Would Two Different Tax Systems within the UK benefit anybody?

30^th May 2014

In a week when the SNP was forced to admit their oil tax numbers were now hopelessly optimistic, I was amused (or is it bemused) to see they are now saying we should be over £1,000 per person better off after about 15 years – if Scotland’s GDP grows faster than rUK because of better government decisions in Scotland.  Really?  Is this not just politicians promising they can do better than other politicians?

The UK Government trumped this by saying we’d be worse off immediately by the same sort of sums.

To be fair, Salmond’s prediction that the costs of the transition to Independent Status might be £250m looked light (the Parliament building alone cost £414m) but what do I know!?.

The point is that all change creates uncertainty and we must be sure this uncertainty is worth it for democracy.  Would it be churlish to suggest that the scant rise in average Glasgow house prices compared with those in England over the last year might be connected with the uncertainties this debate is causing?  Maybe?  Maybe the number of large family homes that have been for sale in Helensburgh for a long time indeed tells a story about what this debate is doing for property market confidence out there.

However, I do think that it is possible we could be better off (financially and morally) in Scotland if we vote YES but only once the transitional agony has passed – expect a lost decade is my guess.  Also, I wonder if we may really need to default our national debt and issue our own currency.  This would destroy confidence and families but in ten years time we might recover stronger.  Are the voters really “up for that” risk?

I’m not sure the current “social justice through independence” campaign themes present much hope of Scotland being a high performance economy even if it may be a more democratic/just one.

Further redistribution of wealth appears to be one of the key “sales features” being sold to the voters in order to vote YES.  45% tax along with 2% employee and 13.8% employer national insurance rates on top income is apparently too low to be fair.  Dennis Canavan was reporting in parliament to some committee recently and I noticed him saying he was confident the majority of Scots wanted the rich to pay more so we could have a fairer redistribution of wealth.  I find it a great pity that this great national debate is being presented as a mechansim by which Scotland can be become a socialist society.  Left or Right wings should not be using the debate for this purpose.  However, Salmond’s timing to have the referendum after four years of Tory rule plays into that strategy nicely.

As a country, we’ve come a long way since Peter Mandelson said Labour was “intensely relaxed about people getting filthy rich”.  This was a tactic-  and it reflected the fact that to become electable across the UK the Labour party vision was modified to promote a vision of a country where those what want to get rich can do so, provided they pay a reasonable amount in tax to help provide welfare, education etc.

I am not sure the left wing in Scotland ever made the transition to this centre ground and the outcome may be quite interesting if we get tax powers here and a left wing Government.  Few people emigrate from the UK to save tax (some do, not many) but I do anticipate Scotland may find it hard to attract the quality of immigrant it wants if top tax rates are increased.  Why would, for example, the finest doctors and bankers (yes, bankers) in the UK want to work in Scotland if our income taxes are higher ?

The Scottish politicians may have correctly picked up on what will swing the vote Yes or No but I am intensely uncomfortable about the debate here being turned into a “Socialist/high tax vs Tory/low tax” type debate.

When Neil Kinnock lost his 1992 election to John Major this wastruly  a watershed moment for Britain.  After that, Labour had to move right and offer Tony Blair and Cool Britannia.  It was socialism for entrepreneurs.  Nothing about the SNP and Labour offerings in Scotland just now appears to me to offer anything positive for business.  The Conservatives had the same problem with Michael Howard – and had to find an electable central ground message.  What scares me is that whether we vote YES or NO, there appears to be no “voice of the centre or right” in the Scottish debate now.  Nothing about helping young businesses, nothing about encouraging enterprise etc.  It’s all about “get rid of the Tory toffs” as far as I can see.

Even more worrying is that even if we vote NO the politicians appear to want to give Holyrood more tax powers.  This might feel democratic but it is hugely unattractive to create tax competition within a single country.  Particularly where the Parliament appears to have no motivation to reduce taxes and appears to me to have a consensus that taxing the rich above current levels would be fair (even if the money isn’t needed) –  is there no upper limit at which a rich person being taxed becomes unfair?  This reflects the classic left wing thinking that the state is better than the individual at organising matters and that your income and assets are not your own but are there for society to remove from you as and when they wish.

So…YES or NO I see headaches ahead.  Salmond has opened “McPandora’s Box” – it’s the debate the Scots never really wanted or thought they’d see happen.    My own idea of making Scotland an autonomous region of Canada appears to be getting little response (stable currency, excellent tax treaties, English speaking democracy, less national debt etc) as does the idea of selling Faslane to Putin.

