A political assessmentPhilip Stephens
Chief political commentator, Financial Times
Resentment with austerity has not translated to visible enthusiasm for the expansive economic strategy advocated by Labour. For the moment, at least, the public mood carries an air of fatalism.
Conservatives were cheered by George Osborne’s Budget. The economic news might be grim – growth has stalled and so has progress in cutting the deficit – but the reaction among Tory MPs was that the chancellor had at least got the political signals right. No more proposals for pasty, granny and caravan taxes. This year Mr Osborne’s help for motorists, beer drinkers, home buyers and small businesses had put the Conservatives squarely on the side of middle Britain’s ‘strivers’.
The core message from the Budget was one redolent of the 1980s. Mr Osborne had faced calls from right and left to loosen the ties, the fiscal straitjacket. Some on the Tory backbenches wanted ‘supply-side tax cuts’. Labour’s Ed Balls was pressing for a big relaxation of borrowing constraints. Sounding more like an economics professor than a government minister, the Liberal Democrat Vince Cable had suggested that there was an interesting intellectual debate to be hard as to the competing merits of austerity and stimulus.
The chancellor was not for turning. Whatever the short-term cost in terms of lost growth, he declared there was no alternative to his austerity strategy to restore the health of the public finances. In this respect, Mr Osborne’s measures changed nothing much at all as far as the outlook for the economy goes. The Office for Budget Responsibility judged the economic impact of a fiscally-neutral package to be almost zero.
Among the individual measures in the Budget, there was good and bad. The politics of Mr Osborne’s promise to underwrite mortgage borrowing are transparent enough. The economics are at best dubious. Britain certainly needs additional demand in the economy but, given recent experience, boosting the housing market is a dubious answer at very best. Cuts in national insurance contributions for small businesses and a further reduction in corporation tax make more obvious sense. The impact of raising the income tax threshold to £10,000 is likely to be psychological more than anything else, but it will make a difference.
The economic news is not all bleak. The employment market has remained inexplicably strong and, if the chancellor is sticking to ‘plan A’, there has always been more flexibility in the fiscal framework than the Treasury is prepared to admit. The so-called automatic stabilisers are being allowed to operate in a way that pushes some of the pain into the next parliament.
Mr Osborne is also betting on the changing of the guard at the Bank of England. The Budget changes to the bank’s inflation remit were scarcely radical, but the hope is that Mark Carney will bring fresh insights and imagination to the operation of an expansionary monetary policy. Among the topics under discussion with the Canadian central banker who will replace Mervyn King are a significant extension of the ‘business for lending’ scheme and a credit easing policy that would allow the bank to buy in corporate bonds as well as government stocks. If nothing else, Mr Carney should put a cheerier face on the bank’s public pronouncements.
This is unlikely to be a Budget than lives long in the political memory. As living standards are further squeezed, it is becoming harder for the coalition to persuade voters that the medicine is working. The promised sunlit uplands of prosperity have receded further into the future. Yet if the opinion polls show a solid Labour lead, it is one no larger than would be expected for any opposition party halfway through a parliament. As fed up as they are with cuts in living standards – rises in energy and petrol prices cause particular rage – voters are divided about the best course of action.
Resentment with austerity has not translated to visible enthusiasm for the expansive economic strategy advocated by Ed Balls. Labour has neither shaken off its share of responsibility for the financial crash nor produced a persuasive prospectus for an economic recovery combining growth with fiscal prudence. Seasonally adjusted, as it were, the polls at present point to another stalemate at the next election rather than to a runaway Labour victory.
For the moment, the public mood carries an air of fatalism. Whether that persists depends on how the economy performs over the next year. Mr Osborne still has the benefit of the doubt – but only just. The voters, and the chancellor’s own supporters, are looking for the green shoots of recovery. And the chancellor has a fight on his hands within the coalition to find another £11.5bn of cuts in this summer’s public spending round. With the general election now looming ever larger on the horizon, politics may well start to get interesting again.
Shoots of simplificationJohn Whiting
Tax director, Office of Tax Simplification
More of our simplification ideas are flowing through.
As I’ve said before in Tax Journal, I don’t believe we will ever get to a truly simple tax system in the UK. But given that everyone agrees that our system is too complex, it has to be worthwhile working towards simplification, even if the steps taken are modest rather than ‘big bang’. So it was good to see once again a few green shoots of simplification in the Budget documents, with some earlier OTS-nurtured green shoots growing further.
With another massive Finance Bill about to land on tax professionals’ desks, many may feel that simplification isn’t making much progress. But even that big Bill shows signs of simplification lessons – in that the great majority of it has been consulted on. The OTS has said many times that change brings complexity; we recognise that changes need to happen but that those changes need to evolve steadily, over a period.
The Red Book confirmed the Bill will contain a number of OTS-inspired changes. Many of the recommendations from our work on ‘approved’ share schemes are flowing through and it is good to see the commitment to consult on a number of the ideas from our ‘unapproved’ report. Please do contribute to the consultation and indeed voice support for any points not in the consultation, as they may be under consideration for later. Our pensioner report makes an immediate mark with a consultation on abolishing MIRAS … and for those of you who thought MIRAS was long gone, we found a vestige that means that the whole raft of legislation is still on the statute book!
