A loss of public trust is putting the credibility of the UK’s tax system at risk, the chair of the Commons Public Accounts Committee warned, as the panel released a new report that calls on HM Revenue & Customs to do more to counter “the belief that people are getting away with tax evasion.” Read more: My news story for Tax Notes (paywall) published by Tax Analysts.
MPs will debate the new Finance Bill on 11 April. Some of the most difficult measures to understand concern matters that should perhaps be the most straightforward – such as personal income tax rates.
Wherever you stand on “tax simplification”, the complexity in this area is hard to justify.
For tax year 2015/16 there were three main rates of income tax:
Basic rate 20%
Higher rate 40%
Additional rate 45%
In addition, there was a 0% starting rate for savings.
Dividends were taxed at one or more of the following rates (subject to a tax credit):
Dividend ordinary rate 10%
Dividend upper rate 32.5%
Dividend additional rate 37.5%
For tax year 2016/17 there is a new savings allowance (as well as the starting rate for savings) and a new dividend allowance.
But neither of these is really an allowance. For savings, there is effectively a new 0% band of either £1,000 or £500 or nil – depending on your tax rate. For dividends, there is a new 0% band of £5,000, and dividends in excess of that are taxed (and there is no tax credit) at:
Dividend ordinary rate 7.5%
Dividend upper rate 32.5%
Dividend additional rate 38.1%
The changes necessary to bring in the new dividend tax regime, and deal with the interaction between the various rates and bands, occupy seven pages of the Bill.
I haven’t considered here the potentially different Scottish and Welsh rates of income tax, nor national insurance contributions, nor the issue of marginal tax rates (and marginal deduction rates for those receiving tax credits or other benefits). Some of the marginal rates are very high, creating cliff-edges and perverse incentives at various levels of income.
What does this have to do with the Panama Papers? Nothing – but if you’re interested you can follow me on Twitter where I’m keeping an eye on developments, and I may say something on the blog soon.
When I was one of those people who thought Labour might win last year’s general election I suggested that the new income tax ”marriage allowance” might be short-lived. “We think it is a dud of a policy,” Labour’s shadow Treasury minister had said.
The government said more than four million married couples and 15,000 civil partnerships would be eligible for the allowance, introduced from April 2015. The maximum benefit is just over £4 a week.
But in a parliamentary written answer on 2 February the government said only 332,301 couples had successfully claimed the allowance by 28 January, prompting another shadow minister to call the policy a “complete and utter flop”.
HMRC calls it the “marriage allowance” but the legislation calls it (more accurately, but it’s a bit of a mouthful) a “transferable tax allowance for married couples and civil partners”. It is not available to higher rate taxpayers.
For example, H works full-time and is a basic rate taxpayer, and W works part-time and has an income below the personal allowance. H is entitled to a tax reduction of £212 (20% of £1,060) for 2015/16 if W elects “for a reduced personal allowance”.
HMRC points out that W can transfer “no more and no less than £1,060” of her personal allowance.
What happens if H gets a pay rise and becomes a higher rate taxpayer? As Paul Johnson of the IFS told a Lords committee on the draft Finance Bill last month, he would lose the benefit of the allowance immediately, so “you are facing several hundred per cent tax at the point at which you move from the basic to higher rate”.
An IFS briefing note had said in the run-up to the election:
“Indeed, some can be worse off after a pay rise, or better off after a pay cut, because the transferred allowance is withdrawn in ‘cliff-edge’ fashion – that is, income tax liability jumps by more than £200 per year when taxable income crosses the higher-rate threshold. The removal of this cliff edge would be a welcome side effect of abolishing the transferable personal allowance.”
Johnson was giving evidence to peers discussing the new personal savings allowance and the new regime for taxation of dividends. These changes, to be introduced in Finance Bill 2016, are raising some serious concerns.
We will have “all sorts of additional marginal rates layered on top of each other,” he said, adding that “becoming a higher rate taxpayer is going to become a very expensive part of your life”.
 Income Tax Act 2007 sections 55A-55E
Our tax code provides relief for losses so that the profits earned over the lifetime of a business are taxed once and only once. For example, a business has made trading profits of £550,000 and losses of £200,000 over five years, and has no other income. Its net profits are £350,000 and tax is paid on that amount, as shown below:
The company would be able to claim to have the loss in year 3 set first against the profit of year 2, leaving a smaller loss to carry forward, but the table shows how the carry forward of trade losses works. There are conditions, and special rules for banks and groups of companies.
Bringing forward allowable trading losses is not tax avoidance, and it is worth noting that a similar relief (with some important differences) is available to the self-employed. It is not just for companies.
I think we can probably expect the Treasury committee’s inquiry into UK tax policy and the corporate tax base to be more informative and fruitful than the public accounts committee’s inquiry into “corporate tax deals”.
This note on the importance of clear guidance on the interaction between tax-free childcare and other means of support is extracted from my recent update for Tax Adviser:
“The new childcare support landscape will be complex and we have stressed the importance of providing users with guidance that not only explains the rules of each scheme but also gives enough information for users to choose between schemes. Research published by HMRC has found ‘very strong support’ for an online calculator. However, parents – particularly those in two-parent households – often assumed they would be ineligible for [tax-free childcare]. This suggests that HMRC faces a challenge in raising awareness among parents.”