Tax Break

Who said tax is boring?

Archive for the tag “British Tax”

Yes, Minister

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Keep it simple…

Looking confused next to the overhead locker of my assigned Business Class seat on a British Airways flight from Heathrow to New York last year, I was approached by a helpful flight attendant (if that is what stewardesses are called these days) who offered assistance. Pointing to the little picture indicating which mini-compartment was 12A, and which 12B, I told her I was unfortunately pictorially dyslexic. She looked momentarily sympathetic before bursting out laughing: ‘What do you mean, pictorially dyslexic? There is no such thing!’

For all I know, she was right.

The fact is that our brains have become so used to hard-edged information being pureed into easily digestible mush, that many of us find it hard coping with anything more taxing than a Facebook intelligence test. (I was recently informed I had an IQ of over 160 because I knew a photograph was of Adolf Hitler, rather than the other choices of Donald Trump and Michael Bloomberg. Surely everyone knows that neither Trump nor Bloomberg has a  moustache.)

If you think I am being unfair, take literature. In this day and age, if you want to be published, you have to keep sentences short, and multiple adjectives locked up. So, you would think that chucking the following paragraph – which doubles up as a sentence – at the reader on the first page of a 500 page novel might have condemned the author to obscurity:

‘In consideration of the day and hour of my birth, it was declared by the nurse, and by some sage women in the neighbourhood who had taken a lively interest in me several months before there was any possibility of our becoming personally acquainted, first, that I was destined to be unlucky in life; and secondly, that I was privileged to see ghosts and spirits; both these gifts inevitably attaching, as they believed, to all unlucky infants of either gender, born towards the small hours on a Friday night.’

Thankfully, the book saw the light of day  in 1850, not 2017, and  David Copperfield became one of Charles Dickens’s most-loved novels.

Until fairly recently, I believed that one area of intellectual pursuit that had escaped the brain surgeon’s knife was taxation. Taxation is complicated, and advisors have kept it complicated. How often have we watched with satisfaction as our clients’ eyes have glazed over, knowing at the end of a tortuous meeting that they will just tell us ‘to deal with it’?

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…or not.

 

Then – Shock! Horror! – in 2010 the British Treasury came up with the Office of Tax Simplification. 450 recommendations later – including such game changers as simplification of the corporation tax computation and out-of-date procedures still requiring paper confirmation for stamp duty transactions (themselves an anachronism) – the OTS published its first annual report. Apart from a ‘first annual report’ issued seven years after inception being a leading candidate for the accolade ‘the triumph of hope over experience’, the wording itself left hope for tax professionals:

‘The OTS is in a unique position to highlight issues, stimulate debate and act as a catalyst for positive change, being strongly connected within government, having exceptionally wide access to a range of deep expertise from outside government and speaking with an independent voice.’

Charles Dickens couldn’t have written a better paragraph (doubling up as a sentence) himself. In fact, it almost looks like the Office of Tax Simplification could come to rival Little Dorrit’s Circumlocution Office.

The spirit of Bleak House’s Jarndyce and Jarndyce lives on. Mercifully.

 

His Kingdom For A Hearse

With England burying one of its monarchs today, 530 years late, I thought it appropriate to re-post this item from March 25,  2012.

Greatest Britain

What makes Britain great? There is, of course, no single answer (and the French would suggest there is no question), but the nation that gave the world its principal parliamentary system, its principal international language and (sorry, Yanks) its principal sport must have something in its national DNA that sets it apart from all the rest.

It seems to me that a major factor is Britain’s innate conservatism as described and promoted by the 18th century philosopher and politician, Edmund Burke. British society doesn’t change – it evolves. And evolution produces strength, step-by-step. There have, of course, been potholes in the road over the years – most notably the Civil War and Protectorate of Oliver Cromwell in the 17th century – but, let’s face it, after a few years of that miserable puritan they brought back Charles II whose head had fortunately not been cut off along with his father’s. When things went haywire again a quarter of a century later, the King (the last James we are likely to see) was booted across the water and none other than John Locke, the very man who challenged the divine right of kings in his “Two Treatises of Government”, was charged with schlepping the new king and queen from Holland.