More of our small business ideas are flowing through. The disincorporation relief will soon be on the statute book. Do make sure it’s used! Cash basis may be getting there. HMRC continues to work upon our programme of administration recommendations, with the Administrative Burdens Advisory Board keeping watch on progress. Our PAYE/NIC integration ideas have helped to prompt a consultation on possible class 2/class 4 combination.
We can’t claim credit for the new employment allowance – the £2,000 annual NICs reduction. But it does have resonances with our small business findings, arguably offering a measure of compensation for administrative burdens. Inevitably, small businesses incur such costs disproportionately. The way the measure will operate seems likely to be in line with OTS principles – as simple and straightforward as possible. As CIOT president Patrick Stevens said, it mustn’t be tied up in red tape.
The OTS did highlight the small profits rate and the marginal relief calculations as a definite candidate for simplification in our reliefs report. Clearly, progress in this area was very much a political and economic judgment but from a simplification standpoint the potential abolition of marginal relief calculations is wholly to be welcomed. Even if some older practitioners (and examiners) will have a tinge of regret about the passing of an old friend ...
Looking to the future, the OTS is getting under way with our employee expenses and benefits review. That is going to be a major exercise and we will shortly be appealing for problem areas and ideas, together with offers of meetings. The Budget also announced our second project for the coming year: partnership taxation. In some ways, this is a continuation of our small business work, but we do want to look at all aspects of an area of the tax code that sometimes feels a little ramshackle. Hopefully these two projects will provide some more shoots of simplification in Budget 2014!
A Budget for all businesses?Paul Aplin
Chairman, ICAEW Tax Faculty Technical Committee; Partner, AC Mole & Sons
This Budget suggests that the government is starting to better understand the concerns of small businesses.
At the turn of the year, my firm conducted a survey of our small business clients. They felt overwhelmingly that the government did not understand their issues, that large businesses had been favoured over small businesses, and that red tape was increasing rather than diminishing. This Budget suggests that the government may be starting to better understand these concerns.
One piece of good news actually came the day before the Budget. The announcement that small employers would not be saddled with the extra compliance burden associated with the RTI ‘on or before’ rule, at least until October, was very welcome. Small employers who run their payroll monthly but who pay employees (or advance money to them) more frequently will have breathed a sigh of relief. We now have to use the six months, breathing space to ensure that a permanent solution – one that recognises the reality of running a payroll in a small business – is secured. The simplest solution would surely be to codify the easement announced on 19 March.
The second piece of good news came in the form of the ‘employment allowance’. The benefit of a saving of up to £2,000 in employers’ national insurance will be welcomed by all small employers. The measure also appears to have the advantage of simplicity.
The freeze on fuel duty was again welcome news, especially for small businesses in rural areas where fuel is an essential business cost. The two SEIS amendments were also helpful.
Combine these announcements with the increase in the annual investment allowance to £250,000, unveiled in the Autumn Statement, and there is some sense of an increased awareness of the small business community’s needs and of its importance to reviving the economy.
I am less convinced by the cash basis for small businesses, which in many ways adds complexity instead of the potential simplification offered by the original OTS proposal.
The RTI easement was in no small part a result of HMRC officials being willing to spend time with small businesses to see life through their eyes. If the government is to deliver more effective help for the small business sector in future Budgets, then there is a compelling case for more people from HMRC, from the Treasury and from BIS doing this. Life at the coalface is often very different to the way Whitehall believes it to be. There is no substitute for talking directly to small businesses about the issues they face.
Tackling avoidance and evasionJames Bullock
Head of litigation & compliance, Pinsent Masons
There were a few interesting Budget measures, but little that had not already been announced.
Having read the newspapers on the morning after the Budget one might, however, be forgiven for thinking that ‘enforcement’ was at the centre of the Budget. This is as a result of much trumpeting of HMRC’s achievements in its war against avoidance and evasion – and a great deal of ‘fighting talk’ about how this is to be continued. There is, however, relatively little of substance that had not already been announced.
The ‘centrepiece’ was a rather self-congratulatory document entitled No Safe Havens setting out HMRC's offshore evasion strategy for 2013 and beyond. Much of this is about better and more sophisticated technology – for example, data sorting by postcode and region and more specialised training for staff. There is also a promise of ‘tougher penalties’, with ‘more investigations and prosecutions’ – though we had known about that for some time. There is a commitment to ‘increasingly regard those who still do not come clean as deliberately breaking the law’. This suggests a much greater push for penalties at the higher end. There is also a proposal to ensure that ‘offshore evaders’ will only benefit from the full penalty mitigation where they give details of any ‘third parties that have supported them in putting arrangements in place’. Together with proposed ‘incentives’ for those who support the identification of ‘offshore evaders’, it is clear that the next ‘tightening of the net’ will very much focus on taxpayers being encouraged to ‘shop’ offenders and scheme promoters in particular.