The Better Together campaign have still (in my view) to haul out their guns and offer something the Scots would rush to vote for.  But maybe they don’t need to?  I listened to Radio Scotland’s phone in yesterday morning in the car (as I drove back from an all too brief jolly to the whisky festival on Jura) and was struck by the caller who said he didn’t see why we’d take a risk and that he knew just now what he had by way of his pension, savings, currency, driving licence, passport, taxes etc – he didn’t see why changing things and I could see his point.

In the car this morning Radio 4 had Stephen Noon from the SNP/YES campaign on.  And he was quick to say that it’s not about whether we’re going to be £1,000 better off or worse off.  And he would say that now that copies of “Scotland’s Future” (with it’s sections on the land of milk and honey ahead as oil turns into cash dripping from every tap in the land) have been reluctantly moved from the “Non-Fiction” to “Fiction” shelf at our local library.

However, Stephen Noon then suggested on air that there was “a clear consensus on having welfare and taxation powers in Scotland”.  With regard only to the taxation comment, I presume he means a political consensus as I don’t hear my clients saying

“Do you know Donald, although I don’t understand my tax return just now, what I’d like is a separate set of tax rules in Scotland too.”

Or

“Why is tax so complicated?  Let’s add to that by having different rules in Scotland”.

The worry with this “consensus” comment is that the Politicians think the people of Scotland want Holyrood to control the tax system.  Whereas, I think that is simply untrue and is being marketed by Scottish Politicians who want some “new toys for the Parliament to play with”.   Between the recent Scotland Act and this political direction of travel, a separate tax system in Scotland seems certain whether we vote YES or NO.  How can this be good for business in Scotland?

This thought was fermenting in my head (over a whisky) when I spotted an article in my Tax Journal (it’s the kind of publication usually only seen in public if selected for the “Have I Got News For You” show for their funny captions at the end).  A partner at Slaughter and May has written an interesting piece entitled “The tax impact of Scottish Independence”.  Copyright probably prevents me from circulating it but if you are doing business “cross border” within the UK….here’s a few comments on what YES may mean….

1. If your business is in both countries you’ll have to consider your structure and how you arrive at an apportionment of profits between your rUK and your Scottish permanent establishments.  Before Independence Day you’ll have to think about whether you need to move businesses around within a group structure to try to get your business tax resident and registered in the right country. For example a rUK registered company with all their activity in Scotland may end up having obligations in both countries, whereas a Scottish registered one may lose their rUK requirements.

1. A Double Tax Treaty will have to be drawn up quickly – to clarify when rUK and Scotland get taxing rights in “tie breaker” circumstances where a company is dual resident.  It would also have to cover withholding taxes.  I guess the treaty will be drawn up quite quickly as part of the negotiations on currency and national debt.

1. Scotland will also need tax treaties with other countries.  At the moment the Vienna Convention on the Succession of States apparently allows UK treaties to be inherited by Scotland.  Or, rather, should but for the fact the UK didn’t sign up to the convention.  That’s worrying as the US, for example, has UK treaty provisions that it hasn’t given other states and one wonders if some countries might see this as the point where favourable historic arrangements can be removed to Scotland’s detriment.

1. As a separate nation, corporate bodies with group structures may find their ability to offset losses against profits cross-border restricted.

1. VAT – for me this is the big one – as a separate state we will all get new Scottish VAT returns but many businesses will also have an rUK Vat return by virtue of sales in that country.   VAT groups would need to be disbanded or Scottish companies removed at least.  The VAT aspects of a separate state will create a practical barrier to trade that doesn’t exist just now.  For larger businesses this is an administrative hassle.  For smaller businesses who sell around the UK it is a considerable inconvenience and may put English companies off doing business  with Scots on equivalent terms.

