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PBR 2007: The highlights. By Simon Sweetman

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10th Oct 2007
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Strange things, these afternoons. The phone calls start about three minutes after the Chancellor sits down and just as I’m trying to start downloading the documents and finding them under their fancy names (is that under meeting the aspirations of the British people or under Protecting Tax revenues?). And to be fair, I could download them just after he sat down.

So here’s a summary, not without comments.

Income shifting
The government doesn’t like it, as it said immediately after losing the Arctic Systems decision in the House of Lords, stamping its feet. It thinks it’s not fair to split your income: but it’s only not fair when it’s a distribution from a company or its partnership income. So there will be a consultation, but one of those consultations that start with draft legislation, which means there’s not much room for discussion. And it will come into effect for 2008/9, so there’s not much time to talk about it.

We knew this was coming: it doesn’t mean we have to like it!

Domicile
Mr Darling appears to have caught Mr Osborne bathing and made off with his clothes (in the words of that nice Mr Disraeli). The press release talks about UK residents who are non-domiciled rather than those who claim, which is an improvement because domicile is a question of fact, however difficult it can be to establish that fact.

Seven years’ residence and you cop a £30,000 annual fine. Sorry, but that is not taxation as I understand it. It’s a poll tax and utterly unrelated to the ability to pay. If you are a Bengali running a tandoori takeaway and you hope that one day you can go home, are you going to be caught for this? Or a Polish care worker? Even if you’ve got no offshore income at all? Oh, and if you’ve been seconded to the City you won’t be caught. Yes, most of them won’t stay for seven years, but to exclude the very people making the most money seems strange. And the seven years won’t catch most footballers (but it’ll be goodbye Christiano Ronaldo by 2010, then).

It is also – very probably – in breach of EU law as being discriminatory. I am all in favour of chucking domicile out of income tax law completely and saying that if you’re resident here you’re resident here and you take the rough with the smooth, but this is just playing to the gallery. I suspect this won’t happen.

Inheritance tax
You might say the same thing again, but in fact this looks like a sensible move. Those solicitors who bang a nil-rate band discretionary trust into every will won’t like it. Briefly, when the first spouse/civil partner dies and leaves everything to the survivor, you haven’t used your nil rate band. So now it passes to the survivor, who gets £600k at 0% instead of £300k. So it achieves the same result as the nil-rate band trust without the complication that the survivor no longer owns part of their home and may have lost their security of tenure.

Whether that will make any difference to the frothing headbangers at the Express and the Observer, who can say?

Simplification
There’s actually quite a lot here, and most of it is in the small print. There will be a consultation on three areas –

• VAT administration
• Anti avoidance rules
• Related companies

Which makes sense because they are difficult and complicated areas? There is also a paper on aligning PAYE and NICs, though at a quick glance it looks like it’s not going to do much.

There will be a consultation on benefits, looking at taxing them through the payroll (no more P11ds) and removing the £8,500 threshold (which will not make much practical difference now).

Class 2 NIC might be collected through the tax return: the three line account threshold goes up to £30,000 and there is a simpler self employment section for those below the VAT threshold.

What this does demonstrate is that there is now a commitment to a rolling programme of simplification and burden removal. The Chancellor is actually doing things just because they make life easier for someone, not because he hopes to collect more tax.

Capital gains tax
This is the real bonfire of legislation. We lose Schedule A1 (taper relief), sections 53-57 (indexation), S.35 (the kink test), Schedule 4 (halving relief, if anyone can remember what it is), and we get simplified share identification rules (just a pool for each holding of shares of the same class). All this from 6 April 2008. And no transitional stuff.

Of course, there are losers, and the additional tax on an asset held for a long time might be considerable, with people worrying about whether to sell things before 5 April next, because you might not just pay a higher rate of tax, but your base cost may be much lower. If you are selling a business that you have built up over 20 or 30 years, you won’t like this at all. Before 1998 if you sold your small business and were over 55 you were covered by retirement relief and paid no tax. Taper relief made that 10% and now you’re looking at 18% on what will be a larger gain.

But it is much, much simpler. Now if somebody could just wash all that accumulated stuff out of my brain on 5 April that would be good…

Pre-Budget Report 2007:
At a glance guide

Pre-budget coverage sponsored by

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Teignmouth
By Paul Scholes
11th Oct 2007 08:15

Balance
Thanks Simon, at last, something with a bit more balance in it, over the past few days commentators have exercised their knees whilst castigating the government for doing the same.

I agee that much of the headline stuff eg income shifting, non-doms, nil rate bands & CGT changes have been knee jerk, politically and/or PR motivated but perhaps they now put us into a position we should have been in years ago?

The “encourage small business” measures rolled out over recent years have been ill conceived and clumsy and in most cases just encouraged people to switch their businesses to Ltd Companies.

The holiday is over, surely the ability to strike off your company paying 10% tax on the proceeds and starting up again or a husband/wife paying themselves £80K pa tax & NI free is unsustainable and, to my mind unfair on the rest of society.

Thanks again Simon for mentioning simplification. I for one punched the air at the prospect of no more taper relief and a single CGT rate.

At least these days we get 6 month’s notice of this stuff and for all those who can’t hack change, don’t forget it generates your fees.

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