Ian Bingham, Senior Tax Partner at BDO
9th December 2022 at CHAPEL EN LE FRITH GOLF CLUB
It was – 6° outside, the golf course was closed (nobody wants to find a frozen player next time round), and it felt like chilly times on the economic front too, with fears about inflation, interest rates and possible recession. Our well-attended gathering needed a calm and experienced guide to show us what has, and has not, happened to taxes, and what to expect next year. All hail Ian Bingham, Senior Tax Partner at BDO in Manchester who has been coming to us since 2014.
“I don’t do politics,” Ian wisely said. He quickly mentioned that we’ve had 4 Chancellors in as many months, whereas in his lifetime we’ve only had 5 Labour Chancellors, and challenged us to remember who (answers at the end*).
The problem across a wide range – business, employment, indirect taxes such as VAT, and personal taxes – is to disentangle what was done in the spring of 2022 from the mini-budget that caused such havoc in September, followed by the Autumn Statement in November. All three had introduced wide-ranging changes, including cancelling some already announced. Ian also took a hard look at increased HMRC powers and enforcement, which can cause such headaches to the unwary.
Firstly, an overview, with Ian feeling that the current growth forecasts predicting a recession are possibly overdone; a recession is two quarters of negative growth (not a single month, as the media often suggest) and “this looks like a shallow one.” Inflation is seen as the main problem, but the bank of England thinks that’ll drop quickly next year. Tax revenues are due to rise, but that is “more painful during a recession.”
And that means Corporation tax rates are definitely going up, from 19% to 25% from April for most businesses, though they stay at 19% for companies with profits below £50,000. “When I started, it was 52%,” Ian said, “But in practice these business tax rates are in line with many other countries.” So there is no great incentive to move HQ to Frankfurt (effective corporation tax rate 29.5%) or Paris (36.6 -38.3%).
Banks will be paying more than that: 27% this year, 28% from next. And electricity generator companies will be paying 45%. That’s the new windfall tax on “excess” profits, but critics argue it won’t make electricity any cheaper, or have companies racing to invest in increased supply.
A lot of members’ questions related to Research & Development allowances which have been cut back sharply while new ones have been added (or clarified) including cloud computing, pure maths and data sets. “The problem here is creative accounting,” Ian remarked, “where not much R & D was being done.” His firm like others has had to expand to include experts from a much wider range as the complexity of allowances and restrictions has mushroomed. The Annual Investment Allowance of 100% up to £1million “actually suits the majority of businesses” in his view and has now been confirmed as “permanent” – though nothing is ever permanent in the world of taxes. Any bigger capital expenditure has to be done by next March, when the “Super Deduction” will disappear.
The rules around claiming some of these allowances have been spelled out, in an effort to combat fraud. For R &D tax credits, companies will have to notify HMRC in advance; all claims are to be made digitally, a more detailed report is required; a named senior officer of the company is obligatory – not just an agent; and full details must be included of any agent. Whether that will put an end to rogue operators, or just drive honest people crazy, remains to be seen.
And then there’s the “Apple Effect” – the OECD global effort to exert a minimum global corporation tax rate of at least 15%, to combat those vast businesses which can legally avoid paying much tax anywhere. “This will be messy…” Ian mused. The Treasury has also allocated an extra £79 million of funding over the next 5 years to tackle serious fraud, which as one member pointed out, could be used up in a single protracted court case. “Every time I speak on this the government is trying to do more on fraud.” In September 2022 the total tax debt was estimated at nearly £47 bn, up from £19 bn in March 2020 (though as ever, the cynic in me wondered, how would they know..?). But in the Law of Unintended Consequences, this can have a real drag effect on growth and enterprise. Ms Truss thought the problem was that taxes were too high, but maybe they’re just too complicated, with the additional expense in accountants, lawyers, enforcement and courts, none of which is a new factory or fleet of vehicles. The Nigel Lawson idea of simplification seems to have been abandoned.
We were concentrating hard, asking lots of questions, but we were also laughing, sometimes ruefully, for example as the Levelling Up Programme was mentioned.. and we moved on.
Ian turned to taxes on employment and the reintroduction of the dreaded IR35, also an anti-avoidance measure, briefly abolished in September, now reinstated with tighter rules. The onus is on the employer to ensure that people who work there are genuine contractors; if HMRC think you (as an employer) are trying to help people avoid tax, they will use penalties. The idea is to push as many people as possible into the PAYE system. If you’re a company Director, then you should be on the payroll. The litmus test is whether a contractor can send somebody else in his place? If so then he’s independent. If not, then he’s an employee. But what if he’s the only person running his own little business, doing 80% for one client? Hmmm.. then.. he could be arguing with HMRC in future, and it could cost him. A lot.
As for National Insurance rates: “Anyone could be forgiven for losing the plot on National Insurance,” Ian sighed. Up, down, whatever.. the effect of freezing earning limits, like freezing tax allowances, is to pull a lot more people in future years into paying more tax, as their earnings rise. It’s called fiscal drag, otherwise known as a stealth tax; no adverse headlines for the Treasury, but by doing nothing, tax revenue rises quite quickly. Once again, however, it can be a drag on effort, as there’s an incentive to keep earnings below the limits, by working part-time perhaps or not going that extra mile. The same applies to keeping the VAT threshold at £85,000 turnover with harsher penalties for submitting late. Though as some members pointed out, the quarterly returns required for VAT are an effective and simple way of managing the business and ensuring good relations with customers and suppliers.
We covered a lot of other ground in Ian’s tour d’horizon – minimum wage increases and how they’re enforced; company car benefits, with a schizophrenic attitude to electric cars – tax relief for businesses to install chargers, but Vehicle Excise Duty to be payable from 2025, though “Salary exchange for an electric vehicle remains attractive.” Income tax rates have settled down at virtually no changes except for the top 45% rate applying over £125,140 pa. But that will bring in many middle managers, especially in London, in both the public and private sectors. Ian’s team had worked out the effective tax rates over the next 5 years on annual incomes of £30,000, £60,000 and £120,000: simplified, this is what it looks like:
Effective tax rates on annual incomes
So we’ll all be paying a bit more, and the better-off will be worst off. If allowances were indexed, the well-paid would be paying less tax each year, and the rest of us would be paying more. I can’t see that being reversed in a hurry.
And if you own your business, you should think twice before paying yourself dividends instead of salary: the effective marginal tax rates on dividends next year even for a basic rate tax payer will be 31.56%, and 50.31% for a higher rate payer. You might as well live in France.
From AirBnB to nudge letters, the tax system has become more onerous and scary, though Ian felt people had become more compliant – “They just want to pay what they owe and not worry about it.” Slide 35 in his PowerPoint was perhaps the best advice of all: “Tax reliefs may be frozen but you can still use them” – on ISAs, pension contributions, an electric company car and by careful management of IHT and Capital Gains Tax. As ever, if you have enough to worry about, you need a good accountant.
It may well be, as one member said, that it’s getting harder to run your own business, and easier to just be an employee. Strange outcome from what is supposed to be a business-friendly administration (those are my views, not Ian’s). But at the end of his magnificent talk, we all felt better informed, ready for a peaceful Christmas in the hope of a quieter and more prosperous 2023.
*Did you find the five Labour Chancellors?
You probably remembered Alistair Darling (2007 – 2010) and Gordon Brown (1997-2007)
You may remember Dennis Healey (1974 – 79 under Harold Wilson and James Callaghan)
Callaghan himself was Chancellor 1964 – 1967.. followed by Roy Jenkins 1967-1970.
See you in the New Year…