General election: the party’s over
Once the celebrations die down over winning the general election, the victor will soon find that the trouble stored up in the UK economy could result in one massive hangover.
The general election should (with any luck) sort out who will be taking up the reigns of power for the next few years. But, for all the spectacle and ceremony, one thing remains constant: the gaping hole in the UK’s finances and widespread unhappiness with our tax system.
Whichever party takes on these responsibilities will have to tread carefully in order to avoid nasty clashes with advisers and businesses while attempting to plug this hole.
Looking at the obvious changes to the tax landscape that will be required and the potential for further political uncertainty, it’s easy to see how such arguments could flare up.
Francesca Lagerberg head of tax at Grant Thornton says: “Clients and advisers want to know exactly how the land lies, and what the timeframe for changes are. It’s all about consistency and knowing where you’re going. If you have a hung parliament, who’s going to drive this change?”
On the ground, one of the most concerning issues is the fate of the taxman as public spending cuts are pushed through.
“The big one for us is that whatever political party is in place there needs to be sufficient quantity and quality of people in the government agencies for us to co-ordinate with,” says Lagerberg. “One of the biggest changes going through is what’s happening at HMRC. They are being asked to do a lot more with fewer people, which will put a huge demand on its resources. That would be a massive worry." “
Leslie Strathie, HMRC’s chief executive, says the next financial year is set to be a tough one for the department as it continues to respond to changing demands impacting the way the taxman collects revenue, while also making the payments people are entitled to. “I am confident we will rise to these challenges as we continue to focus on closing the tax gap.
Although we still need to reduce the size of our workforce, I want our people to feel that HMRC is an exciting place to work,” says Strathie.
The chief executive also says that while HMRC has a talented and hard-working group of staff who meet these challenges head on, there is still a clear need to up their game.
“As we become smaller, we need a more highly-skilled workforce if we are to deliver what is expected of us by government and our customers,” she says HMRC has been forced to provide an olive branch to businesses by letting them put off the payment of tax bills currently – to the tune of £5bn – but businesses of all sizes, from the sole traders to the multinational giants continue to suffer. Lingering problems have still not been resolved. If anything, the financial crisis just aggravated weeping sores already plaguing companies.
Recent research shows that during the second half of 2009, 28% of business owners were forced to approach friends, relatives and company directors to provide funding for their business. A further 8% meanwhile, found themselves having to turn to their own personal credit cards to finance their business.
Martin Williams, managing director of credit referencing agency Graydon UK, believes the recession has highlighted the vital need for additional sources of funding to be made available for established small and medium-sized businesses. “It beggars belief that, in a developed economy, over a third of business owners have had to take on personal financial risk because of a shortage of alternatives to bank funding. This is proof that the current system cannot be relied upon to do its job during times of economic stress.”
At the global level, countries are still mulling plans to hit banks with a tax while trying to keep the economy from falling apart.
The tax think-tank at the OECD says cross-country consistency is critical. This is also recognised in the G20’s Mutual Assessment Process and in international discussions of financial sector reform and taxation.
“We welcome the ongoing work within the G20 and the IMF on options to impro ve the global financial safety net based on sound incentives,” states the OECD, IMF and others jointly – a thinly –veiled threat that this issue is not going to go away.
Banking taxes formed a key part of the election spin, but advisers have been quick to pick holes in the fledgling plans.
The banking industry’s stance is clear. “All taxes have an impact and more tax has more impact,” the British Bankers Association says.
“The [IMF] recommendations need to be carefully examined but we remain concerned about moves which would place the UK industry at a competitive disadvantage internationally. We also need to see all the detail of what is proposed – and how any new levy and tax would apply – to determine the effect it would have.”
Deficit-busting proposals were also taken with a pinch of salt by the Institute for Fiscal Studies, which unveiled the massive shortfall in the parties’ proposals.
The major political parties are at odds over how to deal with this shortfall, the Conservatives insisting that tax rises could be prevented by slashing public waste, with Labour countering that the rich must pay their share to drive economic recovery.
The parties were forced to reveal more detail following on from the rushed Financial Bill “washout” process.
Labour, said it has taken “tough choices on tax” citing the bankers’ bonus tax, reduced tax relief on pensions for the well off, a new 50p tax rate on earnings over £150,000 and 1p on National Insurance Contributions as its main planks on taxation.
But everyone shied away from a rise in VAT – one of the biggest money spinners. Advisers flagged up the extra £12bn that would be generated by VAT going up to 20% as an obvious revenue raiser.
Lest we forget, the money brought in from penalties and the various tax a mnesties are also set to have an effect. However, the powers introduced to underpin it is of concern to the profession.
HMRC now has powers which cut across all taxes, allowing the department to carry out checks on current records of all businesses, and, controversially, visit business premises without giving advance notice in some cases.
Baker Tilly’ tax cjief George Bull issues a stark warning about the uncertainty in the penalty regime and the powers behind them. “The penalty rules in taxation are in danger of becoming like those in rugby union: highly numerous but not properly understood by players (the taxpayers) or consistently applied by officials (HMRC). Or perhaps like football; often awarded, or not, arbitrarily and without full, if any, explanation.”
Bull says piecemeal implementation of the penalty regime that has already been embodied in statute, with some penalties still to be brought into effect and more still to be legislated for, would cause serious problems. “Time for the refrain ‘you don’t know what you’re doing’,” Bull adds.
With a new administration about to take its place at the seat of power, the profession’s representatives also made a final plea to whichever party (or parties) takes control to use the election as a chance to iron out the kinks in the UK’s tax system.
“In the next parliament, the UK needs to develop a much more straightforward and stable tax system,” says the ICAEW.
The institute called for an overhaul of the way tax law is formulated in order to encourage “clarity, fairness, effectiveness and certainty”.
It has also warned that the structural problems with the UK tax system – such as the length of the tax code – have to be met head on if the UK is to improve the environment in which businesses can grow, create wealth and generate tax revenues as a result.
“It’s not just the deficit, both business and private taxpayers would benefit hugely from the certainty that long-term tax policy can bring,” says Richard Mannion, national head of tax at Smith & Williamson.
“Such certainty helps provide businesses with the framework and confidence to plan for the future.”
Advisers, their clients and taxpayers will hope that now the election is done and dusted , the fact that the UK is still a long way from recovery will not be forgotten when the celebrations die down.
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