Analysis: Budget 2012 is not so simple a plan
- 23 March 2012
- From the section Business
The chancellor promised reform of the tax system, making it simple, fair and predictable.
There are clear simplifications in the 2012 Budget.
Small businesses will be able from 2013 to use a 'cash basis' for calculating their tax, which will greatly simplify their tax return.
In the future, they will only need to count up what they have received and paid, and not worry about complicated accounting concepts such "accruals" and "prepayments".
That should cut their accountancy bills too.
The age-related personal allowance which benefits pensioners is to be frozen, and then abolished.
The nasty clawbacks applied to pensioners who earn slightly more than the current thresholds will also disappear.
On a wider canvas, increasing personal allowances simplifies the overall tax and benefits system.
By allowing people to retain more of their earnings before tax, it reduces the merry-go-round of first paying tax on a low income, then claiming benefits to make up the difference.
That has to be a good thing.
It is not all good news. The budget also introduces new fiscal tangles.
One is the new taper for child benefit - those with earnings between £50,000 and £60,000 will see the child benefit clawed back through the tax system, causing high marginal rates of tax for those individuals and a good deal of complexity.
Another tangle is the new restriction on reliefs for high earners.
This is a novel way of squeezing more tax out of the very wealthy by limiting the tax reliefs they can claim to a maximum of 25% of taxable income.
This will not affect the vast majority of people because reliefs can be claimed up to £50,000 in any event.
But it will seriously affect sole traders or partners who have made losses. Currently, trading losses in one year can be offset against the profits of an earlier year, or against other income of the same or the previous tax year, or carried forwards, without limit.
This is not a tax dodge - it simply allows a person to pay tax on their overall income, taking one year with another. There are extensive anti-avoidance provisions to prevent abuse.
The new rules will delay a person from getting tax relief, and may prevent it altogether. If a person cannot use loss relief to offset against other income, they can only carry forward the extra losses. If the business subsequently fails, the losses can never be claimed.
How can this be helpful to small businesses, struggling with the recession?
Of even greater concern is that this cap on tax reliefs apparently applies to charitable donations, which can currently be offset without limit against your taxable income.
The government has promised more work on this area, but when the chancellor spoke, charitable donations were expressly mentioned as within this new restriction.
This means that a rich person who planned to give away half his £10m of earnings, would now be restricted to only £2.5m with the attendant tax relief.
In the past the government has praised the US culture of philanthropy; this new announcement will cause serious damage to many charities by reducing the amount they can expect from large UK-based donors.
Knowledge is power
For the first time, the government is going to tell you how much tax and National Insurance Contributions (NIC) you pay.
Every year around 20 million tax payers will get an individual statement setting out their contribution to the chancellor's funds.
The figures will not be complete - they will only cover income tax and NICs, so they will be paying VAT, stamp duty, airline passenger duty, fuel and alcohol duties on top - but they will be interesting.
Once you can see clearly how much tax you have paid, I am prepared to bet that tax cutting will move up the political agenda.
Just in time for the next election.
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