There was a marvelous example of British evolution a few months back that, typically, went almost unnoticed. One Friday morning an announcement was made in Perth (the Aussie one) – which is just about as far as you can get from Buckingham Palace without jumping on a spaceship – that henceforth the first born of the monarch (etc) will be the heir to the throne irrespective of gender. In a stroke, countless centuries of common law and statute were set aside and Britain and its Commonwealth moved on (I am aware that political correctness dictates that I should be talking about the United Kingdom – but, frankly, I am a bit ambivalent towards Northern Ireland). And what about Decimalization 40 years ago? After watching sterling evolve over centuries into the quaint system of pounds, shillings (20 in a pound) and pence (12 pence in a shilling) – instead of changing the currency they just dropped the shillings and recast the pence. To maintain an element of originality in the change, instead of using a normal date (like January 1 used for introduction of the Euro) they went for the totally obscure February 15 1971 – which could, at least, have been identified as the middle of the month – in any month other than February.

Which brings me to the central point. I have a hunch (but not an ounce of evidence) that we may be heading for another of those evolutionary changes in the next few years.

Last week, in the month of March as from time immemorial, Chancellor of the Exchequer George Osborne presented the Government’s budget for the coming fiscal year. The Government’s fiscal year starts April 1 but, for the purpose of income tax the year starts on April 6. Why April 6? The story is simply wonderful.

New Years Day used to be recognised in Britain as March 25. That date represents Lady Day when, according to Christian tradition, the Archangel Gabriel informed the Virgin Mary she was going to conceive (count nine months and you get to Christmas Day). The Treasury understandably collected its taxes based on the year commencing March 25. When, in 1582, Pope Gregory XIII instituted his calendar replacing the old Julian version European countries gradually adopted it. The Protestant English, however, gave him the two finger salute and hung on until 1752 when, in addition to adopting the Gregorian calendar New Year’s Day was moved to January 1. The tax year was left untouched but for one small point. Adoption of the Gregorian calendar required an eleven day leap forward in the date (there were riots reported at the time of people claiming they had been robbed of part of their lives). Not prepared to give up on tax revenue, the Treasury moved the collection period forward by the said eleven days – meaning that the new tax year would start on April 5. As part of the calendar change leap years are generally skipped at the turn of the century – in 1800 another day was added bringing the start to April 6; in 1900, the Treasury was magnanimous and left the date alone; 2000 was a leap year, so we will never know what Gordon Brown might have done.

It is hard to see how this system can go on forever. I recently had to do some foreign tax credit calculations for a client invested in real estate in the UK – I felt like getting out an abacus (and hitting someone over the head with it). I would assume that one of these years when the economy is doing well and a government is in the middle of its term there will be a quiet announcement from somewhere like the Isle of Skye (if it is still part of Britain) that the next tax year will start on April 1 – but then everyone will probably assume it’s an April Fools joke. Happy New Year.

The Balls In Her Court?

1966 all over again?

1966 all over again?

What with the World Cup and Wimbledon, the last few weeks have been jam-packed with balls – an appropriate time, perhaps,  for the British Labour Party to present its ideas for the future of tax policy should it win the next General Election. But more of that later.

I grew up thinking the Queen was so prim and proper that if any man were to use fruity language in her imperial presence (even her colourful husband), he would be hoisted on a gibbet outside the Tower of London.

Then, in 1992, the BBC  aired a documentary, the title of which they had filched from an old series about someone else entirely: “Elizabeth R”. In contrast to the earlier, professional production which starred Shakespearean superstar Glenda Jackson, this latest offering was Reality TV in its infancy, a camera crew following the matriarch of a rather dysfunctional family for an entire year as she happened to run into just about everybody who had the power to destroy the world (Celebrity Big Mother).

