Comment by Tony Cohen, Tax Partner, Deloitte
In his opening speech, Mr Darling declared his budget as a one
built of core values of 'fairness' and
'opportunity'. The result of the measures announced,
according to the Chancellor, would enable Britain to grow its way
out of recession. So will the Budget provide entrepreneurs with the
opportunity to achieve growth. And is it fair?
Undoubtedly the headline from an entrepreneurs' perspective was
the 10% increase in the income tax rate on earnings of
£150,000 or more from 40% to 50% (and yes, this is a 10%
increase: the 45% rate announced in November's Pre-Budget Rate
was just that: announced, but never implemented). Psychologically
the 50% rate is always considered a bit of barrier as only half of
every £1 earned is actually kept and indeed the scale is
tipped distinctly in HMRC's favour when the impact of the
increase national insurance contributions are taken into account.
It's a big leap to say that of itself it will deter
entrepreneurs from generating income over £150,000 but it
will definitely lead to consideration of how the value created is
realised. The obvious answer to this from a tax perspective is to
plan to ensure that value is realised as a capital gain, the rate
of which remained unchanged at 18%. The traditional exit route for
gains is limited as very few deals are being done in the current
environment. So the message from the Budget must be: invest now to
grow for the future and limit the amount taken out.
As to whether the Budget was a 'fair' one there are a few
ways of looking at this. From a fiscal perspective it was a mixture
of pluses and minuses. On the 'plus' side measures were
announced which would clearly support entrepreneurs and small
businesses:
- 40% first year allowance for capital expenditure incurred in between April 2009 and April 2010
- extension of the loss carry-back from 1 year to 3 years;
- practical support via the top-up credit insurance and deferral of tax liabilities;
- deferral of the 1% increase in the small companies tax rate.
Whilst the sentiment is welcome, the impact in cash terms may be
limited. The maximum benefit of the additional loss carryback is
£14,000 and the value of the 1% deferral over the first
£300,000 is £3,000 - neither of which are sums likely
to change entrepreneurial behaviour. The increase in capital
allowances may have a much bigger financial impact, and could
indeed accelerate some investment decisions, but it is a temporary
increase for one year only.
On the 'minus' side there are increased costs. The increase
in the income tax and national insurance rates as well as the 2p
rise in fuel duty is pretty indiscriminate and affects most
companies in most sectors, entrepreneurs and small businesses
included. From a numbers point of view, then, whether the Budget is
fair is arguable. One thing is clear it is not a big Budget
give-away.
Another way of looking at whether the Budget is 'fair' is
in dealing with the relationship between HMRC and the taxpayer or
'customers' as we are increasingly known. On the one hand
HMRC are publicly encouraging open and honest relationships with
its taxpaying customers, as evidenced by the increasing role of the
Customer Relationship Managers in the forefront of HMRC dealings.
It was always accepted that taxpayers could run their businesses to
minimise tax yet the increasing interchangeability of avoidance and
evasion (one legal, one not) and today's announcement of a
'name and shame' policy for deliberate tax defaulters
suggests that taxpayers and HMRC may now not see eye-to-eye. On the
face of it naming taxpayers who deliberately default HMRC may not
be contentious. The difficulty comes in the definition of
'deliberate' which is applied and which all turns on
whether the HMRC believe a taxpayer has taken reasonable care.
Where reasonable care has not been taken, the implication is that
the default is deliberate. This could apply to 'grey' areas
of legislation, even where the taxpayer has taken professional
advice and the limit for such naming and shaming is set very low at
£25k. This inevitably provokes the question of whether HMRC
deliberately intend to use 'naming and shaming' as part of
the approach for dealing with difficult tax issues?
The overall message coming out of the Budget for entrepreneurs
concentrate on growing the business and plan how to realise the
value generated carefully.
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