The Taxation Halls of Fame and Shame
Being resident in the UK exposes a taxpayer to a multitude of revenue-raising measures imposed by the state. James Paull, head of the incentives group at Andersen UK, assesses types of taxation, and separates those that do the job well and belong in the Hall of Fame from those at the other end of the spectrum
or sheer longevity alone, income tax merits inclusion in the Hall of Fame. First introduced in 1798 by William Pitt the younger to pay for the Napoleonic Wars, income tax has been a stalwart of the UK tax system ever since, contributing £194bn ($267bn) in 2019-20.
Rates have oscillated over that period and reached an eye-watering high of 98%, including an investment income surcharge before gradually falling since the Thatcher government came to power in 1979, with the top rate currently sitting at 45%.
Although there is often controversy in the form of fiscal drag – freezing rate bands to capture more taxpayers as inflation lifts their pay – it is generally a progressive tax, such that higher rates are paid for those best able to afford it. With generous personal allowances and historically low entry level rates as well as a relatively well-understood collection system in PAYE, income tax remains the top of the tree.
A relative new kid on the block, capital gains tax (CGT) was introduced in 1965 to tax gains made on the disposal of assets. It is generally seen as fair in principle, and the annual allowance as well as the principal private residence exemption mean the majority of taxpayers never have to report chargeable gains.
By its lower rates compared to income tax, it is invariably seen as attractive by investors and entrepreneurs. However, the need to factor in inflation and uncertainty as to how best to reward entrepreneurship has led to a reasonable amount of tinkering, with indexation relief being replaced by taper relief – business asset or non-business asset – being replaced by entrepreneurs’ relief with the latest proposals under discussion being another alignment of income tax rates and CGT rates. This leads to a lack of certainty for taxpayers, and for this reason, CGT trails income tax in the Hall of Fame stakes.
Not a tax but a relief, the enterprise investment scheme and its younger sibling, the seed enterprise investment scheme, are attractive tax breaks for investors in high-risk start-up companies, providing a mixture of income tax and capital gains tax reliefs for investors. Many of these businesses have been able to access funding which may not otherwise have been forthcoming, and this has played a large part in the booming tech sector in the UK. It is an illustration of how targeted reliefs can really shape economic behaviour.
James Paull, head – incentives group,
Hall of Shame
On the other side of the coin, a perennial whipping boy is inheritance tax (IHT). In its predecessor form of death duties, it has been the bane of the landed gentry for generations. However, its wider ambit has often seen it touted as double taxation – taxing income in death that has already been taxed during life.
Although the nil rate band exemptions have increased to £325,000 and there is now the ability to transfer this to the surviving spouse, house price and other asset inflation have seen more taxpayers dragged into the IHT net. The fact that very few estates (3.9% in 2017-18) actually pay IHT does not seem to have dented its unpopularity with the public.
Every family has its black sheep, and disguised remuneration fits this role to a tee in relation to income tax. Originally a broad-ranging piece of legislation designed to catch a narrow piece of tax planning, its primary role now seems to catch out innocent arrangements that have nothing to do with tax avoidance.
Stamp duty payable on property sales sat at a relatively modest 1% for many years before in 1997 the new Labour government started to escalate rates on more valuable properties. It has steadily risen so that it is now as high as 12% for amounts paid in excess of £1.5m. This can add material costs to the already substantial outlay of moving house.
Again, the rate bands have not kept pace with house price inflation and seen modest houses, particularly in London and the South East, dragged into higher stamp duty brackets. The frantic rush to complete transactions before the expected end of the current stamp duty holiday is proof, if it were needed, of how material stamp duty is as part of the house buying process.
Business rates have a similarly distortive effect in the retail sector and are often named as a key contributor to the decline of UK high street as bricks-and-mortar retailers struggle to compete with online offerings. When a tax creates such an uneven playing field, it is surely time for a radical overhaul.
This is a light-hearted look at some of the best and the worst examples of taxation, but it does illustrate a serious point: there are some taxes that are generally seen as more acceptable than others. As policy-makers tinker with their armoury of revenue raising measures, it is worth remembering this.