Stephen Herring: Beyond the big picture - now that's interesting

Click to follow
The Independent Online

The Chancellor has again provided us with his view of the big picture so far as economic stability, inflation and his "golden rule" are concerned. He does not, however, share with us his view of the longer term development of a sustainable taxation framework. Perhaps this has always been a much lower priority for him. An alternative analysis of Gordon Brown's Budget speech today could focus upon this year's debate concerning the most desirable (least undesirable?) longer term framework for UK taxation. This has concentrated upon the rights and wrongs of the UK adopting a so-called "flat taxation" system which applies lower, fixed single rates of income tax paid by individuals and corporation tax paid by companies to a broader tax base where there are fewer exceptions and reliefs. For example, a flat income tax rate would be applied to all income above a fixed exemption financed by the abolition of reliefs for pension savings, venture capital trusts and enterprise investment scheme relief etc. and, similarly, a single, lower corporation tax rate would be applied to accounting profits financed by the abolition of capital allowances, research and development deductions etc.

The intrinsic problem with a flat taxation system is that, wrongly or rightly, Chancellors like to introduce tax measures to favour the current perceived wisdom of what is needed by the economy and/or what would be popular with the electorate. This has lead to special reliefs for a wide range of persistent or fashionable causes over the years. Similarly, spending perceived to be undesirable has been more heavily taxed including cigarettes, alcohol, fuel, waste disposal and pollution. There are clearly questions arising as to whether creating a more complex taxation system is the appropriate mechanism to encourage desirable activities or influence personal behaviour.

In my opinion there is no desire to adopt an extreme form of flat taxation such as might be welcomed by a handful of scary-eyed academics but there certainly is a consensus that our taxation system has both too high tax rates and too many complex reliefs and rules. The result has been an undesirable focus on complex and sometimes aggressive tax planning to reduce the income and profits to which these high rates of income tax, corporation tax, capital gains tax and inheritance tax are applied. How far does the Chancellor's Budget today recognise this viewpoint?

Firstly, what is the potential impact of the Chancellor's measures on income tax? He has not been tempted in this area by the flat tax approach: in fact quite the opposite. Instead he is raising the child element of the notoriously complex child tax credit by 14 per cent over the next three years. Had he wanted to move in the direction of a flat tax approach he might have been tempted to set a higher level of child benefit significantly above the £17.45 applying from 10 April.

Turning to income tax reliefs, the Chancellor has continued with his penchant for maintaining a panapoly of reliefs in the areas of Venture Capital Trusts ("VCTs") and Enterprise Investment Schemes (" EIS") . The new rate of income tax relief for investors in VCTs will be 30%. This is a decrease from the current "temporary" income tax relief of 40% but an increase from the anticipated 20% income tax relief that was expected to apply from 6 April 2006. However, the holding period has increased dramatically from three years to five years. This is probably a reaction to the, perhaps unanticipated, success of the previous VCT arrangements. By contrast the EIS regime had been flagging somewhat and doubling the available level of annual investment for shares issued on or after 6 April 2006 to £400,000 may assist in moving capital into qualifying companies. However, here the relief is at 20%. Both of these reliefs would be rejected by flat tax enthusiasts as they attempt to target particular businesses.

Turning to the corporation tax regime, there has, arguably, been a small move towards a flatter regime with the abolition of the zero rate band leaving us with just two rates of tax, the small companies rate of 19% and the full rate of 30% but a 0% small companies rate and, say, a 20% full rate would be a clearer flat tax approach. However, as a whole there has been no move whatsoever towards a flatter corporation tax system as increased relief for research and development, continued discrepancies in the capital allowances available to different sized companies leave corporation tax as complex as ever at a time when business is crying out for less red tape and simpler rules.

It's a similar picture on VAT where the Chancellor announced he would extend the special VAT scheme for horse racing, renovation of churches, monuments and other sacred places. If the Chancellor had any sympathy with a move to a flat tax then perhaps VAT would probably be the simplest area in which this might be implemented.An interesting debate concerning flat taxation would be its alignment with the roll-out of tax transparent real estate investment trusts (UK-REITs) which are flat tax friendly in that they remove a layer of taxation for investors but are not flat tax friendly in that they target only on sector of the economy.

If his tenth Budget does, indeed, prove to be his last, it will be left to his successor to state where he stands on the tax framework as a whole and, in particular, to what extent he or she is sympathetic towards the introduction of a flatter tax system and is willing to support future detailed tax proposals against this criteria.

Stephen Herring is a tax partner at BDO Stoy Hayward

* Treasury Budget site

* Chancellor's Statement in full

Comments