Time To Break The Silence

1,411 views

Published on

It is unacceptable that the public should be expected to wait for an election campaign before a debate around tax levels.
This report issued by BDO Stoy Hayward calls for greater clarity over the tax policies of the main political parties. It urges that, should it become inevitable that there will be a need for tax increases, in tandem with spending cuts, due to the ongoing size of the national deficit, now is the time for the main political parties to break the silence over where tax increases might be – and comes in the same week that Alistair Darling has said there should be more openness over potential spending cuts.

  • Be the first to comment

  • Be the first to like this

Time To Break The Silence

  1. 1. Autumn 2009 Time to break the silence? Assessing the tax options available to help rebuild the UK Government’s fiscal policy
  2. 2. Contents: 02 Assessing the tax options available to help rebuild the UK Government's fiscal finances 04 The worst options 05 Reading between the lines – political choices, policies and tax 08 Finding the elusive balance 09 Appendix
  3. 3. Time to break the silence? 01 Assessing the tax policy options available Preface Hard decisions will need to be made about the best ways to address the scale of the Government’s £175bn fiscal deficit. All the political parties are – or should be – more than aware of this.We believe that the public deserves to be fully engaged in the process of debating the key taxation priorities well before the election is called. The electorate is becoming increasingly alive to the fact that there will be both cuts in public spending and increases in taxation. However, voters need to have a clear idea about the level of pain they are expected to endure and where exactly it is going to hurt. We have identified a number of areas of tax policy where the three main parties could raise the additional £25bn a year, which a prudent estimate suggests is now necessary to rebuild national finances. It is important to stress, of course, that none of these are, as yet, the stated policies of any of the three major parties. We believe that the onus is now on all three parties to share their projected tax policies – it is time to break the silence. Stephen Herring Senior Tax Partner
  4. 4. 02 Time to break the silence? Assessing the tax policy options available Assessing the tax options available to help rebuild the UK Government’s fiscal finances The 2009 Budget revealed that the fiscal deficit for a single year return the Government’s finances to a more sustainable footing had reached an alarming £175bn with no prospect of significant is urgently needed. A prudent estimate suggests that an reduction in the next two years.The ensuing political debate additional £25bn of tax revenue could well be required to help has initially focused on the inevitability of cuts in public address the deficit and place the UK’s public finances on a path spending that will be needed to address such a large shortfall. to long term sustainability and ultimate balance. However, a less openly discussed painful truth is that there will, almost without a doubt, be a need for some taxes to rise – at The recent deterioration in tax collections least in the medium term. Political debate about which taxes as the impact of the credit quake works its these will be, and at what levels they will be imposed, is remarkable by its absence.The three major political parties are way through to businesses, employees and understandably reticent to provide details of their proposed tax the consumer, is highlighted in Government increases. However, while no politician is keen to discuss statistics (Table 2) demonstrating the taxation (unless popular tax cuts are being proffered), a debate dramatic falls in tax collections in the first about the contribution that increased taxes will make to helping half of the calendar year. Table 1 – The scale of the Government deficit Source – HM Treasury “Budget 2009 Building Britain’s future”, April 2009. Actual 2007/08; Estimate 2008/09; Projections 2009/10 and 2010/11 800 700 2007/08 600 2008/09 500 2009/10 400 £bn 300 2010/11 200 100 0 -100 -200 -300 Government Spending Tax Receipts Deficit
  5. 5. Time to break the silence? 03 Assessing the tax policy options available Table 2 – Tax collections from largest Uncomfortable truths Analysis of the public pronouncements from the major parties taxes are falling (All figures £bn) (Note 1) and reading between the lines of other areas of their policies, suggests that there are some common areas of tax policy that TAX 2006(H1) 2007(H1) 2008(H1) % (Falls) 2009(H1) all may agree will receive relatively little challenge politically and [2008(H1) to will raise useful tax revenues without crushing the fragile tips of 2009(H1)] the ‘green shoots’ of economic recovery.These measures which all three political parties might consider ‘acceptable’ tax rises Income tax 76.0 81.3 88.7 (6.5) 82.9 include leaving personal allowances to lag behind inflation, Corporation tax 21.1 18.5 21.3 (25.4) 15.9 increasing alcohol and tobacco duties at a rate above inflation, VAT (note 2) 36.3 39.6 39.9 (15.5) 33.7 increasing fuel and road duties by an inflation-exceeding amount and increasing insurance premium tax by four per cent. National Insurance Contributions 45.9 49.7 51.0 (3.5) 49.2 Notes 1. Source for all figures is Office for National Statistics “Statistical Bulletin; Public Sector Finances” for June 2009 published 21st July 2009. Table 3 – The tax rises