There is a very interesting suggestion in relation to the proposals (previously announced) to impose penalties for careless behaviour on taxpayers who implement tax avoidance schemes which ultimately fail in the courts. The government will now consult on a further proposal which will require taxpayers who have implemented avoidance schemes (which have been defeated in litigation pursued by another party) to acknowledge to HMRC that the judgment in question applies to their own circumstances and to confirm whether, as a result, they either stand by their existing return or, alternatively, opt to amend the return. The proposal is that the penalty for careless behaviour should be extended to this ongoing duty. This could be quite radical if it is ultimately implemented. It could also have an impact on clearing the ‘backlog’ of avoidance cases stacking up without resolution (and which, if all were litigated, could potentially keep the tribunals busy into the 2020s or even beyond).
The compliance progress report Levelling the Tax Playing Field confirmed what we already knew – namely that the tax gap (for 2010/11, the latest year for which figures were available, and before the coalition’s ‘investment’ in tax enforcement had really taken effect) had increased by £1bn to £32bn. Interestingly, 13% of this, or £4bn, (as opposed to 14% for avoidance) is attributable to ‘legal interpretation’. It would be interesting to know how this concept is analysed – and how it breaks down. Does it represent matters currently under dispute? Or differences of legal interpretation where HMRC has conceded or lost? In any event, given a loss of £4bn annually (and bearing in mind the amount of resource being thrown at avoidance), one might expect a little more ‘noise’ to be made about this.
Two new offshore disclosure facilities – for Jersey and Guernsey – have been announced, along substantially similar lines to that announced previously for the Isle of Man. The problem here is that none of the three ‘Crown dependency’ facilities are anything like as attractive as that for Liechtenstein, which remains available until 5 April 2016. The Crown dependency facilities continue until September 2016.
The view from LabourCatherine McKinnell MP
Shadow exchequer secretary to the Treasury
The Budget contained a few welcome measures but it was largely more of the same, not the radical change of course that is needed.
It is pretty clear that the government’s plan is failing. Our economy is flatlining, unemployment is rising again, prices are increasing faster than wages, the coalition is set to borrow £245bn more than predicted in Autumn 2010, and even the triple-A credit rating has been lost.
The recent stinging rebuke issued to the prime minister by the Office for Budget Responsibility made it quite clear that the coalition’s fiscal consolidation measures have reduced economic growth over the past two years.
What we needed on 20 March, therefore, was a bold and radical change of course – to kickstart the economy and to help the millions on low and middle incomes struggling with the rising cost of living, so that a strong and sustained recovery is made by the many, not just the few.
As the ICAEW has said, ‘this Budget was the last chance to make changes that businesses will notice before the 2015 general election’. Unfortunately, what we got from Mr Osborne was a bit of tinkering around the edges and more of the same – and the startling, but unsurprising, confirmation from the OBR that people will actually be worse off in 2015 than they were when the coalition came to power.
There were some welcome measures in this year’s Budget. Labour has consistently called for a tax break for small firms taking on new workers, and the government is now set to introduce a similar scheme. Let’s hope it has a better success rate than its current policy, which at the last count had supported the creation of around 70,000 jobs – somewhat short of their original prediction of 800,000.
On tax avoidance, the government said it would consult on how to clamp down on abusive payroll services based in tax havens, as well as confirming its intention to strengthen the DOTAS provisions introduced by the Labour government back in 2004. Again, these are both areas in which we have been calling for action for some time now.
But there was no temporary reduction in the VAT rate as called for by the opposition, to provide an immediate boost to spending power and thereby local economies. This is extremely disappointing, as we know that the increase to 20% has cost the average household £500 – and recently published TUC research indicates that any gains made by people on lower incomes through the raising of the personal allowance and primary NI threshold are wiped out by the VAT rise in 2011.
The millions of people struggling with childcare costs will have taken little comfort in the promise of greater tax-free support after the next election. Families need support now – not in over two years’ time. But the Budget document did confirm the chancellor’s intention to press ahead with a reduction in the top rate of tax, handing the very richest people in the country an average £100,000 tax cut from April.
Beyond the reduction in corporation tax and some tax and NICs simplification measures, a collective sigh of relief will have been breathed by taxation professionals that there were few further changes to the system announced on 20 March. This relief will have been matched with that felt at the announcement – somewhat slipped out just ahead of the Budget – that real time information (RTI) reporting requirements are to be pushed back six months for small firms.
It’s welcome news that the government has finally woken up to the warnings of countless business organisations and professional bodies that small firms just aren’t aware of, or ready for, this significant change. But it came just days before RTI’s planned introduction, and despite repeated and very recent reassurances from ministers that all was well.
The government has clearly failed to communicate this policy properly, and simply didn’t sufficiently grasp the red-tape burden it would place on SMEs that are already struggling in the current economic climate. This is really worrying given the critical role RTI will play in delivering universal credit, which is already delayed and over-budget. We will see in the coming months just how this situation progresses.
