Recently in Taxes and rumours of taxes Category

Faint warnings (for now at least) of the possibility of a "broadband tax" to pay for the public service programmes put together by commercial TV stations.

The proposals are being put forward by the Office of Communications (Ofcom), the regulator for telecoms. It is included in their latest public broadcasting review. Click here to read the pdf, if you must.

So Ofcom thinks it's a good idea to introduce a tax to pay for such programmes. In their words,

It might be possible to introduce levies on providers not currently part of the formal public service broadcasting model, such as broadcasters, equipment sales, internet service subscriptions or UK online content providers.

Interesting how they use the less aggressive word, "levy", to describe what is in essence, a tax.

Needless to say, this "levy" will not be borne ultimately by the internet service provider. Rather, it will be passed down to the poor consumer, who will have to pick up the tab for whatever passes for "public service" programmes in dumbed-down Britain today.

What rot. Now I have nothing against public service programming - some of the programmes are quite good - but I fail to see why the average broadband user should be made to pay for programmes for which he does not care. If these public service programmes provide value, surely it shouldn't be too hard for them to find some commercial sponsors, and leave the poor taxpayer alone. If, on the other hand, they can find no advertisers or sponsors for their wonderful programmes, then perhaps we are all philistines who do not know what is good for us. Forcing us then to pay for such programmes would not be right, as we obviously do not value them enough to watch them. But perhaps Ofcom does not care whether or not we watch; they are simply satisfied if they can part us from our money.

A few days ago, I wrote a post on this blog entitled 'Abolition of taper relief - will there be a U-turn?'

The answer, from reading today's Telegraph, appears to be 'yes'. That in itself is not surprising; the surprising thing is that the U-turn has come so soon. I was expecting that we would have to wait until the 2008 Budget to find out that the Government had changed its mind in some way or the other.

Apparently, the U-turn consists of reviving some aspects of the old retirement relief rules. Retirement relief was a capital gains tax relief available to taxpayers who were disposing of their businesses after attaining a certain age, or retiring earlier due to ill health. The way the relief worked was that a certain amount of the gain was exempted from capital gains tax, and any amount in excess of that threshold would attract the tax at the normal rates. The relief could only be claimed once in a taxpayer's lifetime.

The U-turn being proposed now is that taxpayers disposing of their businesses would be entitled to the first £100,000 free of capital gains tax, with the 18 per cent rate to apply to any gains in excess of that threshold. Like retirement relief, the £100,000 can only be claimed once in a taxpayer's lifetime. In effect, it is a 'retirement relief', because if the taxpayer went off and started another business, the relief would not be available to him when he came to dispose of it.

As usual, I will wait until I see the actual detail of the proposal before I comment fully on it.

Turns out this blog was right to be sceptical about the news that the proposed bin tax was to be shelved.

The charge hasn't been shelved after all. It has reappeared in the Climate Change Bill, which gives local authorities the power to levy the charge.

This means that the Government will be able to distance itself if or when a local authority actually introduces the charge. The Government can claim that the decision to levy the charge was an 'independent' one made by that council.

But will it really be an 'independent' decision? A squeeze on local authority funding by the Government could very well lead to a local council introducing the charge. I wouldn't call that an 'independent' decision by the council.

So forget last week's spin by the Government. The threat of bin taxes still remains.

Given the outcry about the proposed changes to capital gains tax taper relief, don't be surprised if the Government performs a U-turn in next year's Budget.

Here are my predictions:

1. They may decide to 'phase in' the abolition of the relief, in order to take some of the sting away. Maybe by tinkering with the rates somewhat. You can trust this Government to make things more complicated than they need to be.
2. They may decide to exclude certain assets from the 18 per cent rate. I'm thinking of things that would currently qualify as 'non-business assets' under the taper relief rules. Things like second homes, shares held for investment purposes, etc. They may decide that these should continue to be taxed at their current (higher) rates.
3. Instead of (2) above, they may create a 'special exemption' from the 18 per cent rate for assets that currently qualify as 'business assets' for taper relief purposes. Those can continue to be taxed at the current effective rate for higher rate taxpayers of 10 per cent. There will, of course, be stringent conditions to be met before an asset can take advantage of the special exemption.
4. Or they can just quietly shelve the whole abolition of taper relief thing, and pretend it never happened. This should be the easiest way out. Of course there would be taunting and jeering from the Opposition benches, but if the Government is brave enough to weather that (which I doubt), then this would be the best thing all round for everybody. Don't bank on it, though.

Good news. The Government has come to its senses and abandoned plans for a pay-as-you-throw domestic waste tax.

I discussed the lunacy of such a bin tax some time ago. There are all sorts of reasons why this tax was such a bad idea, not least the public health reasons: taxing people for throwing out rubbish will simply lead to fly-tipping and all the hazards that would follow.

Anyway, according to the Telegraph, Gordon Brown has intervened to scrap the plans, out of fear that they could cost the Labour Party dear in next year's local government elections.

Hmm. So does this mean that the plans could be revived once the danger of the local elections is past? We will find out soon enough.

Inheritance tax - transferability of allowances between spouses and civil partners.
A cunning move to unsettle the Tories, but let us see how this tax break works in practice.

Capital gains tax - abolition of taper relief.
Yes, you heard correctly. Taper relief, which was introduced by Gordon Brown in 1998 to replace the indexation allowance, is now to be abolished. Another example of a tax u-turn by this Government. Remember the zero per cent rate on corporation tax?

The abolition of taper relief is being spun as a necessary measure to deal with the private equity issue. However, they are not the only people affected. Taper relief is available to every taxpayer who disposes of chargeable assets, so they are all affected. See Bel for an interesting piece on the effects of the abolition.

