Roy's Sentiment
Issue 79 - 23rd January 2008
The beginning of every new year is filled with resolutions coupled with the hope, expectations and anxieties of a new year. We thought we would share with you our thoughts of what the new year will bring not for IFS, Miles and Roy but for the UK as a whole. There is no question that the UK starts the new year with many anxieties ahead, but relatively speaking, it has a sound base from which to start the new year. London has been voted the world’s best capital city to live in, and certainly its financial power is unrivalled. In our tax practice, we advise on so many transactions where neither the investors nor the assets being acquired have anything whatsoever to do with the UK, yet advice is sought here from tax experts, lawyers, bankers, accountants and other professionals. So why are Gordon Brown, Alistair Darling and their colleagues seeking to jeopardize the supremacy we have built up since the days of Margaret Thatcher? The old maxim ‘if it ain’t broke, don’t fix it’ springs to mind as the ever increasing meddling and incompentency of proposed tax changes becomes clearer by the week.
The pre-budget report which we discussed in earlier ITNs is a glaring example of the UK shooting itself in the foot. I remember a similar self-destructive path followed by The Netherlands in the 1990s where, after 3 decades of enjoying the position of the world’s leading jurisdiction for international holding companies, finance companies and licensing companies, the Ministry of Finance developed unhelpful practices and disadvantageous legislation designed to discourage the use of such entities by third country residents. What has now happened in The Netherlands, 10 years later, is that the current government has realised the benefits of developing The Netherlands again as a financial jurisdiction, but is now fighting severe competition from other now established centres such as Luxembourg, Switzerland, Cyprus and elsewhere to which business has been transferred over the past 10 years. Why cannot the Government learn from the mistakes that The Netherlands now admits to? Is it too late?
The pre-budget report (PBR) of November 2007 has recommended changes to the laws related to non-domiciled individuals who are resident in the UK; pay £30,000 levy per annum or be fully taxed on all overseas income whether remitted or not. How easy is it now for HMRC to target individuals who are extremely wealthy and probably have significant assets overseas? Simply by paying the levy, such individuals open themselves to Revenue investigations. I cannot image that this is going to sit very happily with those who are a source of considerable wealth in this country, and who have contributed hugely to the vibrant economy which we have enjoyed over the last 15 years. Without question, they will leave the UK as they have already threatened to do.
The DOTAS regulations (Disclosure of Tax Avoidance Schemes) has created the relatively new phenomenon of Numbers being allocated to such ‘schemes’ which have legitimate credentials but which are promoted under certain conditions. These Numbers then need to be noted on all future tax returns of those individuals who have benefited from the schemes. It seems likely that those tax returns will form the focus again of Revenue enquiries into those and other transactions into which taxpayers have entered. Whilst IFS does not promote or recommend ‘schemes’ in general, it seems wrong that investigations are automatically triggered simply because legitimate planning has been followed by clients and their advisers.
And then there is the hike in the capital gains tax rate for business gains from the 10% taper relief rate to 18%, an increase of 80% in effect. This has clearly not been thought through properly, as has been admitted by the Government and as is clear from the fact that Regulations, which were supposed to be issued before Christmas clarifying the rules, have still not been published. The low rate of 10% did encourage individuals to remain in the UK when making capital gains rather than emigrating to avoid this tax rate; with an 80% hike I am not sure that this will be the case for individuals on the verge of making large capital gains.
Another PBR provision is the change in the treatment of offshore funds, and what may now constitute ‘non-reporting funds’. Even UK resident investors in collective companies may now be taxed at a 40% income tax rate on accumulated but unrealised profits (capital gains as well as income) of such companies, even if no distributions are effected. So they will have to find the tax charge without any relevant income. Hardly a provision to encourage global investments.
The global credit crisis is already discouraging banks and other financial institutions from lending monies for Investment purposes. Even a lowering of interest rates to encourage Investment will not succeed if bank lending has significantly dried up. The only tool at the disposal of the Government is to motivate existing entrepreneurs with sound track records and retained earnings to provide the fillip to Investments which may not come from elsewhere. This they are unlikely to do in the newly negative sentiment within the UK business community. The Government needs a wake-up call, but I hope that the alarm doesn’t go off too late in what may become the start of a deflationary cycle.
On a more positive note, we at IFS will do our best to help our entrepreneurial friends to maximise potential after-tax income from Investments they would like to make in the global economy. We wish all our readers a very happy 2008, principally in respect of their health but also in respect of their wealth.
