Two different finance ministers have now presented their tax plans. Moira McMillan wonders how they will work. (This article first appeared in the Winter 2017/18 edition of our Connect client newsletter.)
I recently celebrated 25 years of working at Chiene + Tait. I really do not know where the years have gone since I first arrived at our office, then in Albyn Place, in 1992. That was an interesting year as, against all the odds, John Major led the Conservative Party to a fourth successive General Election win. Norman Lamont’s pre-election tax-cutting budget was widely seen as having a significant impact in securing the victory for the Tories. Proof, not that I needed it, that I had chosen the right career and that tax matters!
I have sat through many budgets over the years, some more memorable than others. There has been talk of ‘tax simplification’ which has made my heart sink, as experience tells me that the actual result is likely to be anything but simplification. And now, of course, I have double the delight with the Scottish budget too.
Philip Hammond’s Autumn budget in November was a relatively damp squib. There had been pre-budget speculation about dramatic cuts to the VAT registration threshold which could have raised a significant amount of tax. In the end, however, the VAT threshold has simply been frozen at its current level for the next two years. There was also the usual concern about the removal of higher rate tax relief for pension contributions but higher rate relief remains (albeit that the maximum contribution limits now are not generous, particularly for high earners).
I do wonder what is in store for us with the announcement that the government is to publish a Consultation in 2018 on how to make the taxation of trusts simpler, fairer and more transparent. This comes on top of the new onerous requirements for trustees to register with HMRC and provide detailed information about trust assets and beneficiaries. There seems to be a view that trusts are set up purely for tax avoidance purposes although in reality, this is often not the case.
The Chancellor announced modest increases to the personal allowances and basic rate band for the 2018/19 tax year. We had to wait for Derek Mackay, the Scottish Finance Minister, to present his draft Budget on 14 December to find out the rates and bands that would apply for Scottish taxpayers. In a radical overhaul, Mr Mackay proposed a move to a five band system:
|19%||Starter rate on income from
£11,850 – £13,850
|20%||Basic rate from £13,851 –
|21%||Intermediate rate from
£24,001 – £44,273
|41%||Higher rate from £44,274 to
|46%||Additional rate from
The Scottish government said that the changes would mean that 55% of Scottish taxpayers will pay less than they would if they lived elsewhere in the UK. This, of course, means that 45% will be worse off than their counterparts outside Scotland. In reality, the differences between Scotland and the rest of the UK will remain insignificant until income levels reach £50,000, at which point Scottish taxpayers will be worse off by around £650. An individual earning £100,000 will pay around £1,150 per year more than their equivalent south of the border.
The SNP would argue that this is a fair system in which the tax burden is moved to those with the greater means to pay it, and which allows for a long-delayed payrise for those in the public sector. Opponents could see the budget as a blow for the ambitious. The tax differentials may not be enough to prompt many to move south of the border but they are unlikely to encourage any talented individuals to move north. Further to this, there have already been criticisms over the lack of incentives to encourage businesses.
The proposals remain draft at this point and must be passed through the Scottish Parliament, which will not happen before February 2018 and may necessitate another deal between the SNP and the Green Party.
It must be borne in mind that the Scottish Rate of Income Tax (SRIT) applies only to certain types of income, namely earnings, pensions and rental income. Interest and dividend income remains outwith the scope of SRIT. Capital Gains Tax also remains the responsibility of the Westminster government.
Tax has always been a taxing subject. It remains a challenge with the added layer of complication that the partially-devolved tax system brings. I may not be with Chiene + Tait for another 25 years, but I am sure that I will have plenty to think about in the years to come to ensure that our clients are complying with their responsibilities, but paying no more tax than is required of them.