Tax and the coalition government: first 100 days - what next?

Comment from Richard Mannion, national tax director of Smith & Williamson, the accountancy and financial services group

The first 100 days of the coalition Government have certainly been busy. George Osborne announced the deepest and fastest cuts in public spending in living memory in his emergency Budget and the Office for Budget Responsibility was formed to provide an independent assessment of the public finances and the economy. More recently we’ve also witnessed the emergence of the Office of Tax Simplification to provide the Government with independent advice on simplifying the UK tax system. Vince Cable firmly believes that ‘fair taxes' must be at the heart of the Government's programme for the next five years. Unfortunately, fair taxes tend to be complicated.

The Chancellor’s stated desired goal is to achieve a balance of 80/20 between spending cuts and tax rises over the next five years, but it is difficult to see how the government will achieve the necessary level of spending cuts in the current climate. This means we could see further tax rises in the not too distant future and in my personal view a further rise of VAT (to 21%) or even an increase in the basic rate of income tax (to 21%) shouldn’t be ruled out. It’s worth noting, that in terms of which taxes generate most for the government’s coffers, income tax, VAT and NIC are the clear leaders, together generating about three quarters of total tax revenues - so these taxes inevitably come under review when funds need to be generated. But any increases, particularly VAT, are likely to come with a good deal of adverse publicity – especially in light of the mixed views already expressed on the VAT increase to 20% which will not be with us until next January.

Although we’ve witnessed some very welcome changes, it hasn’t been without the odd lapse. On Budget day the Government published ‘Tax policy making: a new approach’ setting out measures to improve the way that tax law is made, and emphasising the role of good consultation as a “corner-stone”. Unfortunately that was the day that the Chancellor declared that they would be changing the capital gains tax regime mid-year without any such consultation, resulting in a number of very untidy practical issues including a complicated tax return for the current year.

The country’s tax system has expanded over the last 50 years like a hydra with many heads with no sign of any long term core planning. Now is the time for a proper debate about the shape of the tax structure for the next ten years, including the balance between taxes on spending (eg VAT) and income (eg income tax) as well as the ratio of local and national taxes. Bearing in mind the requirement for Government to reduce its own spending we also need to consider whether any of the existing taxes can be made redundant. As a starter for ten do we really need to have both an Inheritance Tax and a separate Capital Gains Tax administered by separate groups of specialists or could they be merged into one tax?

Richard Mannion - National tax director – mob 07799 761326 /   020 7131 4252

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Disclaimer

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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