Budget 2012: One step towards simplification

When it came to tax simplification, the 2012 Budget was a game of two halves, writes Rebecca Benneyworth.

There were some quite marked movements in the right direction. The overhaul of the tax regime for businesses falling below the revised £77,000 VAT threshold is highly significant. And in spite of some inevitable negativity, the slow phasing out of the higher age-related allowances for income tax is also a welcome step.

Key business measures

1.  Small companies simplification - including changes in how HMRC deals with small companies.

2. VAT rate: £77,000 sounds like a big increase, but it’s inflation-linked. The bigger the limit, the bigger the increase.

3. Enterprise Management Incentive and other schemes extended.

4. Accelerated reductions in the Corporation Tax rate.

5. R&D and film tax credits extended - It won’t just be Downton Abbey, Wallace & Grommit and video games developers celebrating.

6. Company car tax: Tax and fuel benefit charge rises go further than expected. Cars will also have to output 130g/km or less in emissions to qualify for 18% main car rate allowance and 95g/km for 100% first year capital allowances.

7. Anti-avoidance: GAAR on the way, with more targeted rules until it arrives.

8. Capital allowances: See company car changes above; first year credits for energy-saving equipment extended for five years from 2013.

9. New 7% Stamp Duty rate for residential property over £2m; property worth more than £2m owned by businesses will be hit with a 15% SDLT rate.

10. Charities could see donations evaporate with the new £50,000 cap on income tax relief.

It’s a novelty to have some genuine simplification measures to assess and debate. Both these initiatives came from recent Office of Tax Simplification (OTS) reports. In each case, the Chancellor didn’t just endorse the recommendations of John Whiting and his OTS advisory committees, he acted faster than expected with the age-related allowances, and raised the turnover level for micro businesses under the new tax regime to more than double the £35,000 suggested by the OTS.

But at the other end of the scale, there is additional complexity as the Chancellor continues to try and plug avoidance loopholes exploited by higher rate taxpayers. The general anti-avoidance rule (GAAR) is intended to put a stop to that sort of behaviour, but like many advisers I have my doubts about how effectively it will work.

This isn’t a political objection. As a profession, we have to recognise that the time for a GAAR has probably come and we might as well get used to it. The proposals before us are a first step towards implementation in next year’s Finance Bill - but a lot of work will need to be done to get it right, particularly in such a short timescale. And the concern for many accountants is that the definition of “reasonable tax planning” as currently defined is so nebulous that some very common - and hardly unethical - practices could be caught. For the GAAR to work as envisaged, the Treasury and HMRC also have to believe it can work, and to abide by the spirit of the safeguards that have been advanced to ensure it is applied fairly.

The possibility remains, as Simon McKie eloquently warned in this month’s Tax Adviser, that if a tax barrister of Graham Aaronson’s standing, with advice from some of the country’s finest tax brains, can’t formulate a GAAR that provides reasonable certainty of application, “then it cannot practically be done”.

We should also spare a few thoughts for many of the people who drive company cars for a living. The people who fix photocopiers and drive around the country with samples in their boots will be clobbered by the increases in benefit in kind charges they will have to pay over the next five years.

Even if it wasn’t so Draconian, the company car regime would be ripe for simplification. Assumed private use is the target of this regime, but try telling any road warrior who’s being taxed 15-37% of their car’s list price for being stuck in motorway traffic jams that what they’re enjoying is a benefit in kind.

We got a lukewarm response from accountants and business people at the end of the Chancellor’s speech. Following our live Budget blog we polled the participants to find out “how friendly to small businesses” the Budget was.

This is what they said:

Comments

is this cash basis nonsense

The Black Knight | | Permalink

going to be optional ? or is it just a way of raising more taxes, that is bound to backfire.

Will you be able to prepare accounts in the most beneficial way ? Or will you need to do two sets, for example if you have a profitable year but have slow payers or the timing indicates you have a loss, when you are trying to raise finance to fund cash flow for expansion....this can only be a bad thing.

Will there be a transitional relief when changing from one system to another ?

Will we need to restate previous years figures for comparative purposes ? (relevant to mortgage reference letters and other funding issues)

How do you even know what basis you are on ? Turnover real = £80K Bank receipts £50K

Reduce your tax bill (tax tail always wags the dog in client prepared figures) by not banking the cheques in the draw until the next year...will also reduce your payments on account...not brilliant for business cash flow in the normal sense or is it ?

Don't forget the government tax cash flows will automatically be put back one year + payments on account, as presumably last years debtors have already been taxed but will be received in the new year (taxed twice ?) and the new years debtors will not have been received, could easily result in a no tax year especially if tweeked.

As for saving accountancy fees I can see twice as much work.....if we are asked to get it right in the first place.

The fees are going to have to increase if they want that lot explaining each time or perhaps it will be easier to say just pick a number at random as no one WILL or CAN check it anyway.

Prophesy : next year this will enable them to announce there is a huge problem with cash payments and these will be banned ?

Loss of tax ? HUGE

What a muddle is coming !

 

Cash basis

johnwayne2010 | | Permalink

I would have thought the (optional) simplified cash basis is for those that choose not to use an accountant and do their own self assessment returns. For those that use accountants it will be a case of carry on as before.

until

The Black Knight | | Permalink

Some lawyer decides you were negligent in not obtaining a vital cash flow advantage, by not taking advantage.

re write all your engagement letters again...ooh whoops guess who gains out of this again.

I agreee with Black Knight

petestar1969 | | Permalink

The switch to cash basis will be a nightmare, its already well nigh impossible to get tradesman clients to declare all their income. If they are told they don't need to declare it until they get paid they'll just conveniently "forget" to tell us or just get paid in cash and we'll none the wiser.

Its a really bad idea - what Georgie Boy should have done is ban cash accounting for VAT and make everyone who is self-employed register for VAT..

"make everyone who is self

John F Reed | | Permalink

"make everyone who is self-employed register for VAT" - are you mad? 

HMRC would never cope with the consequent lack of VAT compliance by those with modest, if not tiny, turnovers who struggle with their annual tax return - if they need one.  Many aren't liable to income tax anyway - just think of all those who make a few bob making cards, delivering parcels, etc, income way below the PA.   

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