So, I’ve reflected on 2010, what hopes for 2011?
Politics
We’ll still have a coalition government — but the Lib Dems will begin to defect.
Osborne won’t do a U turn despite all the evidence that his policies are failing. That will come in 2012 as the scale of opposition increases across society — especially as the NHS and social services for the elderly begin to crumble.
Cable will quit but it won’t make any difference.
Ed Balls will become shadow chancellor.
The main discussion on politics will stay outside Westminster as the initiative is taken by new thinking which Labour will begin to assimilate. Unions will feature in this process.
Tax Justice
The issue will grow. The opposition from big business will be strong, and maybe messy.
Country-by-country reporting will get an EU endorsement — at least for the extractive industries.
Sarkozy will reignite the tax haven debate but the OECD will seek to water it down.
We will see widespread discussion on a General Anti-Avoidance Principle in the UK and the CBI will make that the focus of its opposition to reform.
UK Uncut will become policy focussed as it develops.
Personally
I hope to work on a book (agent, anyone?)
I might do a bit less blogging as a result.
Because NGOs, TJN and UK Uncut are delivering the message that reform is needed my focus will be on the solutions to the problems, not that the problem exists. That’s agreed now.
Solutions are in short supply at present, and I’m looking forward to promoting them on tax and the broader economic issues.
Overall
It’s going to be a very hard year with the pain horribly unevenly spread.
The divisions in society will become very apparent.
The pressure for change to promote greater justice for those who are poorest and in the middle in this country will become unstoppable.
But it will be very tough on the way.
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@Richard.
Just had a case where a property business could be accounted for and taxed in two different ways.
1. As a property development. This means when the property is sold the profit will be liable to income tax at 20%, National Insurance at 8%, and a personal allowance of £6,475.
2. As a property investment. This means when the property is sold the capital gain will be liable CGT at 18%, no National Insurance, and a personal allowance of £10,000.
The tax deductible costs are the same under both alternatives. Both are viewed as property businesses, but the former is deemed trading (or earned) income, the latter investment (or unearned) income.
I hope your book on tax justice will also have something to say about this injustice, namely that unearned income enjoys a lower tax rate and higher allowances than does earned income.
Equalising these features may only have a marginal impact on the overall tax take to the Treasury but if tax is about fairness then surely the discrepancy between earned and unearned income needs to be addressed?
Sorry, the tax free allowance for capital gains tax purposes should have read £10,100, not £10,000.
Season’s greetings Richard! It doesn’t feel appropriate to say ‘happy new year’ given the implementation of these unfair cuts. I just wanted to add my thanks for all your hard work in up dating your blog … you have made it so much easier for those engaged in opposing the coalition’s cuts on the ground. To be able to quote your statistics and reference you, succinctly undermines the usual political ‘smoke and mirrors’ answers.
For a specific example, Norman Baker MP wrote back to me saying that he shared my concern about uncollected tax of all sorts and that the coalition are putting extra resources into tackling tax evasion, but I was able to give him the statistics about the cuts to revenue staff and the 30-180k retrieved over and above the cost of each salary. Thanks again.
@Stephen
Dear Stephen
I was a little confused by your comment. I thought that under UK tax law when property was acquired with any form of commercial intent, it was acquired either as a development property or as an investment property. As you will know there is even legislation that taxes as income what appear to be capital profits in certain circumstances.
If this is the case, how can you have a choice as to how a property transaction is to be accounted for and taxed? It is the facts that determine whether the transaction is trading or investment. Using the concepts introduced by Richard, taxation should follow the underlying economic reality, in this case either it is a trading transaction or it is an investment transaction and the economic reality or facts determine which it is to be.
If the facts determine a transaction to be trading then to account for it as investment sounds remarkably like tax evasion (not even tax avoidance) and vice versa.
Your views on this are welcomed.
Regards
Gregory
@Gregory
You are spot on Gregory, I am not disagreeing with your analysis at all. Your are correct in stating that I don’t have a choice about how the transaction should be taxed – perhaps I worded my posting poorly if I suggested that a choice existed.
The point I was really trying to make was that if I buy a property for £100,000 with a view to letting it then the income I derive from the rent is not subject to National Insurance even though I am in business. Further, when I sell the property, I will be subject to Capital Gains Tax at 18% but with a tax free alowwance of £10,100. Any improvement costs I incur are deductible in the CGT computation.
In contrast, if I buy a property for £100,00 with a view to developing it
and I incur the same improvement costs as in the example above and then I sell for the same price as above, then I will pay income tax at 20% on the profit, National Insurance at 8% on the profit but I will only get a tax free allowance of £6,475 against income tax and £5,475 against NI.
In other words I will pay a lot more tax as a property developer compared to what I would as a property investor. Both are businesses but why the differential tax treatment? That is the point that I am querying. In essence the two transactions are similar, or are not different enough to justify the differential tax treatments. Using the substance over form argument there is little justification for the differential treatments.
I fail to see why earned income (trading income) incurs a higher tax rate and lower personal allowances than unearned income (investment income).
Do you think I am wrong to question this apparent anomaly?
@Stephen
Dear Stephen
Thank you for your prompt response.
By all means question the apparent anomaly. When engaging in such questioning it is probably necessary to do so from many aspects, for example:
1. Compared to income tax, capital gains tax is a very recent introduction so, whether you like it or not you have to consider history and all the baggage that goes with it. Recently it has proved difficult to abandon taper relief because it had become part of the mental framework of many UK citizens hence the apparent concessions on CGT for entrepreneurs and the apparent lower rate of CGT as opposed to IT;
2. Income (for example rent or profit on “a turn”) derived from capital (in this instance property) is subject to income tax. Capital gains is subject to capital gains tax. It might be easier to identify income generated in a period than a “true” capital gain over a number of periods (what about inflation of capital assets?);
3. Should taxpayers be encouraged to invest rather than trade? The existing government has decided that investment should be encouraged by offering more attractive tax rates. The previous government offered many potential investors even more attractive tax rates to encourage investment. This suggests that the difference between that taxation of capital and the taxation of income is a political/economic matter that is considered by each goverment and cannot be predicted based on historical expression of principles by the different political parties.
4. Savings invested in trading can be used to produce far more profit (by “turning” the investment a number of times in a period) than can savings invested in an investment which is not “turned” over a period. This type of use of saving is needed to produce wealth in a society and needs to be encouraged also.
I am sure that you will have read it, but an interesting introductory book on these matters is Cedric Sandford’s “Why tax systems differ: a comparitive study of the political economy of taxation”. This book offers some insight into why tax systems are the way they are in different countries and at different times.
Kind regards
Gregory
You think Cable will resign?
Ho ho ho
You misread completely. There is no better chance for a free trade addict to push that forward for corporations than the Sec of State for BIS role.
@Gregory Morris
Thank you Gregory. That is a very illuminating and interesting response. As a matter of fact, I have not read Cedric Sandford’s book although I have now placed it on my reading list. I have found references to other works authored by Sandford in one of my old text books from my undergraduate days (The British Tax System, Kay and King) but not to the specific title you mention.
Yes, I was aware that there was disquiet when taper relief on capital gains was abolished and that the 18% rate was introduced to placate those affected. And yes, I now see the justification for the favourable tax treatment permitted to property investors because of the low turn on their capital when compared to the turn typically achieved by property developers/traders.
Clearly, I need to do some more reading!
All the best
Stephen