TAX AND POLITICS

 

BLOG 220 

TAX AND POLITICS

 

I have been reading an article in Tax Journal on “Tax and Politics” by Sam Mitha.  Sam is a friend of mine.  Until he retired a few years ago, he spent his career with the Inland Revenue/HMRC where he was involved in tax policy since I first met him in the early nineties.  What interested me is how differently tax changes appear to Sam looking out than they appear to me looking in.

 

For a start Sam points to some things that have gone wrong because ministers put politics before tax, whereas I believe that tax is a creature of politics so needs to be crafted by HMRC/The Treasury to be able to meet the political needs.  This comes down to the purpose of taxation, which, sadly, Sam does not address.  I believe that taxation should have only one purpose, namely to raise the money that the politicians in government believe that they need to run the country.  In practice, of course, a significant part of the tax legislation does not have this aim.  It creates incentives for people to engage in activities that the government wishes to encourage.  A lot of the complexity derives from this.  Firstly, such legislation needs to be targeted to restrict the “goodies” to the activity in question.  Secondly, much of such targeting is short-term so affects only a few years but nevertheless needs to be complex to deter misuse.  Thirdly, most tax incentives only benefit those who generate sufficient profits to utilise a tax relief, whereas often who ought to be encouraged is the entrepreneurial new business that has not yet reached profitability (and taxabililty!).

 

I mention this because Sam starts by lamenting that Mrs Thatcher (actually her Chancellor) reversed the seemingly inexorable increase in the level of income tax “that had funded the growth of government expenditure on health, welfare and education”.  He thinks that as low income tax rates have a powerful electoral appeal, later Chancellors have been almost forced into maintaining that policy.  This begs a number of questions?  Why should government expenditure on health, welfare and education grow inexorably?  Why should that growth be funded wholly by taxation, not partly out of fees charged to those users of government services that can afford to contribute – as happens with prescription charges for example and is happening with pension auto-enrolment which is intended in due course to reduce reliance on the State pension?  Why single out those three areas when government expenditure grows generally.  Wikipedia tells me that there are currently 25 government departments.  There are also a large number of Quangos and bodies such as HMRC to which ministers have delegated functions.  Why do we need to fund such a vast machine?

 

Sam thinks that low taxation can force governments to resort to stealth taxes, which he defines as “taxes collected in ways that are not always obvious to those who are paying them”!  If an ideal tax involves plucking the goose with the least amount of hissing, plucking the goose with no hissing at all sounds like almost a perfect tax to me.

 

Sam says that “the policy of increasing the income tax personal allowances, whilst leaving tax rates unchanged, has made the tax system lop-sided.  Over 40% of those who receive taxable income don’t pay any income tax, while the top 1% of earners pay an estimated 30% of all income tax”.  He worries that exempting so many people from tax might encourage them to vote for those who advocate irresponsibly expensive policies.  I have not heard that suggestion before.  But exempting low earners from tax also reduces the costs of administering the tax system and reduces the silliness of the State taxing the low paid and then paying them benefits to restore the spending power that the tax has taken from them.

 

Sam is in favour of a wealth tax to “help alleviate the economic, social and political risks posed by the growth in wealth inequality”.  He does not mention that few countries have managed to create efficient wealth taxes and many such taxes have been short-lived.  It is politically unacceptable to tax some forms of wealth such as houses, pension funds and family businesses, which makes a wealth tax unfair on those who choose to invest their wealth in different assets.  A wealth tax is difficult to collect because many forms of wealth are hard to value.

 

Wealth inequality is a different area to address, and it seems doubtful to me that greater taxation of those with wealth is the right way to do it.  Indeed, wealth inequality arises from a number of factors.  Most would agree that equality of opportunity to accrue wealth is needed.  I doubt that many would agree that those who work hard and save a large part of their earnings to pass on to their families, should have some of their savings taken away and given to their neighbour who has worked less hard and has spent every penny he has earned in enjoying life in the extra time that not working has hard has given him.  Do many of those who seem to spend their lives in front of their computer and phones really resent that Bill Gates, one of the leaders of the microchip revolution that made that lifestyle possible, has, as a result of his energies, more wealth than they do?