Also with the abolition of taper relief is the 'withdrawal' of indexation allowance. What does this mean? Does it mean that any indexation allowance accrued to date, is lost? When selling a capital asset, allowance is normally made for inflation from the date the asset was acquired, or March 1982, whichever is earlier. This inflation is calculated as an 'indexation allowance', and deducted from any gain on sale. Indexation allowance is abolished for sales by individuals with effect from 1998, and replaced by taper relief. So what would happen would be that, on a sale after that date, indexation allowance is calculated from the date the asset was acquired until April 1998, and then taper relief would be calculated from that period onwards. So the indexation allowance that was built up was preserved.

I assume that, when the April 2008 changes take effect, any indexation allowance accrued until April 1998 will be preserved - there will be a huge outcry otherwise.

Indexation allowance still continues for companies, and I assume that this remains the case even after April 2008.

£30,000 levy on non-domiciles.
Well, you know where they got that idea from. They just added an extra £5,000 to the Conservative Party's proposal.

To read the Pre-Budget Report notes in full, click here.

The Chancellor will deliver the Pre-Budget Report next Tuesday (9 October 2007). Speculation is rife that there is a General Election on the cards. If so, the Report will be all the more interesting for what it leaves out, rather than what it says.

Gordon Brown may have handed over nominal control of the Treasury to Alistair Darling, the Chancellor, but only the very naive would assume that the latter has any real control over what goes into the Pre-Budget Report.

Things have gone somewhat quiet, but the consultation period is still open for the Government's proposals for changes to the capital allowances regime (pdf). Comments are invited up until 19 October 2007.

The Government is consulting on:

• the proposed Annual Investment Allowance (AIA); and
• the proposed rules for 'integral fixtures'.

We will discuss integral fixtures in a later post. The rest of this post summarises the Annual Investment Allowance.

Time to be wary. Gordon Brown is promising 'justice and equity' in the tax affairs of the private equity industry.

There has been much outcry of late about how the private equity sector is taxed favourably. And from even within the industry. Nicholas Ferguson, the chairman of a SVG Capital, a private equity investor, recently made the point that there was something wrong about the fact that a private equity executive was paying less tax than a cleaner.

I agree with Mr Ferguson that there is something wrong about that. But this is like comparing two different taxes: the cleaner's income tax, and the executive's capital gains tax. The cleaner pays income tax at the basic rate of 22 per cent. The executive makes a lot his money from selling off capital assets, and after claiming the available reliefs, he benefits from a much-reduced capital gains tax rate, in some cases, as low as an effective tax rate of 10 per cent.

This reduced capital gains tax rate is not available only to the private equity sector. It is available  to any taxpayer who has held a 'business' asset for at least two years. Such a taxpayer is entitled to 'taper relief' of 75 per cent, which means that only 25 per cent of the gain is chargeable to tax. In the case of a higher rate tax payer (paying tax at 40 per cent), the availability of taper relief reduces his tax rate to an effective rate of ten per cent.

So this is the so-called favourable ten per cent tax that we are being informed is enjoyed by private equity. However, what the critics do not add is that this relief is available to any one who holds for at least two years, and then disposes of, a 'business asset' as defined by the tax legislation.

So yes, while there is something wrong with a ten per cent rate for an executive versus a 22 per cent rate for a cleaner, one should not ignore the point that there are two different taxes at play here. In any case, I think the argument should not be about denying the executive his legitimate ten per cent tax rate, or the opportunity to arrange his tax affairs in the most favourable way for him. Rather, the argument should be about whether the cleaner is paying too much tax.

The Chancellor should not be penalising the executive because he has arranged his affairs so as to pay as little tax as he can legally pay. Tax avoidance is, after all, not (yet) a crime, and in any case, what the executive is doing, is just simple, straightforward tax planning. What the Chancellor should instead do, if he wants to introduce 'justice and equity' into the tax system, is to enable to lower earners to keep more of their money. That shouldn't be too hard to do. What about a more generous personal allowance, say £10,000, to take out of taxation the lowest earners, and to encourage more people into work?

The Education Secretary, Alan Johnson, is indulging in some old-fashioned class war. He's standing for the deputy leadership of the Labour party, and what better way to appeal to the core Labour vote than to make a few attacks on private sector education?

He has announced that private schools should do more to 'earn their charitable status'. In particular, he wants them to share their equipment with their state school counterparts. Many of them do so already. He also wants them to share their teachers. Never mind the morale-sapping effect of such a measure on the overworked, harassed teachers in the state sector.

What Mr Johnson did not say, but what was implicit in his mention of 'charitable status', was that, if he had his way, private schools should be stripped of charitable status if they failed to comply with these new conditions .

What benefit does charitable status bring? Tax breaks, for one thing. A charity is not liable to tax in respect of its charitable activities. The charitable status of private schools is commonly estimated to be worth around £100 million per year. It is this benefit that Alan Johnson is threatening to withdraw, by blackmailing such schools into intervening in the public sector, and, in effect, doing the Government's work for them.

(As an aside, the Independent Schools Council has published figures showing that bursaries and scholarships awarded by independent schools in 2007 exceeded £300m, far greater than the amount of tax breaks afforded to the schools.)

The Conservatives also have ideas of their own along the same lines. The key difference is that they are not attempting to threaten anybody. Rather they are hoping to lure private schools into helping out a bit more in the state sector. They want to relax the stringent conditions applying to organisations that want to run city academies. They hope that this will make such a project more attractive to the private education sector, resulting in some private schools helping to run these academies.

A much better idea than the blackmailing threats of an ignorant class warrior representing a Government lacking in ideas.