By George Bull, Head of Tax, Baker Tilly
1. Will a “mansion tax” make up shortfalls in the 50% income tax rate?
In the 23 March 2011 Budget, the Chancellor announced that HMRC will be asked to report how much tax the 50% top rate has raised in its first year, 2010/11. The Treasury estimated that the 50% rate for individuals should produce some £1.8 billion (official estimates combined the 50% rate for individuals with the tax rate on trusts but once the expected liability of trusts was discounted the figures looked credible).
But concerns were raised that taxpayers would find ways of reducing the effect of the 50% rate. If HMRC’s review shows that the tax has not produced the expected returns, the pressure to scrap it will grow but how will the Government make up the lost revenue?
One likely answer would appear to be to revive the Lib-Dem “mansion tax”. The estimated yield from a property levy of one percent of the value of any residential property valued at over £2 million is also in the region of £1.8 billion. Originally the Lib-Dems floated the idea as a means of financing the increase in personal allowances. Those allowances have now been factored into Government estimates but the idea has been raised again.
1.1 Why would a mansion tax be more appealing?
Setting aside any political considerations, there may be practical attractions to the idea.
If the 50% rate is not collecting the expected revenue an alternative will be required, perhaps that is the Government’s concern.
A tax on property looks easier to assess and more difficult to avoid because:
· property cannot be concealed or relocated in the same way as income;
· property values cannot be manipulated in the way that income may be managed by changing investments to produce capital or deferring realisation.
The tax could be made self-assessable in the same way as other personal taxes and the major cost of compliance, obtaining valuation, would fall on the taxpayer. In addition, HMRC would have the opportunity to challenge assessments, in particular the valuations used. Under-assessments could also produce a further stream of income in the form of penalties and interest based on tax underpaid.
It may just be a happy accident but the fact that a policy reluctantly adopted by the coalition could be replaced by one that the junior partner espouses may just be a little more than fortuitous.
2. Post Budget perspective on the corporation tax changes
The Budget contained much for the corporate business taxpayer. Further, almost all was very good news. The list of proposed enhancements to various reliefs is lengthy: venture capital reliefs, research and development and real estate investment trusts being particularly notable. Arguably, the main focus is on the changes made to encourage corporate taxpayers to remain within (or return to) the charge to UK taxation.
For multinational corporations, tax is a cost that has to be managed in much the same way as other costs. Such is the complexity of the tax system worldwide that numerous taxes need to be considered and each presents a challenge. The announcement that AstraZeneca has only now resolved an issue regarding transfer pricing with the UK and US tax authorities relating to the period since 2002, at a net cost of $1.1bn, merely emphasises the magnitude of the task and the costs of getting it wrong.
Corporation tax is an easy target for public attention as it is so visible. Being charged, as it is, on the profits after expenses but before distribution to shareholders, it is clearly highlighted in the accounts. The relative importance of corporation tax will however depend upon the cost structure of the business. Typically, income tax, national insurance contributions and VAT, although far less visible in the accounts, are the more significant costs to most businesses.
The projected costs to the Exchequer of the CT reforms in the Budget are not insignificant. Whilst the cost of the reduction in the rate of CT (some £15.9bn) will be partly offset by the savings from the reduction in capital allowances (some £5.6bn), the interim and full changes to the CFC rules alone are expected to cost £2.5bn over the next 5 years.
While the return of some of those multinationals (WPP and Shire Pharma in particular) that moved their head offices overseas around three years ago was a significant PR prize for the government, it remains to be seen whether the wider benefit to the UK economy of such companies returning or remaining exceeds the cost of the tax revenues foregone.