 

To put things in perspective, a recent Institute for Fiscal Studies briefing note, tells me that the top 1% of income taxpayers (those with income exceeding £164,000 p.a.) received 12% of total earnings, but paid 27% of the total income tax.  Indeed, the top 10% of income taxpayers (those with income over around £54,000 p.a.) paid 59% of the total income tax, and the bottom 50% of earners contributed less than 10% of the total income tax.  The IFS describes this system as “very top heavy”.  It certainly seems to me to be already addressing wealth and equality.  It is also sobering to realise that 90% of all earners earn under £54,000.

 

Another factor that Sam does not mention is that most of the top 1% of earners and their 27% contribution to the country’s total income tax burden are highly mobile and can readily move to a country that is content to tax them less.  Wanting a bigger golden egg is dangerous if laying it risks killing the goose.

 

Sam is worried that “the tax system has, at times, departed to an egregious extent from the principle of applying similar tax treatment to the same sort of income”.  He instances reduced rates of corporation tax.  But this depends on what is meant by “the same sort of income”.  The tax system has never treated earnings from employment in a similar way to earnings from self-employment.  The treatment of loan interest on a trade within the scope of income tax differs from that within the scope of corporation tax.  Indeed, prior to 1965, companies paid income tax, so the introduction of corporation tax itself departed from Sam’s principle.  This suggests that the reality is that no such principle exists.

 

Sam also thinks that “until about 15 years ago, the Labour party was in the vanguard in warning about the dangers of tax avoidance” and that the Conservatives have toughened up their policy as “fearful of being accused of being “soft” on tax avoidance.  I certainly think that HMRC find it easier to get a Conservative government to introduce tax avoidance measures by playing on that fear.  But the reality is that all of the main tax avoidance measures, transfers of assets abroad in 1937, transactions in securities in 1960 and transactions in land in 1962 were introduced by Conservative governments, which is inconsistent with Sam’s perception.  One thing that has changed is that prior to the Blair years, anti-avoidance legislation was aimed at generic behaviours, whereas now it is mainly either used to block loopholes left by poor drafting of recent legislation or to give wide powers to HMRC to block anything they perceive to be avoidance.  Personally, I would rather that Parliament went back to the old days when it used to scrutinise proposed legislation rather than rush through reams of incomprehensible law in the (normally forlorn) hope that the draftsman had fully thought it through.  I doubt that even Sam welcomes the current approach where Parliament would rather create uncertainty – the enemy of business transactions – than try to get the legislation right.

 

Sam is also worried that as the economy recovers, the increase in interest payments might outweigh the growth in tax revenues.  But 58% of the gilts issued in 2020/21, were medium to long-term, which pay a low fixed rate of interest until they mature by which time we ought to be in a very different economic position.  Who knows?  However, I do not myself question Mr Sunak’s approach of giving priority to a rebound for the economy, which many think would be jeopardised by increasing taxes at the present time.

 

 

ROBERT MAAS

Fairness is in the Eye of the Beholder?

 

BLOG 219

 

FAIRNESS IS IN THE EYE OF THE BEHOLDER?

 

I noticed a recent article in International Investment headed “two-fifths of over 55s “unfairly” on £4,000 pension contribution danger line”.  This tells me that “two-fifths of working over-55-year-old prospective retirees are unaware of Money Purchase Annual Allowance (MPAA) restrictions despite many flexibly accessing their pensions in past 12 months according to new research by Canada Life, which is calling for the MPAA to be scrapped”.

 

The £4,000 limit arises from the pension flexibility introduced in 2014 by George Osborne.  This allowed people to access their entire pension fund flexibly from age 55.  It was soon discovered that wicked people were drawing money tax-free from their pension pots and reinvesting the money in new pension contributions, so doubling up on the income tax relief.  Accordingly, the cap for such reinvestment was introduced in 2016 initially at £10,000 but reduced to £4,000 in 2017. 

