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Dear Mr Chancellor... By Nichola Ross Martin

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27th Oct 2006
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Nichola Ross Martin asks AccountingWEB members what they want to be included in next year's budget.

In the run up to the budget, it is customary for various special interest groups and professional bodies to make their own representations to the chancellor. With the autumn pre-budget statement coming up, and obviously so very much on Mr Brown's mind, we thought he might appreciate few ideas from our members to express the views of accountants at "grass roots level". So we asked our members for their suggestions for tax reform for the 2007 Budget.

The responses we received reflect well the on-going problems that we all encounter on a day to day basis within the current tax regime – and what a diverse collection they are. Some clear themes have emerged from the responses given and these centre overwhelmingly on need for tax simplification. Not just in terms of income tax, but spanning all the taxes, direct and indirect, and in addition to the benefits system and tax credits.

Runaway winner: National Insurance
The clear favourite budget suggestion, which I think must be included as a sub-species of tax simplification, is for the chancellor to abolish National Insurance (NI). Now, this does not mean that we will actually pay any less as a result, as member Graham Easton explained, "Put it into the income tax rates. Too long this direct tax has hidden behind an out of date title as I am sure that it just goes into the general tax 'pot' - at least we would then have a transparent tax rate understood by all."

Geoff Challinger echoed this by calling NI "pointless" – similar sentiments were expressed by many others too. The trouble is that NI is deeply political, it is part and parcel of the welfare state. This is why it may not be on Gordon Brown’s immediate thoughts. The solution perhaps is to re-package the whole welfare product (if that is the right term to use). We do not like NI because it creates a separate and unique layer of complexity with its differing rates, classes and separate rules. We all regard it as just another tax, and the link between earnings and NI really goes totally over most taxpayer's heads. Repackaging it by increasing the basic tax rate would be the simplest for all concerned – but no government wants to increase tax rates, so this is why it might well fit in with our runner up.

Runner up: Simplify tax rates
Alister Postle suggested "taxing all income the same eg. dividends, salary, interest should all be taxed at the same rate whether earned through a company, partnership or sole trader". Les Robinson added to this saying "Abolish income tax and corporation tax and replace them with a "Personal tax" for all income which is personal (employment income, share income etc etc) and a "business tax" for all business income (treating self employment and limited co income exactly the same)." He pointed out that simplicity would remove all the "loopholes". That applies equally to NI, a point not lost on Perry Yarnell.

David Robinson called for simplification of corporation tax and stamp duty land tax to avoid the problems associated with marginal rates of tax being higher than average rates, and to "stop messing about with the system" a direct reference to the starting and non corporate distribution rate fiasco.

Liz Zitzow did not agree on simplified rates for IT and CT, but liked the idea of graduated rates, adding: "Computing tax is the simplest part of preparing someone’s tax returns." It is the plural on the end there that disturbs me, I find doing one at a time quite hard enough.

Some parts of the tax system require a radical overhaul. Members each added their own personal bug-bears but part of the problem may relate to the drafting of the legislation, and this is despite the tax re-write policy.

Simplification
Alan Rolfe, tax manager of HWB Chartered Accountants, said: "Make it explicit that the law stands as it is written and that there is no "purposive" interpretations - maybe they'll draft the law a bit better in future."
It seems that we may need to re-write "the re-writes", because if a tax manager cannot interpret the legislation then what hope is there for any lesser mortal to understand the law.

Harmonise definitions for employee and self-employed expenses said Alan Rolfe, who also put in the suggestion of simplifying the VAT "option to tax" by making all non-domestic property subject to standard-rated VAT. Not so good for VAT exempt organisations though.

Richard Murphy advised the chancellor to "Abolish the domicile rules - massive simplification, increase in the tax yield, no proven cost to the UK economy."

W.D Rothenberg suggested one simplification that would actually require additional legislation and that "would introduce a simple rule for small businesses to escape from the tax and corporate compliance costs of trading through a small company, by bringing in some disincorporation machinery to enable the owners of small companies to disincorporate without significant tax costs." This is something that the chancellor may like to consider if he takes up another suggestion, and that is cash accounting for small unincorporated businesses.

Runner up: Cash accounting - The CASE for cash
This has proved another extremely popular suggestion. Emily Coltman said she would be ready join a campaign to put the suggestion of cash accounting to HMRC and "writers of accounting standards". She came up with a name for the campaign: 'CASE: Cash Accounting for Small Enterprises' – There is a CASE for cash". We have taken up the cause and will now be backing this campaign. So have our friends at Taxation magazine, who are conducting a survey which is attracting a lot of interest.

The case for cash is that very small business should be able to cash account and so have an exemption from the need to prepare accounts on a true and fair basis in accordance with GAAP. Cash accounting turnover thresholds would be in line for VAT cash accounting, and only available to unincorporated entities.

Runner up: Reform of the associated company rules
This is an incredibly popular idea and follows on from our recent feature in which we highlighted the absurdity of the associated company rules that ensure that partners' unconnected business interests can become connected for tax without the partners' knowledge. Rebecca Cave said the rule applies to partners in business, and also spouses and civil partners, but "this rule does not apply if a couple are not married so why should it apply if they are married".

Martin Wardle summed it up, "Amend the associated companies rules to exclude partners where there is no commercial link between a company and partnership", job done.

Runner up: Abolish tax credits
This was a surprise suggestion, as accountants are not supposed to be needed to assist with tax credits claims. That says it all. In reality, members find the system complex and wasteful.

There were a great many other suggestions, each one with its own particular merits and it is really only a lack of space that prevents analysis of each. Many thanks to all who took the trouble to write in and add also add comments. We will duly pass on your suggestions to the chancellor.

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By geoffemtacs
30th Oct 2006 07:32

Problems, solutions
An easy one to solve. You either fatten up the allowances for pensioners, or (simpler) you have a differential tax-rate for anyone over the age of 65. In bygone days people might have fretted about the propsect of their being two sets of tax tables to consult, but it's not hard to program into a payroll program. The masses would be paying at 33% and the wrinklies still at 22%.

There are aspects of this change which are technically more complex, related to HR pensioners relying on dividend income but there's nothing insoluble. It's just that no government wants to be the one seen to put tax rates up from 22% to 33%.

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By docsy.btopenworld
29th Oct 2006 10:23

Poor Pensioners!
Abolish NIC and include in (higher?) tax rates?
Millions of employed or self employed pensioners will be much worse off as after age 65 they no longer pay Class 1 or 2 or 4 NIC.
Would this mean a differential inclusive tax rate for these taxpayers?
Tommy Docherty

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