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Watching George Osborne’s 2012 Budget speech on TV I cringed at some of the ideas that he came up with, not because they might not have points to recommend them, but because Osborne didn’t seem to realise that they gifted the opposition, the media, and some of his own party, opportunities to mock and attack him. He might as well have bent over with a notice on his back saying “kick me”.

Given that Osborne is supposed to be the Conservative Party’s expert on policy and campaigning how on earth did he come up with this politically naive speech? Who was he trying to please? Or was he trying to please everyone and so ended up pleasing no-one?

Let’s have a look at some of the measures he announced that could come back to haunt him:

Age Related Allowances to be Frozen

At present, the over 65s can earn £10,500 before tax, while those over 75 can earn 10,660, but those age-related allowances will removed for new pensioners from April 2013. Allowances for those already of pension age will be frozen until the personal allowance for the rest of the population catches up.

George Osborne claimed that no pensioner would lose in cash terms, but according to HM Revenue and Customs thanks to the effect of inflation in the first full year 4.41 million people will be worse off in real terms with an average loss of £83. Within that total, 360,000 individuals aged 65 will lose an average of £285, while 230,000 people will be brought into income tax for the first time.

I can’t see this going down well with the Tory “blue rise” brigade any more than it will with Labour or LibDem supporters.

Child Benefit

Given the outcry last year when Osborne first announced that Child Benefit would be removed where either parent earned more than £50,000 – people pointing out that this disadvantaged families where one parent stayed at home to bring up the children whereas a family of two parents each earning less than £50,000 would not be affected – you might have thought that the Chancellor could have gained some “brownie points” by dropping the idea which would only work if you brought back joint taxation. But no, George decided to tinker a bit more.

The latest proposal is for Child Benefit to be reduced incrementally. When someone in a household has an income of more than £50,000 the benefit will fall by 1% for every £100 earned over £50,000. Anyone earning more than £60,000 will lose the benefit completely. I suppose that helps a bit but two parents earning as much as £49,999 each will still get the benefit.

Worse that that, perhaps, is that whilst the benefit will be paid to everyone claimants will have to fill out self assessment tax forms – which they might not currently need to do – so that any “overpayment” can be reclaimed via their tax code the following year. This is all too complex George. More work for HMRC staff and more people brought into having to file tax returns or face draconian fines – potentially more than the child benefit itself – if they fail to do so in time.

Stamp Duty (Land Tax) Increases

The Chancellor announced and immediate (from midnight) new stamp duty rate of 7% on houses worth more than £2 million. This will be more than doubled to 15% on houses purchased by so called “corporate envelopes” and there is to be consultation on imposing a large annual tax on such properties.

This move comes following an ill informed campaign in The Times and following pressure from Liberal Democrat members of the Coalition Government. When a house is sold then there is a tax payable to HM Revenue & Customs on any sale over £125,000. The tax – Stamp Duty Land Tax (SDLT) – goes up in stages 1% up to £250,000; 3% up to £500,000; 4% up to £1 million; 5% up to £2 million and now the new 7% and 15% rates.

The level of this tax has gradually risen over the last few years and of course when the UK economy was fuelled by rising property prices it was a nice source of escalating income for HM Government. In the last year or so The Times woke up to the fact that in order to avoid this tax – quite legally – many people were transferring property into a company and then when they wanted to sell, rather than sell the property they just sold the shares in the company. As the property was not changing hands no SDLT was payable and instead there would be 0.5% Stamp Duty payable on the share transfer and if the company which owned the property was not a UK company even that 0.5% was avoided. The Times kept banging on about this being an “offshore tax avoidance scheme” but frankly there are far more properties owned by UK companies than by offshore ones as the cost of maintaining an offshore company is likely to be higher than the SDLT saved for most properties.

I have no complaint about the Chancellor taking action to close this “loophole” in situations where the persons living in a house are also the owners of the company but there are lots of genuine investors – in the UK and offshore – who have invested in properties as a business activity and who pay tax in the UK (HMRC have a special department dealing with “non resident landlords”) and it would be unfair to hit them with higher taxes just because they own property through a “corporate envelope”.

Worse though would be imposing an annual charge – as is being proposed – on properties already owned by companies.

But worse of all is the possibility that individuals living their family homes and which are now worth, thanks to rampant house price inflation, more than £2 million could also be hit by an annual charge starting at £15,000. These people may be asset rich but cash poor and the fact is that most of them will be living in London and the South East which is prime Tory-voter territory. If you haven’t worked out the likely problem for Conservative MPs in the South East think about your own Cheshire constituency George as that’s the other likely area where asset rich but cash poor votes will be caught.

Income Tax

George Osborne announce that the 50% rate of tax was damaging to the economy and was not actually raising much extra revenue. I agree with him on that but I could hardly believe it when he said that he was going to cut it from 50% to 45% when all common sense was that he should simply have put it back to 40%. The Labour opposition are now going to say that Osborne is a friend of the rich and is cutting their tax rates but the fact is that Labour only increased the rate from 40% to 50% when it became clear that they were going to lose power and so left the incoming government with the choice of leaving the rate at 50% or cutting it when they could attack them. A simple ambush – the Chancellor should be pointing out that Labour allowed “the rich” to enjoy a 40% rate for 12 years so if it was such a major issue why didn’t Labour impose it earlier?

Corporation Tax

The Chancellor announced an immediate 1pc cut in the headline rate of corporation tax, which will bring it to 24pc from April. Two further cuts in 2013 and 2014 will reduce corporation tax to 22pc. No Labour, and few LibDems, are going to be pleased by this – reason enough for announcing it? Perhaps but maybe you should have left well alone on Corporation Tax and not bothered with things like Age Related Allowances?

