Friday, August 15, 2008



I am afraid that the major tax changes in the Pre-Budget Report and the Budget have kept me too pre-occupied to nurture this blog. I am about to take my annual trip to Chicago but before I go thought I would share with readers some interesting snippets that the Financial Secretary to the Treasury, Jane Kennedy, told Parliament during the passage of the Finance Bill.

6 May

On the trade-off between environmental taxes and behaviour

“I heard the word elasticity, and the concept of Liberal Democrats bungee jumping policy is quite entertaining. The hon. Member for Taunton suggests that travelling by train is the way forward; he must know that travelling by train requires a degree of public subsidy. He has no serious proposals for how he would promote and encourage that kind of transport. He is suggesting that it will be possible to do so with a wave of the hand”.

On tax credits

“If a family’s income goes down dramatically, the flexibility of the system enables it to respond—in some cases within days, if the information is received quickly enough—to boost that family’s income. There are many families throughout Britain who will testify to the support that they receive from tax credits”.

On the 10p tax band

“We believe that it is important to help work pay, and that is what the 10p tax rate was designed for: it did what it said on the tin. It made a huge difference and was of benefit. However, things have changed. Ten years on, it was appropriate to review the system, and that review resulted in the proposal in last year’s Budget”.

On the abolition of the 10p tax band

“Nobody is more seized than us of the need to be coherent in what we introduce and make sure that it is affordable and achievable, and to introduce proposals that meet people’s expectations that those who have been badly affected will be assisted. We are working on the detail of those proposals. It would be quite wrong to make commitments that I may regret”.

On why the government did not anticipate the furore over the 10p tax band

“I accept what the hon. Member for Taunton is saying about the 10p rate. Representations were made at the time of the 2007 Budget. A number of hon. Members who participated in last week’s debate drew my attention to those representations and I had read many of them when preparing for the debate. However, he will also recall that at that time the overall package of reforms was welcomed by, among others, the Institute for Fiscal Studies, which described the simplification as broadly very welcome and broadly fiscally neutral”.

(Fiscal neutral of course means that the government collects the same amount of tax; shame it achieves this by giving to the middle classes and taking from the poor. But as Jane said, “400,000 families will be worse off by between £5 and £10 a week … but the maximum that an individual should find themselves paying per year is about £232”).

On tax credits

Mr. Hammond: “Do the … Government accept that not only ignorance about the availability of tax credits or the fear of the complexity of the application but the fear of the consequences of overpayment deters take-up? In practice, the system has created a positive deterrent for people on low incomes; they are simply too afraid of the possible consequences of getting it wrong to take up their tax credit entitlements”.
Jane Kennedy: “I accept what the hon. Gentleman says—there is the potential for that damage to happen. However, I am sufficiently concerned about the issue to raise it regularly in discussions with HMRC. It advised me that it sees no indication of any falling away in the rates of take-up, particularly among those families with children, where the proportion of take-up is largest. Nevertheless, it may well be a factor for those households without children, and that is why I am examining the structure around tax credits to see what can be done within the constraints in which we work and to ensure that those who are entitled to tax credits claim them”.

On the 10p tax rate

“The truth is that the proposals introduced last year were part of a worked-out package of measures that would clearly benefit four out of every five households in the UK, whereby they would be neither worse off nor better off. For the 5 million households, we acknowledge that more has to be done, and as we speak, we are working to that effect”.

(It is noteworthy that the Government regard being neither worse nor better off as providing a “benefit”! Not to increase taxes is apparently an act of generosity).

On savings

“We maintained the savings rate in order to continue to reward saving; we also make available vehicles to encourage others to save, including individual savings accounts and the child trust fund….Trustees are not individuals, so the rate for trusts are unchanged, and that is covered by section 11 of the Income Tax Act.”

(So savings are welcome but not if you lock them away for a rainy day in a trust).

On self-certificates

“It is not advisable for a bank or building society to accept a taxpayer’s self-certification that they are in a particular band. That would put a greater administrative burden on banks and building societies”.

(Surely not? Accepting what you are told creates no administrative burden. Being expected to police what you are told and being held responsible if what you are told is incorrect would of course create a huge administrative burden for the banks but that is not a necessary adjunct to a system of self-certification).

On UK plc

“Certainty and the ability to make planning decisions knowing what the tax implications will be are highly prized by business. Striking a balance between the objectives of responding to global changes and providing certainty is not always easy”.

(It is unclear why global changes should inhibit the UK having a tax system that is certain. Certainty is one of the basic tenets of any good tax system).

On corporate tax

“The headline rate is important, which is why we have been taking steps to reduce the headline rate of corporate tax and why we will continue to look for ways to maintain the competitiveness of the UK economy…Competitiveness is about more than just the headline rate of corporation tax. The UK tax system has other advantages, including a generous system with R and D tax credits, but also there is no withholding tax on dividends, which is regarded as very welcome. We have one of the largest networks of tax treaties in the world, and relatively low administrative burdens. We are unusual in offering full interest deductibility”.

(I am not clear what system she is talking about. Low administrative burdens and full interest deductibility are not recognisable attributes of the UK system).

8 May

On CGT reform

“Those changes replace layers of complex rules built up over many decades with a substantially simpler capital gains tax framework….The CGT regime that we are removing [i.e. Gordon Brown’s] charged CGT at headline marginal rates of 10 per cent., 20 per cent. and 40 per cent…It also meant that, for those paying the highest rate of income tax, the effective rate on business assets came down from 40 per cent. to 10 per cent…we believe that it is reasonable to ask those people who are benefiting from capital gains of this sort, particularly where the gain is not being reinvested in the way that was intended by the taper relief, to contribute more in taxes….We are withdrawing the taper relief and indexation allowance because, as I have explained, it was effectively benefiting everybody irrespective of whether it was reinvested”.

(Actually indexation allowance was intended to compensate investors for the ravages of inflation. This seems to be a typical Gordon Brown tax measure; don’t tie a tax charge to the behavioural effect you want to achieve – in this case don’t even explain what you want to achieve – and then withdraw the relief as it doesn’t achieve the hoped for behavioural change).

On transitional provisions

“The announcement in the pre-Budget report, with implementation in April this year, was intended to allow people time. It could be argued that that is not much time, particularly as we then introduced further changes, and the entrepreneurs relief in January…If the primary purpose of a reform is simplification, introducing a transitional period reintroduces complexity to the process”.

(That’s an interesting concept. Achieving fairness and meeting people’s legitimate expectations cannot justify the short-term complexity of transitional rules).

Robert Maas