all three parties might 2. Includes effect of temporary reduction in VAT standard rate from 17.5% to 15% in consider acceptable December 2008. Source – HM Treasury “Tax ready reckoner and tax reliefs” November 2008 • Do not increase income tax allowances in line £5bn The art of the possible? with inflation • Increase alcohol and tobacco duties by £1bn The discussion of tax policy typically takes place in at least two 12 per cent above inflation related but distinct realms: the economic and the political. There have been a number of tax measures proposed or • Increase fuel and road duties by 3 per cent £1bn enacted in recent years that illustrate the tension between above inflation these two perspectives. Politicians are acutely sensitive to how their policies are perceived.The Finance Act 2009 increase in • Increase insurance premium tax by 4 per cent £2bn income tax to 50 per cent, from 2010/11, for those earning over £150,000 or more, may secure significant and controversial coverage from the media, but in economic terms, Total increases predicted for all parties £9bn it barely registers with regard to the extra revenue it will raise. In fact, history suggests that taxing high earners at a higher rate can, counter intuitively, lead to a decline in the tax revenues Using HM Treasury’s data collected in the Government’s “Tax collected from them.This is because the incentive at the margin Ready Reckoner and Tax Reliefs (November 2008)” publication, for those taxpayers is to arrange their affairs so that they applying these measures would generate an annual revenue sidestep the impact of higher tax rates. Other measures may increase of £9bn. The more interesting – and much more be designed to appeal to ‘ordinary voters’ – such as the difficult – question is where additional tax increases could be temporary reduction in VAT from 17.5 per cent to 15 per cent applied that would produce an additional £16bn, making a total but have had little impact on actual economic behaviour £25bn in additional taxes that a prudent analysis suggests may through increased consumer spending. be required to help address and reduce the budget deficit.
  6. 6. 04 Time to break the silence? Assessing the tax policy options available The worst options There are particular areas that we consider must be wholly out illustrated in the table below. Even substantial increases in the of bounds to all three of the major parties. While all tax rises rates of inheritance tax, capital gains tax and stamp duties may be regrettable, some are simply out of the question for could not go far towards achieving any major reduction of the either economic or political reasons. deficit, as their prospective yields are both very low and will continue to be severely depressed for years to come by the The economic impact of some tax increases could be severe. impact of the credit crunch. For example, raising the level of UK corporation tax, already among the highest rates imposed by an EU Member State, Regardless of political persuasion, future Chancellors may feel would undoubtedly inflict significant damage upon the UK under pressure to tax the more wealthy taxpayers. However economy, damaging its prospects for foreign inward investment the recent increase in income tax to 50 per cent for those and diminishing the ability of UK businesses to compete. In earning more that £150,000, for example, will result in less much the same way, an increase in employers’ national than £2bn in extra revenue, even according to the Treasury’s insurance could be seen as a tax on jobs. Given the very own forecasts (our estimates would be much lower due to significant and potentially persistent increase in unemployment behavioural changes by entrepreneurial companies).The arising from the economic downturn, this is unlikely to be perception is that this change is driven more by politics than politically or, more importantly, economically sensible unless and economics. Restricting future increases to target the wealthiest until it can be seen that unemployment is reducing. cannot raise significant amounts and would also have damaging macro-economic impacts.The wealthy targeted by such On the other hand some superficially more politically increases will inevitably seek ways to mitigate the impact of acceptable tax increases simply would not make a noticeable such tax increases through planning and behavioural changes dent in the £175bn deficit. Even before the credit crisis, certain that may well lead to a decline in economic activity which high profile taxes raised a very small proportion of revenues as generates sustainable tax receipts. Table 4 – The amounts raised by key taxes Source – HM Treasury “Budget 2009 Building Britain’s future”, April 2009. Actual 2007/08; Estimate 2008/09; Projections 2009/10 160 140 2007/08 2008/09 120 2009/10 100 £bn 80 60 40 20 0 Income tax National insurance VAT Corporation tax Capital gains tax Inheritance tax Stamp duties