Value Added Tax

Chancellor George Osborne pledged to end anomalies in the tax system which meant VAT was payable on certain items but not on other similar products. Specifically he mentioned extending VAT to “chairs” in hair salons, hot food sold by supermarkets, static caravans and “listed places of worship”.

Chairs

The issue for “chairs” refers to a common system run by hairdressers where stylists claim to be self-employed and simply pay “rent” for the use of a chair in a salon. This means that unless they personally reach the VAT registration limit (£77,000) customers don’t have to pay VAT. This has long been recognised as open to potential abuse – but it won’t go down well with all the Tory ladies when they have 20% more for having their hair done.

Hot Food

The issue of “hot food” is a long standing one and from time to time HM Revenue and Customs, and Customs & Excise before them, has tried to deal with this admitted anomaly. Basically the issue is that whilst food is zero rated for VAT when bought in supermarkets and shops, food served in café’s, restaurants and take-away outlets attracts VAT at (currently) 20%. However for year’s supermarkets and high street bakers have claimed that food such as bread, rotisserie chicken, pies and pasties which they cooked on the premises should not be subject to VAT as the fact they were sold hot – or warm – was incidental to the manufacturing process. It was about 20 years ago that this issue was first addressed when the VAT authorities tried to claim that such food should attract VAT because once cooked it was kept warm in heated cabinets before being sold. This claim was rejected on the grounds of health and safety – or at least on public health issues – as it was accepted that if these products were sold before fully cooled but whilst still warm there could be bacterial infection.

Back then a wise Chancellor admitted defeat but HMRC keep on bringing the subject up again. Frankly it is unfair that large supermarkets and bakery chains don’t have to charge VAT whilst small shops which reheat such products, not to mention fish and chip shops, have to charge VAT. I can’t see why a supermarket can get away with not charging VAT on a rotisserie chicken but my local “chippie” has to charge it on deep fried fish – or deep fried chicken!. But despite this anomaly a wise Chancellor would have steered clear of getting embroiled in this hoary old chestnut. He is going to get hammered for this one. Do “posh boys” eat pasties?

Caravans

Then we have “static holiday caravans”. I must admit I can’t quite get my head around this one at all. As I understand it touring caravans (but only under a certain length) are already taxed at standard rate and static caravans “designed and constructed for continuous year-round occupation”, to quote Mr Osborne, will continue to be zero rated. He doesn’t say that such caravans have to be occupied continuously just that they were designed and constructed to be so occupied. If that’s the case then surely static caravans in holiday parks should still be zero rated and the only losers will be people who buy large so called “touring” caravans but never go anywhere. Is there a point to this George or are you just trying to annoy Margaret Beckett – that well know Labour caravan enthusiast. I can see a lot of work here for lawyers and a lot of time being spent by HMRC in arguing the case.

Alterations to Listed Buildings

Until yesterday the cost of alterations to listed buildings was charged at a zero percent VAT rate but Mr Osborne has declared that henceforth such work will be charged at the standard rate of 20%.

As things stood whilst repairs to listed buildings have long been subject to VAT and the standard rate alterations – often legally required to meet legislation or to ensure the safety and integrity of the building and its future – were zero rated.

I’ve never been convinced that it was reasonable to charge the full rate on repairs, after all we are talking here about buildings that are part of the national heritage of the UK including churches and other historic buildings, and whilst appreciating that sometimes it was arguable whether any work being carried out was a repair, a renovation or an improvement, surely the sensible way forward was to make all such work liable to VAT at the reduced rate of 5%. This would be simple and would have got George Osborne a lot of praise. In addition from what I can see from HMRC documentation it would be pretty well fiscally neutral. As it is the Chancellor can expect to be attacked by the “third sector”, those very charities he wants to pick up the gap in government spending on all so many issues.

Tax Avoidance (and Charities)

I’ll do a separate article on this shortly because Osborne seems to have totally lost the plot on this one. For example, in his budget speech the Chancellor stated his “moral repugnance” towards both tax evasion and what he called “aggressive” tax avoidance and he proposes to consult on a general anti-avoidance rule (GAAR) with a view to introducing legislation in the Finance Bill 2013.

I just found his comments remarkably – possibly even criminally – ill-judged and ill-informed. He seems not to understand that UK law has for centuries upheld the right of taxpayers to arrange their finances to mitigate (reduce) their tax liabilities. Whatever new laws he gets through Parliament could be thrown out by the courts – based on centuries of legal precedent.

If that wasn’t bad enough Osborne seemed to be saying that anyone undertaking any form of tax planning was “morally repugnant”. Well that must include a whole lot of Conservative Party donors and supporters as well as anyone who invests in National Savings Bonds, a personal pension, SIPP, ISA, PEP or similar government-promoted tax avoidance investment.

Then we got to the real banana skin when he claimed that some people were managing to avoid paying any tax at all by making huge donations to charities – some of which he claimed were dubious artificial ways of avoiding tax. Actually George if anyone was doing what you said they were then they were not avoiding tax (legal although morally repugnant to you) they were actually evading tax and there is already enough criminal law in place to deal with that scenario.

No George, what you are going to do by limiting the amount of money that a taxpayer can pay to a charity to the greater of £50,000 or 25% of their income is damage charities – and guess what? Your government wants charities to pick up the slack where local and national governments have no cash. Think it through.

This Budget shows that there really is no joined up policy in the coalition government. George Osborne has always been presented as the main man when it comes to policy, campaigning and economic competence but he has got this whole budget so wrong.

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Category: Taxation

 

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