Press Release

ACCA Briefing – Pre Budget Report

13 October 2007

The Pre-Budget Report – did it match up to ACCA’s principles for a well-run tax system?

Last week, at a fringe meeting of the Conservative Party conference, Richard Aitken-Davies, Deputy President of ACCA (the Association of Chartered Certified Accountants) spelled out four key principles for a better-run UK tax system. These were: stability, certainty, simplicity and fairness, allied to a call for the establishment of a Tax Policy Committee (to be run along similar lines to the Monetary Policy Committee) and a single Budget at the commencement of each Parliament to achieve more stable and less burdensome tax legislation.

So how did the Pre-Budget Report (PBR) this week meet these criteria?

1.      Stability and Certainty

Changing tax rules at short notice is anathema to good business planning. In recent years, we have had unfortunate examples such as the 2002 introduction of zero-rate tax on the first £10,000 of profits for small companies - which encouraged many small businesses to incorporate. This was then effectively reversed in 2004 leaving those businesses which had incorporated, with all the work that entailed, high and dry, often in a structure to which they were not suited.

We have also had uncertainty caused by HM Revenue & Customs suddenly challenging well-established practice, such as the notorious Arctic Systems ‘husband and wife case’. This is unsettling for business and can be costly. We also hear of increasingly long and intrusive  investigations of taxpayers, which create uncertainty and distract business people from their principal role of wealth creation.

Pre-Budget report: The government’s sweeping away of Capital Gains Tax taper relief and indexation allowance does not meet the stability and certainty test. It will represent a sudden and unexpected increase of 80% in the potential tax on disposal for many small business owners and could lead to a rush of entrepreneurs disposing of their businesses before April so that they pay 10% CGT rather than 18%. It also leaves entrepreneurs uncertain as to whether running and owning their own business is something Government wants to encourage. We fear that the tax rules in this respect will impact adversely on economic activity by encouraging short-termism. 

2.      Simplicity and Fairness

Tolley’s tax guide has grown by 80% into 4 heavy volumes in just a few years. Each regulation impacts approximately 60 times as much on SMEs as it does large companies. It is now estimated that small business owners spend something like four days a month just complying with regulations – many of them tax related - instead of getting on with growing the business. In the era of self-assessment, the ordinary taxpayer is also the unpaid administrator of the tax system for the government. And whenever they get this task wrong, they get penalised by fines, interest and penalties.

Pre-Budget report: while it could be argued that the introduction of the flat- rate CGT charge meets the simplicity test, in our view the near-doubling of the effective tax rate in a now well-established and understood taper relief system and its negative effect on business growth outweighs that benefit.

The inheritance tax changes, on the other hand, do meet the simplicity test by removing the need for tax planning to capture the benefit of the exemption thresholds for married couples, and this is to be welcomed. However, IHT could have been further simplified, albeit at a higher cost to the exchequer, by increasing the thresholds for everyone.

Similarly, the introduction of a £30,000 levy on non-domiciled residents is potentially a simple, fair and certain tax.

Richard Aitken-Davies said: “The Pre-Budget Report was a curate’s egg – good in parts where it proposes simplification and increases fairness in the UK tax code - but bad in other areas, notably the CGT changes, which will not help SMEs, the lifeblood of the UK economy, and continue the instability and uncertainty in our tax system.   

“ACCA would still like to see radical action being taken on how tax law is produced in the UK. The establishment of the Monetary Policy Committee has been generally a success over the past 10 years, and we believe a Tax Policy Committee (TPC) would bring analogous benefits. Government would set the overall economic framework, defining the public finance requirement to be sourced from tax, the types of tax and the funds to be raised from each. The TPC would then work on adjusting the tax system to raise the tax required, determining rules and rates within an overarching objective to make the system more effective, simple and transparent over the medium to long term. The TPC would comprise both private and public sector representatives and independent but qualified tax practitioners who know the system and the implications of tax changes.

“A change to the annual Pre Budget and Budget processes is also needed as these create instability and uncertainty for businesses and individuals. There would be strong merit in setting a long term Budget at the beginning of each Parliament and making only minor adjustments on an annual basis to reflect objectively measure changes in economic conditions. Major changes introduced and amended regularly for political purposes create uncertainty; the UK needs certainty and simplicity in the tax system.”

For more information contact:
Ian Welch, ACCA Head of Corporate Communications
020 7059 5729 / 07739 862928
ian.welch@accaglobal.com

Chas Roy-Chowdhury, ACCA Head of Taxation
phone: + 44 (0)20 7059 5976 / + 44 (0) 7710 707516
e mail: chas.roy-chowdhury@accaglobal.com

Notes to editor

1.      ACCA is the largest and fastest-growing international professional accountancy body and has 296,000 students and 115,000 members in 170 countries.

2.      ACCA experts are available for media comment on all aspects of UK and international accounting, auditing, tax, small business, environmental reporting, corporate governance, business law and public sector finance.