  7. 7. Time to break the silence? 05 Assessing the tax policy options available Reading between the lines – political choices, policies and tax Given these challenges, what are some of the choices that the three main parties might consider? Our analysis of each political party’s stated policies, political priorities and past history suggest a number of areas of which they may consider raising current levels of tax. Of course, it is important to stress that none of these are stated party policy – indeed, perhaps unsurprisingly, they have said little on this matter. A summary of our analysis is set out in the table below: Table 5 – Potential options aligned to party priorities and preferences Sources – HM Treasury “Tax ready reckoner and tax reliefs”, November 2008. HM Treasury “Budget 2009 Building Britain’s future”, April 2009. Estimate 2008/09; Projections 2009/10. Labour Conservatives Liberal Democrats Abolish all higher rate Raise VAT by 2.5% £12bn Apply CGT at 10% income tax relief on on principal private pension contributions £6bn residence £3bn Apply full VAT to books and magazines £2bn Raise NIC by 1% Charge full VAT rate for employers on domestic fuel £3bn and employees £10bn Increase VAT on domestic fuel from 5% to 9% £1bn Increase green taxes by 25% over inflation £1bn Increase green taxes by 25% over inflation £1bn Reduce capital allowances by 25% £6bn Abolish relief for savings and investment £3bn Labour total £16bn Conservative total £16bn Liberal Democrat total £16bn
  8. 8. 06 Time to break the silence? Assessing the tax policy options available Labour Conservatives Labour’s likely intentions should be easier to predict as it has The Conservative Party has already expressed its concern set out its fiscal priorities in the 2009 Budget Report. We about what it believes to be the damagingly high rate of consider, however, that it is inevitable that the figures already corporation tax when compared to the UK’s European and announced by the Treasury will have to be supplemented international competitors. It is not unreasonable to infer that with additional and far reaching tax raising measures for the they would view many other increases in direct taxation in next Parliament. much the same way. The Chancellor has already introduced restrictions on the If previous behaviour is a guide to any pension contributions tax relief available to taxpayers potential future steps they make take, earning in excess of £150,000 but this is only estimated to raise an additional £0.2bn. Abolishing the relief on pensions then indirect taxes are a strong candidate contributions for all taxpayers would see this increase to for a potential Conservative Government’s a much more substantial £20bn. However political taxation agenda. considerations would almost certainly prevail, meaning that a more realistic restriction could be applied only to The standard rate of VAT was increased by almost higher-rate taxpayers (ie those earning £44,000 and above) ten percentage points (from 8 per cent to 17.5 per cent) which would raise £6bn. under the previous Conservative administrations. An increase of 2.5 percentage points by a future Chancellor would not seem out of the question. Indeed, a VAT rate of 20 per cent would be comparable to many of the UK’s Another well-tried instrument in the European neighbours and would raise an additional £12bn. Labour tax repertoire has been National Insurance increases, applied to employees Other possible areas in the VAT area might include the full and employers. Raising contributions for imposition of VAT on books and magazines but this and both by one per cent would generate an similar reforms would inevitably be more controversial. The Conservatives have given prominence to their additional £10bn. The combined impact of both measures could realise a total commitment to introducing measures aimed at cutting of £16bn in additional revenue. greenhouse gas emissions.There are a number of existing green taxes and levies including air passenger duty, landfill tax, the climate change levy and the aggregates levy. It is reasonable to assume that a Conservative administration would fulfil their stated commitment by increasing those green taxes by, perhaps, 25 per cent above the rate of inflation. A more politically controversial step, but one that would have a green rationale, would be an increase in the reduced rate of VAT payable on domestic fuel bills.These are currently set at five per cent. Increasing them to nine per cent would yield an additional £1bn in revenue.
  9. 9. Time to break the silence? 07 Assessing the tax policy options available Liberal Democrats The Liberal Democrats’ policies and public statements on various aspects of government policy suggest two particular avenues for their possible future tax policies.The first of these, and certainly the most politically controversial, would be the possible reduction or even abolition of the capital gains tax exemption applying to the sale of principle private residences.The party’s finance spokesman,Vince Cable, has been highly critical of what he characterises as the persistent reliance on asset bubbles in the housing market to boost the economy and tax revenues. It does not stretch credulity too far to suggest that a partial restriction on principal private residence relief may therefore be a possibility for a Liberal Democrat administration. Doing so could yield an extra £3bn in revenue. A second major policy area that seems likely to drive Liberal Democrats’ tax policies is the environment.They have arguably made the boldest claims about their intentions to introduce measures to address climate change, green taxation and encourage green living. We infer from the boldness of their statements that they would be willing to make bold changes in the tax arena on this. One way could be to apply the standard rate of VAT on domestic fuel, as well as increase green taxes by at least 25 per cent above the rate of inflation.Taken together, these measures would result in an increase of £4bn. The Liberal Democrats are also likely to look for additional tax rises by restricting reliefs that favour the affluent and business owners as opposed to less affluent families. This could mean the abolition of a wide range of the reliefs currently applying to various investment incentives – ISAs, VCTs, EIS, SIPs, EMIs, etc – and, possibly, a reduction in the capital allowances available to businesses for their capital expenditure.
