Prudential technical manager Gerry Brown retired last month after 40 years in tax planning. Here he reflects on the changes he has seen over his working life, and the tax planning changes to come.
When I joined the Inland Revenue in September 1976 the UK had a Labour government with tax policies based on the principles of redistribution of wealth. Not long before the chancellor Denis Healey had said: “I warn you that there are going to be howls of anguish from those rich enough to pay over 75 per cent on their last slice of earnings” and had promised to “squeeze property speculators until the pips squeak.” That led to the introduction of a fiendishly complex development land tax on “development gains” with a confiscatory rate of 80 per cent.
The main rate of corporation tax was 52 per cent; the top rate of income tax was 83 per cent and investment income was liable to a surcharge (Investment Income Surcharge) of 10 per cent or 15 per cent depending on the level of investment income. As the Beatles put it;
“Let me tell you how it will be,
There’s one for you, nineteen for me,
Cos I’m the taxman, yeah, I’m the taxman”
Although the maths did not quite work, the sentiment was clear.
The election of a Conservative government heralded a change to the taxation of investment income. Instead of Investment Income Surcharge we got personal equity plans and then tax exempt special savings accounts and of course these later morphed into the Isa.
Venture capital trusts and enterprise investment schemes owe their existence to their favourable tax treatment. We now have the personal savings allowance and from April 2017 the first £1,000 of rental income and the first £1,000 of trading income will be free of tax. The Labour philosophy of favouring earned income over investment income has faded into obscurity.
In the late 1970s and early 1980s we had the Voldemart of the UK tax system, with many highly artificial tax avoidance schemes which were attacked through the courts and by legislative changes.
Of course we now have a General Anti-Abuse Rule. It is interesting to note the terminology used; what started off as “anti-avoidance” became “anti-abuse”. This perhaps reflects growing public concern with tax avoidance; it is no longer seen as an intellectual game of chess but an activity inimical to the public good.
The publication of HMRC tax manuals and Tribunal decisions has been a boon to tax practitioners. Yet HMRC does not always win before tax Tribunals – there are still areas of tax legislation and practice where the law is unclear.
Tax simplification has been a consistent plea throughout my working career. Modern business activities and some modern investment products are complex and thus require a complex tax system to “cope” with them. The Office of Tax Simplification will continue to have a role at the fringes in identifying inconsistencies in the legislation and suggesting improvements but radical simplification of the UK tax system is a pipe dream.
What of the future?
There seems to be a growing view that those individuals on modest incomes should not pay income tax. This makes the administration of tax much simpler and involves less relatively unproductive HMRC activity. I expect the personal allowances to rise steadily over the coming years taking a chunk of the working population out of the income tax net.
Brexit may bring a new approach to international taxation. The relevance of domicile as a factor in determining liability to UK tax has greatly declined in the last 20 years and it will likely eventually be replaced with residence. The statutory residence test is easy to understand and interpret.
The big tax battle of the next few years will be over the liabilities of multinational companies. The opening skirmishes involving Ireland, Apple and the UK are already under way. If the UK is to establish itself as a low tax jurisdiction for companies (and achieve the economic objective of attracting inward investment) then a comprehensive and fair regime for taxing multinationals will have to be developed. Much work has been done on this by G20, OECD and the European Commission but implementation of these proposals will be tricky.
Yet for all the change seen so far the UK tax system as it affects investments should remain relatively stable – which is good news for long-term investors and their advisers.
Gerry Brown is technical manager at Prudential