If you’re still with me, I thank you.  I think the other interesting aspect is the “General Anti-Abuse Rule”.  After much consultation the UK introduced an anti-abuse rule that has, broadly, finally closed down a lot of very aggressive tax planning.  The abuse rule has a double reasonableness test-  which says (my words) – “would a reasonable person think it was a reasonable thing to do” – if the answer is no then your scheme fails.  In Scotland, we now have separate Landfill and Stamp Duty taxes (called Land and Buildings Transaction Tax) and the LBTT has new Scottish rules for avoidance that remove the double reasonableness test in favour of a rather wider “anti-avoidance” rule.  I know you’re thinking avoidance is abuse but in truth avoiding tax was and is legal and remains legal provided it isn’t an abuse of law.  However, the Scottish provision allows tax planning to fall as avoidance if it is “not a reasonable course in relation to the tax provisions”.  What irks me here is that the UK anti-abuse rule was controversial and was allowed to pass into law specifically because it only sets out to stop abusive arrangements.  The Scottish version which is being introduced just now, will apply to LBTT and the Landfill taxes (devolved taxes) but gives a worrying insight into the casual disregard Scottish politicians have for sensible law (in my opinion) as it appears they’d rather have tax collected based on a very subjective measure of what is “reasonable” rather than based on the objective use of law, albeit with a fall back power to stop abuse.  So, if we get more tax powers in Holyrood expect a more “liberal” use of tax avoidance rules by our lovely new “Revenue Scotland” than the charming old “HMRC”.  Out with Moira Stewart on the polite reminder adverts and in with 2 chaps in dark suits and a much more threatening demeanour.  “Tax doesn’t have to be taxing” will be replaced with “Gies yer cash right noo” ?

So, all of this is very depressing and some readers may feel that this is some kind of NO vote campaign statement.  It’s not.  The reality we face is that the politicians on both sides are talking about more devolution of taxation powers even if we vote NO.

If we get a NO vote we get one country with two tax systems.  If we get a YES vote we get two countries with two tax systems.  Neither sounds much fun.

As I sat in Jura with a dram I wondered what will NOT change if we vote YES or NO…..  One of them must surely be the taste of a smooth 16 year old Jura malt, best enjoyed with the sun glistening on the water as it melts over the Paps of Jura behind you on a perfect summer evening.

As ever, these blogs are the personal views and comments prepared by Donald Parbrook and do not represent the view of the firm, the directors or the staff etc.

30^th May 2014

 There are a number of assets that you can sell at a profit without paying capital gains tax (CGT) on the sale. They include:

• Any car that is owned personally, and not by a business.

• Personal possessions worth up to £6,000 each. For example jewellery, paintings or antiques.

• Stocks and shares you hold in tax-free investment savings accounts, such as ISAs and PEPs.

• UK Government or 'gilt-edged' securities, for example, National Savings Certificates, Premium Bonds and loan stock issued by the Treasury.

• Betting, lottery or pools winnings.

• Personal injury compensation, and

• Foreign currency you bought for your own or your family's personal use outside the UK.

Of course, if you make a loss selling any of the above, the losses would not be available to set off against other gains for CGT purposes.

There are also certain reliefs that you can claim to mitigate or defer CGT. These include:

• Business Asset Roll-Over Relief – This applies when you dispose of some types of business asset, which you intend to replace. You may be able to 'roll-over' or postpone the payment of any CGT that would normally be due.

• Incorporation Relief – If you incorporate your business, that is, you transfer your business to a company CGT may not be due at that time.

• Gifts Hold-Over Relief – You may be able to get this relief if you give away a business asset. You can postpone all or part of your gain until the asset is sold or disposed of by the person you gave it to.

• Disincorporation Relief – When a business is transferred from a limited company to the shareholders, it is known as disincorporation. The shareholders continue the business in an unincorporated form – as a partnership or sole trader.

If you are thinking of selling assets that you are concerned may result in a tax charge please contact us for an opinion. Often there are planning opportunities that can be legitimately employed. The key is to plan the transaction carefully to maximise use of reliefs available.

HMRC have had recent successes in the courts that have neutralised tax schemes utilising charity tax reliefs. Here’s what they have to say on the GOV.uk website:

HM Revenue and Customs (HMRC) successfully challenged the tax avoidance scheme used by Nicholas Green and designed by Afortis Limited as part of an ongoing crackdown on charitable tax relief abuse. The First-tier Tribunal ruling and its impact on similar schemes could make sure over £35 million of tax is paid.

Under the scheme, shares were listed on the Channel Islands Stock Exchange at a value significantly more than their real worth. The shares were then gifted to charity at the inflated value. The scheme was designed to allow Mr Green to claim tax relief on the amount that the shares had been listed for, rather than on the much lower amount that the shares were worth.

The tribunal ruled that the relief claimed should be reduced significantly from that claimed by those using the scheme.

This latest decision follows HMRC’s defeat of another scheme using charitable reliefs, promoted by NT Advisors, at a tax tribunal last week.