 

Whether it is unfair to seek to counter tax avoidance in this way depends of course on one’s perception of fairness.  The UK gives full income tax relief for pension contributions up to the amount of the annual allowance, which is currently £40,000.  The MPAA only applies once a person has started to access their pension fund.  The purpose of tax relief is obviously to encourage people to set aside money during their working life to provide for their retirement.  The bargain is that the government will grant tax relief for the contribution and will enable 25% of the resultant pension pot to be withdrawn tax-free with the remaining funds being used to purchase a pension which will be taxed on receipt (in most cases at a lower tax rate than the rate on which relief was given). 

 

It is questionable whether it is fair to grant relief for savings which are invested to provide a pension, but not to grant tax relief for mortgage payments which are invested to provide a home on retirement and thus reduce the need for pension income to pay rent.  Be that as it may, the Canada Life report does not itself talk of unfairness.  It tells us that 14% of working adults over 55 have flexibly accessed their pensions and two-fifths of all respondents are unaware of restrictions, such as the MPAA.  Two-fifths of 14% is 5.6%.  This suggests that out of the 1,013 respondents to the survey, 141 have flexibly accessed their pension and 57 of these were not aware that by doing so they had capped future pension contributions at £4,000 p.a.  I do not find that particularly worrying, but do have a concern that those 57 people must have been told about the MPAA by their pension provider when they decided to access their pension but did not understand what they were being told.

 

Apparently, of those who accessed their pension pot in the last year, 42% (425 people) did so to top up their income, 25% (253 people) used the money to make home improvements and 17% (172 people) put the money into non-pension fund investments.

 

55% of the people who accessed their pensions have also continued to make new tax-deductible contributions to their pension scheme. 

 

Personally, it does not seem to me particularly unfair to limit the future tax-deductible pension contributions that can be made by people who use the money set aside for pensions to make home improvements or to invest outside the pension wrapper.

 

I have sympathy with those who had to draw money from their pension fund to supplement Covid-hit income.  However, I suspect that most of those are fairly lowly paid and as such are not unduly affected by a £4,000 contribution limit.

 

Canada Life have produced a table which shows that for an occupational pension scheme, the £4,000 MPAA will only cover the 8% auto-enrolment minimum contribution if the salary does not exceed £50,000.   Canada Life tell me that “retirement journeys are changing, and it is no longer the cliff-edge event it used to be.  Many more people are choosing to retire later for a variety of reasons and continue working in older age, either by reducing their hours, setting up their own business or perhaps embarking on a less pressured career”.  It is by no means clear why this should mean that those who decide to set up their own business or embark on a less pressured career should expect to withdraw funds prematurely from their pension pot and to be given tax relief to then refill that pot.

 

I can understand that those who reduce their hours are likely to reduce their earnings in consequence and to need some recourse to their pension fund to maintain their standard of living.  However, I would expect the company’s contributions to be reduced accordingly.  On that basis, on Canada Life’s figures, a person earning £50,000 who reduces his hours to a 3-day week would be earning £30,000, and £4,000 allows a 13% pension contribution at that level.  A person earning £50,000 for a 3-day week is equivalent to earning £83,333 for a 5-day week.

 

The HMRC PAYE statistics tell me that a person earning over £55,500 per annum is in the top 10% of earners and a person earning over £75,800 per annum is in the top 5% of earners.  Accordingly, most employees are not affected by the MPAA; it is only the top earners who are affected.  Canada Life comment that the MPAA “is quite simply penalising people for doing the right thing”. I find it hard to regard taking money out of that set aside for pensions to make home improvements or to invest on the stock exchange as “doing the right thing”.  I equally find it hard to agree with Canada Life that it is “deeply unfair” to limit the ability of those who look to their pension pot to manage their expenses or cover unexpected costs to be limited to tax relief on £4,000 per annum of new pension contributions made to refill their pension pot.

 

I know that the MPAA is hated by the financial services industry.  I do not particularly like it myself as it is a nuisance and an extra complication to the tax system.  However, “unfairness” is the last thing I would accuse it of.

