Ask any Liberal Democrat about what they consider to be their biggest achievement in Government and they will likely tell you about their plans to raise the personal allowance for income tax. With the Conservative Party now launching a poster campaign which highlights how they are taking people out of income tax, the issue of taxation is a key one for both political parties. At a time when income is being squeezed and budgets are being cut, reform of the tax system has become central to determining that the Coalition is on the side of ordinary people.
The popularity amongst MPs and the public of raising the personal allowance is reflected in the fact that the Coalition has enjoyed significant success in delivering these pledges. In its first Budget, the threshold was increased to £7,475, with subsequent increases bringing the threshold up to £8,105, £9,440 with a further increase to £10,000 scheduled for 2014, a year earlier than planned. The prioritisation of the personal allowance ahead of measures within the Conservative’s 2010 manifesto, such as cutting inheritance tax or incentivising marriage in the tax system, demonstrates how important it is to the dynamic of the Coalition.
However, this spirit of co-operation between the Coalition partners did not apply when it came to implementing the pledge to tax capital gains at rates similar or close to those applied to income. When these proposals were initially mooted, the plan was to increase the rate of capital gains tax rate to 40%, however, following concerted opposition from the Conservative backbenches this proposal was diluted and the increase limited to 28%.
Some pledges, such as a Lib Dem abstention on a transferable tax allowance for married couples and reforming air passenger duty, have now been either abandoned or do not apply. The delivery of other pledges is proving more difficult. For instance, the pledge to ‘make every effort to tackle tax avoidance’ is very broad and allows a lot of scope for failure. Whilst proposals such as the introduction of the General Anti Avoidance Rule (GAAR) have helped to fulfil this pledge, the cutting of the HMRC budget and the removal of 7,000 staff make it hard for the Government to claim that ‘every effort’ has been made. Similarly, the pledge to increase the proportion of tax revenue accounted for by environmental taxes only looks achievable when fuel and air passenger duty are removed from the equation.
Despite that the fact that only 44% of the pledges within the Coalition Agreement have been delivered, the Coalition has been sure to prioritise the areas which will be most relevant to their respective general election campaigns. In particular, the raising of the personal allowance threshold is likely to form a core part of both the Liberal Democrat and Conservative electoral manifestos.
Progress against the Coalition Agreement
Pledge: We will increase the personal allowance for income tax to help lower and middle income earners. We will announce in the first Budget a substantial increase in the personal allowance from April 2011, with the benefits focused on those with lower and middle incomes. This will be funded with the money that would have been used to pay for the increase in employee National Insurance thresholds proposed by the Conservative Party, as well as revenues from increases in Capital Gains Tax rates for non-business assets as described below. The increase in employer National Insurance thresholds proposed by the Conservatives will go ahead in order to stop the planned jobs tax.
Status: Done - In May 2010, the Coalition Government announced that as a part of its first Budget it would introduce a substantial increase in the personal tax allowance, with a view to raising it to £10,000 in the long term. From April 2011, the personal allowance rose from £6,375 to £7,475.
Pledge: We will further increase the personal allowance to £10,000, making real terms steps each year towards meeting this as a longer term policy objective. We will prioritise this over other tax cuts, including cuts to Inheritance Tax.
Status: Done – The Coalition has consistently raised the personal allowance threshold from £6,475 in 2010 to £8,105 in 2012/13 with a further increase to £9,440 planned for 2013/14. The recent 2013 budget has announced that from 2014, the personal allowance will rise to £10,000, which is a year earlier than was originally planned. Since no cut to Inheritance Tax has occurred, it is reasonable to assume that as pledged increases to personal allowances have been prioritised.
Pledge: We will also ensure that provision is made for Liberal Democrat MPs to abstain on budget resolutions to introduce transferable tax allowances for married couples without prejudice to the coalition agreement.
Status: Not achieved – No legislation has been brought forward to introduce transferable tax allowances, and as a result there is no legislation to abstain from.
Pledge: We will reform the taxation of air travel by switching from a per-passenger to a per-plane duty, and will ensure that a proportion of any increased revenues over time will be used to help fund increases in the personal allowance.
Status: Not achieved – Following a consultation, the Government announced in the 2011 Budget that it would not pursue a policy of applying Air Passenger Duty on a per plane basis due to ‘concerns over the legality and feasibility of this approach’.
Pledge: We will seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.
Status: In progress – Whilst the Government introduced a higher rate of Capital Gains Tax at 28 per cent, this is not close to the top rate of income tax at 45 per cent (at the time these changes were taken, the top rate was 50 per cent). Whilst initial reports suggested that the intention was to raise CGT to 40%, opposition from Conservative backbenchers scuppered this proposal.