Nicky Morgan, Financial Secretary to the Treasury, said:

“The government wants to encourage more people to give to charity and has provided tax relief to incentivise this, but we will not tolerate abuse of the system. This case is further evidence of HMRC’s tough action to tackle tax avoidance schemes that seek to abuse charitable giving tax reliefs.

“Taxpayers entering into these arrangements are not only damaging their own reputations, they are harming the reputations of charities that may not be aware they are being used to avoid tax. Anyone thinking of getting involved in a tax avoidance scheme does so at their risk and should know that HMRC will pursue them in collecting the tax that is due.”

Institute for Fiscal Studies director, Paul Johnson, recently spoke at the annual Chartered Tax Advisor Address. He pointed out a number of the unnecessary complications and policies that have left the UK tax system more complex and less efficient.

 “For example:

• There is a basic rate of income tax of 20%, a higher rate of 40% and a top rate now of 45%. What is less well known is that the last government introduced a rate of 60% on a band of income starting at £100,000. This government has maintained it and effectively increased its range considerably. There is now a 60% rate of income tax on income between £100,000 and £121,000 (where it drops back to 40%). It’s hard to make much sense of that.
• Several elements of the income tax system no longer adjust with inflation. The point at which the 45p rate becomes payable, and indeed the point at which the 60p rate becomes payable, is fixed in cash terms and has already fallen by more than 12% relative to the Consumer Prices Index since its introduction. More people will gradually be pulled into these higher rates. There is apparently no plan to stop this.
• This government has accelerated a trend overseen by recent governments which has fundamentally altered the nature of our system of income tax, namely a continued increase in the number of higher rate taxpayers. Numbers have risen from less than 2 million in 1990 to nearly 4 million in 2007 and well over 5 million by 2015. The problem is not necessarily so much the fact of the change – there is a case for, and a case against, such a system – but the fact that this fundamental change to our tax system, which appears to have the support of the three main political parties, has never been announced or properly debated.
• Governments of all stripes have continually cut income tax whilst increasing National Insurance Contributions (NICs) – a tax on earned income. The only reason for this is that income tax seems to be more salient and therefore increases to NIC rates are politically easier.
• The last government and this one raised rates of Stamp Duty Land Tax time and time again. This is one of the worst designed and most damaging of all taxes, yet revenues from it are due to hit £15 billion within just a few years. At the extreme a £1 increase in sale price can now trigger an additional £40,000 tax bill. The tax helps to gum up the entire property market.”

Will any of these comments affect future tax policy? We shall have to wait and see.

Consider this case study:

Bill Smith, a self-employed electrician, purchased a brand new van 15 March 2014 for £18,000. Due to a downturn in the local economy his trading profits for the year to 31 March 2014 were just £9,400. Fortunately, he had secured a number of regular contracts for the following year that should net at least £30,000 in the trading year to 31 March 2015, however, he would be required to travel and hence the purchase of the new van.

Towards the end of June 2014 Bill took his books to his accountant to work out his tax position for 2013-14. In July 2014 Bill was called in for a meeting.

His accountant informed him that his adjusted taxable profits for 2013-14 were £10,400. His accountant also informed him that he could claim a reduced Annual Investment Allowance for the purchase of the van of £1,000 that would clear any tax liability for the year.

Bill was feeling good, no tax to pay. Then, the bad news…

As the initial claim for the van had been made in 2013-14 (due to purchase during March 2014) the balance not written off for tax purposes (£18,000 – £1,000) £17,000 would only be available in later tax years for an 18% writing down allowance. So for the tax year 2014-15 Bill could claim (£17,000 x 18%) £3,060 as a reduction of his profits for that year. Based on estimated profits of £30,000 this would produce a tax bill of approximately £3,400.

Then more bad news, Bill was advised that if he’d delayed the purchase of the van for three weeks, until after 5 April 2014, he could have written off the entire purchase price of the new van against his profits for 2014-15 and reduced his tax bill for that year to £400 instead of £3,400. With no claim for the van in the earlier tax year, his tax bill for 2013-14 would have been £200 and £400 for 2014-15. In total a cash flow saving of £2,800 (£3,400-£200-£400).

The moral of the story is – planning is important.

If you are considering any significant change in your business activities talk it over with us BEFORE you under take the change. The old cliché is supremely relevant: there really is no point in closing the stable door after the horse has bolted.