 

 

ROBERT MAAS

 

PENALISED BY GUIDANCE

 

BLOG 218

PENALISED BY GUIDANCE

 

I was reading an article the other day by Robin Ellison, a well-known solicitor, when my eye was caught by “HMRC publishes tens of thousands of pages of “guidance” breaches of which also involve heavy penalties”.  Surely not, I thought.  Guidance is just that.  You cannot be penalised for ignoring HMRC guidance, but you can be penalised for ignoring the law.  Tax is a creature of statute.  It is governed by law, which is either passed by Parliament or authorised by Parliament (statutory instruments) or in some fairly minor administrative areas promulgated by HMRC under specific statutory powers.

 

But after a bit, I realised that, in practice, Robin is largely right.  Many, if not most, HMRC officers who impose penalties seem completely oblivious of the law.  They rely wholly on HMRC guidance.  Most unrepresented taxpayers – and, sadly, some small firms of accountants – are unfamiliar with the law too, and if HMRC say that a penalty has been incurred, accept that as a fact.  Accordingly, I think that many people are charged, and pay, penalties on the basis of HMRC guidance, albeit in many cases no penalty, or a significantly lower penalty, is in fact due under the law.

 

In many cases, the HMRC guidance reflects the law, but guidance is just that; it cannot relate to a specific set of circumstances so lays down principles.  Unfortunately, many HMRC officers seem to try to squeeze the facts into the guidance rather than consider the facts in the light of the guidance.

 

On the question of guidance, my attention was recently drawn to what HMRC say about the congestion charge in their Employment Income Manual.  This ties the charge to the registration of the car.  HMRC think that if the charge is incurred by a vehicle registered solely in the employer’s name and the employer bears the charge, there are no tax consequences for the employee.  However, if the charge is incurred by a private vehicle registered in the employee’s name but the employer pays the charge, “the amount of the payment is a benefit to the employee because it prevents a penalty fine being imposed on them”.

 

I find that an extraordinary concept.  HMRC seem to have discovered a new way of collecting lots more tax, because there is nothing special about the congestion charge.  Perhaps business rates are not a deductible expense.  Most of us have seen them as a normal business expense, but if the occupant does not pay the rates, he can be fined so rates cannot be wholly and exclusively incurred for the purpose of the business if there is also a purpose of avoiding a fine for non-payment, which is a non-business item.  And what about licences?  A taxi driver needs a Hackney cab licence or a private hire licence and if he is employed by the taxi company, it pays the licence fee but now HMRC have discovered that while it thought it was doing so solely so that it could run its business, it is actually partly doing so to avoid the driver being fined for driving without a licence.  The possibilities are endless.

 

Or, of course, the guidance might be complete nonsense!  The congestion charge, like tax, is a creature of statute, in this case the Greater London (Central Zone) Congestion Charging Order 2004 (as amended).  It imposes the charge “in respect of each charging day on which a relevant vehicle is used or … kept on one or more designated roads during charging hours”.  The charge is imposed by the payment of a licence fee to Transport for London.  There is nothing in the Order to tie either the licence or the penalty to registration of the vehicle.  The person licensed to use the vehicle in the charging zone is whoever chooses to purchase a licence (by paying the charge).

 

As the charge is for a licence to use the vehicle in the zone, it is simply an extra cost of driving in London.  As such, its tax treatment will follow the normal rules for motoring costs.  If the car is used for private reasons (including home to work travel) there will be a benefit-in-kind on the employee if it is his car and, if it is his employer’s car, there is technically a benefit, but all of the benefits from the use of a car (other than fuel and the provision of a chauffeur) are rolled up into a single car use charge.

 

The employee who drives down in his own car from his normal pace of work in Nottingham to visit his employer’s head office in London is driving in the course of his employment and is entitled to be reimbursed all the costs of doing so, including the congestion charge, without being taxed on a benefit-in-kind.

Tax does not always conform with common sense, but it usually does so!

 

ROBERT MAAS