Fiscal drag 'denting tax system's credibility'. By Dan Martin

Posted by AccountingWEB PM | on Fri, 27/10/2006 - 14:52 2303 1 comment

Fiscal drag, the process by which governments do not increase tax exemptions and thresholds in line with inflation, is undermining the credibility of the UK tax system, experts have warned.

Baker Tilly found that 53% of accountants and 67% of legal professionals believed the fiscal drag has almost completely eroded the £8500 employee benefit threshold and should be updated. Although the original intention of the threshold was to tax benefits enjoyed by directors and higher paid employers, it now catches most employees in the UK.

Continued...

Fiscal Drag

Paulsoper | Mon, 30/10/2006 - 23:45 | Permalink

Look - if a Chancellor of the Exchequer, of any party wants to dress up in clothing of the opposite sex it's jolly well not our business...

But hang on - what is fiscal drag? I don't think its the £8,500 benefits limit - 20 years ago when I was making a programme called Moneyspinner for Channel 4 I asked one of the head honcho's at IR headquarters and was told that it was deliberate policy to extend the net of benefit taxation until, for practical purposes, all employees were included.

But the exemption limits for IHT purposes - in particular the exemption for a non-domiciled spouse - that has been £55,000 since 1981. Before then it was increased in line with the exempt band, but when the exempt band was index linked the spouse exemption wasn't. Now that is fiscal drag!

Arguably almost any increase or failure to increase can constitute fiscal drag - increase PAs by RPI is fiscal drag because it lags behind the increase in earnings. The limits for CT purposes are fiscal drag, but we need to carefully discriminate true fiscal drag which should be attended to and attacking instead deliberate policy which will lead to the concept itself being discredited and ignored. If it wasn't that I strongly agree with most of the sentiments expressed I say it was a load of "bull". Sorry - couldn't resist the temptation!