  10. 10. 08 Time to break the silence? Assessing the tax policy options available Finding the elusive balance There is no doubt that the UK faces an unprecedented and bleak fiscal outlook over the next few years. Hard decisions will need to be made about the best ways to address the scale of deficit and return Government finances to balance or, to an acceptable medium term deficit at least. All the political parties are more than aware of this.The electorate is becoming increasingly alive to the fact that there will be both cuts in public spending and increases in taxation. However, for voters to make informed decisions about the level of pain they are expected to endure and where exactly it is going to hurt, they need to have a clear idea of the choices that each party is prepared to make and the impact those choices will have on the economy generally, as well as their own personal finances. It is beyond the remit of this paper to discuss the political fall-out that may arise from a failure to conduct an intelligent and ‘grown-up’ debate about the harsh choices ahead. However a failure to communicate and debate these key issues transparently will only generate ill-will towards the political parties.We believe that the public deserves to be fully engaged in the process of debating the key taxation priorities and choosing between the tough choices that undoubtedly lie ahead. Call for tax policy honesty… now! Assuming, as we do, that the political parties say that we have made incorrect inferences about what tax increases they might have in mind, the onus is on all three parties to share their tax policy alternatives with the electorate well before the election is called.Three weeks in the run up to an election is not enough to debate the complex tax options and make properly informed decisions.
  11. 11. 09 Appendix The appendix contains all sources used, and reproduced below is an extract from one of the sources (1) Office for National Statistics “Statistical Bulletin; Public Sector Finances” for June 2009 published 21st July 2009. (2) HM Treasury “Tax ready reckoner and tax reliefs”, November 2008. (3) HM Treasury “Budget 2009 Building Britain’s future”, April 2009. Extracts from "Tax ready reckoner and tax reliefs", November 2008. Table 5: Direct effects of illustrative changes in other direct taxes and national insurance contributions £m National insurance contributions 2009-10 2010-11 2011-12 Rates Change Class 1 employee main rate by 1 percent pt 3,900 4,100 4,300 Change Class 1 employee additional rate by 1 percent pt 950 1,000 1,100 Change Class 1 employer by 1 percentage point 4,950 5,200 5,500 Change Class 2 rate by £1 per week 155 165 170 Change Class 4 main rate by 1 percentage point 340 350 365 Change Class 4 additional rate by 1 percentage point 180 190 205 Table 6: Direct effects of illustrative changes in indirect tax rates £m VAT 2009-10 2010-11 2011-12 VAT: change reduced rate by 1 percentage point 250 260 270 VAT: change standard rate by 1 percentage point 4,600 4,800 5,000
  12. 12. About BDO Stoy Hayward BDO Stoy Hayward is the UK Member Firm of BDO International, the world’s fifth largest accountancy network, with more than 600 offices in over 100 countries. How we can help you If you would like further information about this publication or our wide range of services please contact: Stephen Herring Senior Tax Partner 020 7893 2437 stephen.herring@bdo.co.uk Paul Eagland Head of Audit and Tax 020 7893 2435 paul.eagland@bdo.co.uk www.bdo.co.uk ‘Audit Team of the Year’ 2008 ‘Tax Team of the Year’ 2008 ‘Corporate Finance Deal of the Year’ 2008 *Including exclusive alliances of BDO Member Firms. BDO Stoy Hayward LLP operates across the UK with over 3,000 partners and staff. BDO Stoy Hayward LLP is a UK limited liability partnership and the UK Member Firm of BDO International. BDO international is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V., incorporated in The Netherlands, with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located. In the UK the Belfast Firm is operated by a separate Partnership known as BDO Stoy Hayward - Belfast. BDO Stoy Hayward LLP and BDO Stoy Hayward - Belfast are both authorised and regulated by the Financial Services Authority to conduct investment business. BDO Stoy Hayward LLP is the Data Controller for any personal data that it holds about you. We may disclose your information, under a confidentiality agreement, to a Data Processor (Shamrock Marketing Ltd). To correct your personal details or if you do not wish us to provide you with information that we believe may be of interest to you, please call Beverley Keery on 020 7893 2164 or email beverley.keery@bdo.co.uk Whilst every care has been taken to ensure the accuracy of this information at the date of publication, the information is intended for general guidance only. Please call us if you would like specific advice on any matter. Copyright © August 2009. BDO Stoy Hayward LLP. All rights reserved. This document is printed on 9lives 80, a paper containing 80 per cent recycled fibre and 20 per cent virgin Totally Chlorine Free (TCF) fibre sourced from sustainable forests. 9lives APPR 80 is produced by an ISO 14001 accredited supplier. NAPM O VED EC D YCLE R

×