Among the documentary’s many fascinating scenes was one dealing with the preparations for a State Dinner at Windsor Castle in honour of the, then, President of Poland:

The Queen is observed  in an anteroom with her family waiting to escort the President and his wife to dinner. Passing the time of day with her daughter, Princess Anne, she informs her that she has been showing Lech Walesa (the former Gdansk shipyard labourer) around the Castle. She cheekily mentions that,   amazed by the size of everything,  every time he had entered a room he had uttered the only two words he knew in English, “Quite interesting words”. Anne stops her in mid-flight: “Was it ‘Good Heavens’?”. “Bolder than that,” comes the reply. The Queen produces a wry smile, implying that her sense of humour may be slightly more ribald than one might have imagined.

Michael Foot always had a sense of occasion

Michael Foot always had a sense of occasion

Well, if Labour wins the election next year, one hopes that – as she approaches 90 – Her Majesty is still game for a laugh. For the party that once tried unsuccessfully to put a “Foot”  in No. 10 Downing Street is now likely to put “Balls” in No. 11.

Shadow Chancellor, Ed Balls, gave an interesting talk at the London Business School last week.  Surprisingly for a Labour Economics man, he  informed his audience that a Labour Government would provide tax breaks for businesses, especially small ones.

Before announcing the positive news, however,  being Labour Balls had to dampen the good cheer of the satanic captains of industry crowding the auditorium – so he announced that a Milliband Government would reverse the current Government’s  corporate tax rate reductions. The rate would, however, be kept at the lowest in the G7, that is less than Canada’s 26.5% (Karl Marx, bless Mother Russia for annexing the Crimea and getting kicked out of the G8). Against this there would be substantial Business Rate  (local property tax) reductions, which would serve as a significant incentive to small and growing businesses. There would also be provisions to encourage the long-term holding of shares.

The most controversial announcement, however, was that Labour is considering an “Allowance for Corporate Equity”.  The concept is not new and has been tried in Croatia (failed), Italy (failed),  Brazil (as always, different), Belgium (EU Commission trying to make it fail) and Australia (gave up trying).

The basic concept of ACE is that debt financing and equity financing are equated. In an ideal world this would lead to less volatile companies – a case in hand being Manchester United, a once great football team, that was saddled with tax-deductible debt by its unlamented late owner, Malcolm Glazer. By providing a notional deduction against a company’s capital (and assuming interest and dividends to shareholders are treated similarly), there is effectively no tax on a risk-free investment – tax only applying to “super-profits”.

The potential advantages of such a system, in addition to canceling the debt/equity advantage, are that:  there is tax neutrality regarding investment; it cancels out the effect of differing depreciation rates (the higher the depreciation rate, the lower the capital on which the allowance is calculated); and inflation can be compensated for through changes in the notional rate of deduction.

The downsides are that: in a global economy, the headline corporate tax rate is highly relevant in attracting foreign investment; and there can be issues with foreign tax credits. Then there is the small question of how to calculate the risk free rate  that achieves neutrality.

Seen in this light, it appears far more sensible to follow the approach taken by several countries in recent years to restrict interest deductions to a fixed percentage of EBITDA (earnings before interest, taxes, depreciation and amortization), thus widening the tax base and permitting  reductions in headline rates. But at least the Labour Party, under its soft-left leader, is not threatening the raining down of fire and brimstone  on British Industry.

Power couple?

Power couple?

Of course, should Labour fail in its bid to form the next Government in 2015, the likeable young  Milliband will almost certainly be sent packing. While Mr Balls was a credible candidate in the last leadership contest in 2010, it is thought that, this time, he will support the candidacy of his wife, who is shadow Home Secretary (Interior Minister). Should Mrs Balls make it to No 10 in 2020, the Queen will doubtless be thankful that Yvette Cooper had the good sense to keep her maiden name when she married. If, on other hand, Ms Cooper makes her husband Chancellor of the Exchequer, they will be neighbours. What would that do to the, by then,  ancient Queen’s constitution?

 

 

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