It would be a shame if HM Treasury’s more relaxed view, post-Brexit, on the timing of the elimination of the UK’s annual fiscal deficit was not used to facilitate some overdue tax reforms and simplifications. My suggestions for the Chancellor include the following tax changes. We hope (and, indeed, trust!) that he might announce some of them, if not all of them, in his Autumn Statement or his first Budget next Spring.
Focusing firstly upon the taxation of businesses:-
- Boost the Annual Investment Allowance (the ‘AIA’) to £1 million per annum. This was cut by the previous Chancellor from £500,000 to £200,000 with effect from 1st January 2016. We have always considered this cut to be counter-intuitive as the AIA is, in reality, the only tax incentive focussed mainly upon medium sized businesses. It is immaterial to the largest multinational companies and not relevant to micro companies and most small companies which do not spend even £50,000 per annum on qualifying capital expenditure. It is, however, very relevant to medium sized family-controlled, entrepreneurial businesses and would certainly lead to some of them accelerating capital investment and thereby securing the associated productivity gains. Accordingly, it would be very much a win-win policy.
- I consider that many SMEs suffer unfairly from the existing business rating system. More often than not, it is the largest multinational businesses which mainly benefit from technological developments such as remote retailing and service provision. The existing reliefs are insufficiently generous to owner-managed businesses and are withdrawn much too rapidly as these businesses expand.
- The Chancellor should also announce that HM Treasury will be issuing a consultative document to democratise, liberalise and boost the Enterprise Investment Scheme (‘EIS’) and the Seed Enterprise Investment Scheme (‘SEIS’) to enable more start-up and scale-up businesses to qualify and the excessively onerous – and expensive - investor protection legislation to be reduced and made more fit-for-purpose.
- If the Chancellor is not ready to allow SMEs to be taxed, if they choose to be, on a tax transparent basis, similar to the very successful and long-standing ‘S-Corporation’ legislation in the United States, he should look to replace corporation tax on SMEs with a much simplified ‘Small Companies Tax’ focussed tightly upon the audited (or independently verified) accounting profits, adjusted only by depreciation, capital allowances and AIAs as described above. In essence, can it be right that the same corporation tax which applies to the likes of BP, HSBC, GSK and Tesco etc. should also apply to an SME with no overseas branches or complex derivative financial arrangements?
Turning secondly to the taxation of individuals:-
- The Chancellor should announce that he will implement the - already announced target for this Parliament of a - £50,000 higher rate income tax threshold with immediate effect from 2017/18. In most of our key competing countries a 40% income tax rate occurs at a much higher level of income. Unsurprisingly, an income tax rate of (approximately) 40% is only paid by individuals in the United States when their income exceeds $415,000 whilst, more surprisingly, even in highly-taxed France the equivalent income tax rate (of 41%) is only paid from €72,000.
- The Chancellor should announce at the same time that the higher rate income tax threshold will be ‘triple-locked’ to the highest increase in consumer prices, median earnings or a fixed percentage of 2.5%. This ‘triple-locking’ would be identical to the percentages currently used for the increase in the recently introduced single-tier state pension, so why should a form of indexation applied to a state benefit not similarly be applied to an income tax threshold?
- The Chancellor should announce in his Autumn Statement that he will abolish the much-hated ‘spikes’ in income tax rates which occur at £50,000 and £100,000 as the financial benefits of the child allowance and the personal allowance are progressively withdrawn. Such spikes have no place in the tax system if simplification is a focus and incentives are considered to be important for mid-ranking managers and professionals in both the private and public sectors.
- The Chancellor should announce that HM Treasury will publish a consultative document upon merging capital gains tax and inheritance tax so that inheritance tax cannot arise upon proceeds which have already been taxed as capital gains. In my opinion, this should represent the first step towards fully merging capital gains tax and inheritance tax into a single capital tax with a flat rate of, say, 10% upon gains realised during lifetime and upon assets owned at death. This would both attract entrepreneurs to invest in the UK and encourage foreign direct investment into the UK by multinational companies by removing the concerns about inheritance faced by their key executives on their re-location to the UK.
Stephen Herring, Head of Taxation, Institute of Directors