However, the Government has introduced a number of exemptions for entrepreneurial business activities, including raising the individual lifetime limit for entrepreneurs relief to £10 million and extending this to shares acquired through the exercise of enterprise management incentives options. Similarly, gains that are reinvested in shares that qualify for Seed Enterprise Investment Scheme income tax relief are eligible for Capital Gains Tax relief.
Pledge: We will make every effort to tackle tax avoidance, including detailed development of Liberal Democrat proposals.
Status: In progress – It is clear that the Government has taken a number of steps to reduce tax avoidance, it is hard to quantify whether every effort has been made.
With a view to reducing tax avoidance, the Government has invested £917 million in HMRC up to 2014/15, and HMRC believes that this has helped to increase the total tax revenue received from £474.2 billion in 2011-12 to £468.9 billion in 2010-11. Similarly, HMRC has recovered £29 billion in additional revenue from large businesses during the last six years. So far during 2012-13 they have charged 339 individuals with criminal offences. However, during the 2010 spending review, funding for HMRC was cut by 16.5% (£2 billion) which has led to 7,000 job losses since the Coalition has been in power. It is calculated that by 2015, HMRC staffing levels will be at 56,000, their lowest level for many years.
The Government has also commissioned the Aaronson study, which recommended the General Anti-Abuse Rule (GAAR). This is expected to receive royal assent in July. However, criticisms have been levelled at the Government that GAAR has not gone far enough that it will not raise the amount of money hoped, and that it is too open to interpretation. The Government has also signed agreements with both the Isle of Man and the Swiss Government to reduce tax evasion. From 2013 onwards, the Swiss government and banks have jointly agreed to apply a new ‘withholding’ tax on behalf of the British government of 48% on investments and 27% on gains where the records show the person is liable for unpaid British taxes. The Government hopes to raise £5 billion from this scheme. However, critics have been keen to point out that this rate of repayment is lower than the UK tax rate, and since the Swiss authorities will not release individuals’ details, HMRC will not know who these individuals are.
The 2010 Liberal Democrat manifesto states that they want new powers for HMRC and a law to ensure that stamp duty is paid on properties that are put into an offshore trust. Action was taken on this in the 2012 Budget in which measures to tackle Stamp Duty Land Tax avoidance were announced.
Pledge: We will increase the proportion of tax revenue accounted for by environmental taxes.
Status: In progress – In July 2013, the Treasury clarified their interpretation of the pledge to mean that environmental taxes should make up at least as big a part of total revenue in 2015-16 as in 2010-2011, and taxes whose primary objective is to encourage pro-environmental behaviour change. However, this definition is different to that of the OECD, which defines such taxes by the outcomes that they achieve and to the ONS which classifies taxes such as fuel duty and the air passenger duty as environmental, a position not held by the Treasury.
Using the Treasury’s definition, it appears very likely that they will achieve this target as the green tax share is set to double from 0.4% to 0.9% of revenues in 2015. However, if the ONS definition is used, it is likely that the Government would fail this pledge as the green tax share is set to fall from 7.8% to 7.1%. The main reason for these discrepancies is the decision not to include fuel tax within the definition, thus giving the Chancellor room to cut fuel duty.
Pledge: We will take measures to fulfil our EU treaty obligations in regard to the taxation of holiday letting that do not penalise UK-based businesses.
Status: Done - The Government launched a public consultation on changing the rules in April 2011, to ensure these regulations would ‘meet EU legal requirements in a fiscally responsible way, by changing the eligibility thresholds and restricting the use of loss relief.’ In December 2011, the Government confirmed that the response to its proposals had been generally positive, and legislation to this effect would be introduced in the Finance Bill after the 2011 Budget.
Pledge: We will review the taxation of non-domiciled individuals.
Status: Done – The Government consulted on reforming the taxation of non-domiciled individuals from June to September 2011. Following this, it incorporated the following reforms into the Finance Act 2012: allowing non-domiciled individuals to bring their overseas income and gains to the UK free of tax, in order to make a commercial investment in a qualifying business; increasing the £30,000 charge, for those resident in the UK for 12 or more of the last 14 tax years, to £50,000; and making technical simplifications to the remittance basis rules. Furthermore, legislation is being introduced in the Finance Bill 2013 to put the rules which determine an individual’s tax residence on a statutory basis; this will include new rules for the taxing certain income and gain arising from a period of non-residence.