different rates between income and gains, aligning them at the individual's highest marginal income tax rate.
Taper Relief and the Shift to Long-Term Ownership: 1998
Despite addressing inflation, the question of whether short and long-term gains should be taxed the same remained. In 1998, under Chancellor Gordon Brown, a significant policy shift occurred. With inflation low, indexation was frozen, and taper relief was introduced. This relief lessened the amount of taxable gain based on the holding period of the asset, incentivising long-term ownership and encouraging investment.
2008 and Beyond: A Flattened System with Tweaks
Since 2008, governments have primarily focused on refining the system established by Alistair Darling. The flat 18% rate was introduced, and entrepreneurs' relief offered a lower 10% rate for certain business owners. The number of CGT rates has increased slightly, with some link to income levels restored, although effectively remaining flat for higher-rate taxpayers.
Recent Developments and Potential Future Directions
Despite impacting a relatively small number of taxpayers (less than 1% compared to income tax payers), CGT remains a topic of ongoing debate. The record year for CGT disposals in 2021/22, attributed by some to the suggestion of aligning CGT rates with income tax rates, highlights the sensitivity of the issue.
Looking ahead, several key questions remain:
Will indexation be reintroduced to address inflation, particularly after the recent period of higher price increases?
Will the number of CGT rates increase, potentially aligning more closely with income tax bands?
How will the system be further simplified, as recommended by the Office of Tax Simplification?
As history suggests, CGT is a complex and evolving tax, shaped by various factors including economic conditions, political priorities, and the desire for fairness and simplicity. Examining the past can offer valuable insights and guide discussions about the future of this tax policy in the UK
Where is the infographic?
With so much to think about with Budget, the infographic is taking a break for a week or two, don't worry it will be back before you know it, I am aware that many of you have come to enjoy this feature of the NEWSLETTER.
I hope you have enjoyed this edition of my newsletter, and found it both enjoyable and informative, if you have any suggestions or comments then please let me know it is always good to hear from you. In addition to the newsletter, I am also updating the website, so please take a look from time to time to see what is happening.
If I or the Tax Matters team can be of any assistance to you, your family or your friends then please do not hesitate to contact me at 01442 828006 or jreeves@taxmatters.tax
