If Rip Van Winkle had just come out of his slumbers this week, he would indeed find the world a strange place. A great deal has happened in twenty years and he would be left in wonderment as to an interest rate of 0.25% (it was 7% twenty years ago when he fell asleep), the fact that 37% of the population is deemed to be a majority (no wonder the pass rate for maths GCSE is only 18% these days) which has sent our politicians on a mission to negotiate our way out of the European Union and the school bully is now in charge of the country with the world’s largest economy…. amongst other things.
If Oliver Hardy were still around, he would be saying “Another fine mess you have gotten us into” to his old buddy Stan Laurel, with great regularity.
Faced with a world with such uncertainty, the economy is continuing following the wise maxim “Keep calm and carry on”, as quite frankly there isn’t very much else anyone else can do.
It seems likely that uncertainties and imponderables will become the way of life with the world now such a fast moving place.
As practitioners, we are dealing with a period of unprecedented change with accounting software capable of great things and causing a revolution in the way we do things with HMRC determined to bring in MTD (does “D” stand for digital, daunting, dangerous, difficult, diabolical, dreadful or doable?) at an early date. Many countries are already far in advance of the UK in terms of digital reporting capabilities. A client of mine who installs coffee machines advised me that in Lithuania such machines are already linked directly to the Revenue authorities who then know the turnover generated by each machine on a real time basis.
I am lucky enough to live on the South Coast and had the opportunity to go to The Festival of Speed earlier in the summer. I was asking a representative of one of the leading motor manufacturers when we would all be travelling around in driver-less cars. He advised that he thought the technology was already there but that the public is not yet ready for it.
This seems to be much the case with MTD. We are informing our clients as early as possible about what is coming and their reaction usually is along the lines of “How will that help?” or “What is the point of that?” or “Why do we have to report more regularly?”. Some people, probably more than do so currently, will take it upon themselves to file information directly with HMRC who will then be swamped with a colossal amount of information that they will not be able to assimilate. This is from the organisation whose own algorithms don’t work for over fifty cases of income and so certain taxpayers are going to have to file manually because of these failings.
We have tax policies where it takes the government at least ten years to realise that what they have proposed does not work or give the desired result, i.e. the recent hike in the percentage of VAT flat rate scheme, the comments that tax motivated incorporations are to be discouraged (Why then Gordon Brown did you bring the 0% corporation tax rate in the noughties so that every gardener, window cleaner who was well advised formed a company to save tax?) and the ability to sell your business to your own company, claim 10% capital gain on it on the transfer and then claim corporation tax relief at 20% on the amortisation whilst possibly protecting yourself from higher rate tax by drawing down on your director’s loan account for a number of years.
All of the above have benefitted no end of clients not to mention ourselves to some extent through sheer inadvertence by Government failing to understand the legislation they have put in place.
Our UK200 CEO Declan Swan tweeted on 22 August, while reflecting on Making Tax Digital, “HMRC really needs to listen to the chartered accountancy professionals and SMEs.”
How true Declan and I suppose we can take some small comfort that continued lobbying has brought some small concessions regarding MTD.
However, the implementation of dividend tax with effect from 6 April 2016 again shows how Government needs our help. Having benefitted from receiving nearly all of my income by means of dividends for a number of years, I have no particular complaint at the introduction per se of the dividend tax at 7.5%.
However, my blood boils at the higher dividend rate of 32.5%.
This now means that any successful business that is incorporated whose director wishes to benefit from his success by drawing an income in excess of £45,000 now is effectively paying tax at an excess of 52% when the corporation tax rate and the dividend tax are taken into account.
Salaried persons on multi-million pound salaries pay at a combined rate of tax and national insurance at 47%.
I used to think when I was young and naive (some thirty years ago) that Government was well aware of the advantages business owners enjoyed by taking dividends as a kind of reward for setting up businesses, creating employment and other taxes. Naïve barely covers it! HMRC, Government and worst of all their advisers in HM Treasury really have no understanding of the reality. Are we really going to be encouraged to create success and wealth when even at a relatively modest level of income, particularly for London , we pay at a greater rate than others who may have little or no responsibility other than to themselves when receiving their salaries?
I wrote to my local MP, who shall remain nameless, to point out this inequality (please bear in mind that I am fully aware that the taxation system has always created inequalities but the last electoral campaign was fought on the basis of fairness in the tax system and the need to encourage small business).
My points were clearly beyond the understanding of my local MP who referred the matter to the Treasury, who responded as follows, “Owners of companies, like your constituent (i.e., me) will benefit from a range of measures announced in the Budget 2016 in particular further reduction of the corporation tax rate to 17% from 2020 will benefit over a million companies. Indeed, this reduction comes in addition to the 6% reduction on corporation tax that many company owners will have benefitted from since 2010.”
Does this gentleman of the Treasury not understand that small business owners have not received a 6% reduction in corporation tax? Furthermore that the corporation tax and higher rate dividend tax are connected? Clearly not.
So, not only should we follow up Declan’s comments to HMRC but we certainly should more to protect the future of small businesses in this country and to encourage entrepreneurship and success.