The Adam Smith Institute (ASI) has already given its response to the budget. We should also remember that the UK’s fiscal position is basically unsustainable even if economic growth is sustainable - and I find that extremely hard to believe. The UK economy needs massive fiscal consolidation, supply side reform and sweeping tax cuts if it is going to prosper.
Moving away from those macro-type issues, there are some very troubling aspects to the 2014 budget that it seems worthwhile highlighting, if only to remind us of the madness that is UK public policy. You won’t read much about these in the popular press, which is more concerned with bingo and beer.
Changes to Annuities Regulations Will Increase Tax Take in the Short to Medium-Term
As this article points out, pensioners taking a lump-sum payment will still face very large tax charges which will make a tidy sum for HM Treasury.
In the Longer Term, Changes to Pensions are Being Funded by Higher Taxes on Contributions
The Chancellor has reduced the relief on higher rate income tax for pensions contributions. Osborne has reduced the cap on tax-free life-time savings from £1.5m to £1.25m. Sounds like a lot of savings, but given the current rate of inflation, this will probably be about average by the time a lot of current workers retire. Anyone breaching this cap will face a 55% tax charge, which promises to raise about £5bn for the Treasury. I won’t spell out the long-term economic effects these sorts of raids on saving have on the UK’s economic growth prospects, but people need to start recognising that we cannot have sustainable, real economic growth without savings.
HMRC Has Been Giving Sweeping New Powers
As if the (much-ignored, but hugely significant) General Anti-Abuse Rule (GAAR) of 2013 hasn’t given HMRC enough. Essentially, the GAAR grants HMRC the discretion to determine, retrospectively, what is ’reasonable' practice, which, as Jamie Whyte points out strikes at the Rule of Law. Less seriously, but dangerous from an investment perspective, is that it creates huge uncertainty in the UK’s tax position.
HMRC has received a £1bn increase to its budget and powers to confiscate funds directly from individual’s bank accounts. This is hugely worrying from a civil liberty perspective, but we should also bear in mind that reducing the level of tax avoidance (which is, or ought to be, legal behaviour) simply represents tacit increases in taxation, which already stands at very high levels.
Changes to the Rules on LLPs Have Been Pushed Through
The changes, outlined here, threaten to have potentially serious tax consequences for LLPs. This is in spite of a request by the House of Lords that they be delayed because of the uncertain impact of the new measures.
New Rules on SDLT are Very Problematic
The Chancellor has signally failed to change SDLT despite the huge ‘fiscal drag’ and distortions to the property market it creates. As property prices rise, this will increase - no wonder the Government is extending its ‘Right to Buy’ scheme! As this article points out: “In the 2012 Budget, Osborne announced that homes worth more than £2m would face a stamp duty rate of 7 per cent.
Osborne said: “We are expanding the new tax we introduced to stop people avoiding stamp duty by owning homes through a company. We will expand the tax on residential properties worth over £2m to those worth more than £500,000.”
This is a smoke-screen, however, as individuals were using this to avoid IHT on properties, and not SDLT. The reliefs available for landlords are very difficult to obtain, and essentially these changes will result in higher tax charges on landlords, thereby increasing rents and reducing availability, in a rental market which is already unaffordable to many and is plunging those on middling incomes into ‘housing poverty’.
This article was originally published at the Adam Smith Institute.
