The economy of a country is measured in many thousands of ways. A measure of the economy commonly quoted is GDP.

GDP stands for Gross Domestic Product, and is a fancy title for the overall output of the economy, or in other words, how much everyone has sold of their goods and services. There are quite a few similar types of measures but GDP is the most commonly quoted of them all.

In order to have wealth creation in an economy, so that we have more money in our pockets to spend and create even more wealth, it is important that our economy grows on a continual basis. Growth means that businesses are selling more of their goods and services and so may be able to pay their staff more, or employ more staff and so on. Growth is where the value of GDP increases compared to a previous period. In normal circumstances, a Western capitalist economy will grow in the region of 2% to 3% per year.

When businesses start to struggle to sell their goods and services, they either have to reduce their prices, or reduce their costs, often by making staff redundant, so that they can continue to make profits, or in worse times to reduce any losses that they might be incurring.

When many businesses begin to fail in this way, that can have a negative effect on the economy of the country, and then the economy might not grow but might even begin to shrink. When this happens, the GDP figure will be negative.

GDP figures are generally announced every three months i.e. quarterly. When GDP is negative for two consecutive quarters, the economy is then said to be in recession.

When an economy comes out of recession, which is when growth is restored, normally it is possible for the economy to continue growing until the lost growth as a result of the previous recession is regained, and this is called recovery.

However, where the economy has a fairly short period of recovery and then slips back into recession, this is known as a double dip recession.

The GDP figures issued today confirmed that the UK economy is now back in recession, just a short period since the previous recession, and so many economists will regard this as a double dip recession.

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Tax evasion is the illegal attempt to not declare or pay tax that is actually due to the Government in accordance with the law.

Tax avoidance is the legal attempt to minimise amount of tax declared and paid to the Government in accordance with the law.

Tax evasion is essentially fraud against the Government and covers a whole range of issues.

Buying in excess of your duty free allowance when returning from holiday abroad, or opening more than one cash ISA to make multiple use of the annual limit, or not declaring potentially taxable income on your Tax Return, through to wide scale black market sale of goods which are not declared for VAT, Income Tax, National Insurance or Corporation Tax. All tax evasion is bad as it means all other taxpayers have to pay more tax to cover the tax lost to individuals or groups who break the law. Those who practice tax evasion if caught face a jail term of up to 20 years to compensate for their misdemeanours.

Tax avoidance is perfectly legal and is practiced by almost every person in the UK every year.

When you buy duty free products on your return from holiday, provided you remain within your allowance, that is perfectly legal and legitimate tax avoidance, using present laws to avoid paying tax that would otherwise be due on the products.

When you deposit money into a cash ISA, provided you only hold one ISA account, that is tax avoidance. You are attempting to use present tax laws to perfectly legally and legitimately avoid paying tax that would otherwise be due on interest that you receive.

When you charge an (allowable) expense against property rental income, or business turnover, that is tax avoidance. It is use of tax laws to perfectly legally and legitimately avoid paying tax that would otherwise be due on business earnings, and so reducing the taxable income declared on your Tax Return.

Many people fail to make use of existing tax laws to pay the correct amount of tax on their income and so overpay tax that is due. Part of the job of an accountant is to identify where this is happening in order to minimise the tax bill and ensure that the taxpayer does not pay more than is due.

The big problem with tax avoidance, is where the avoidance is at the extreme edge of moral and legal use of tax laws to minimise tax that is due.

To a large extent, this happens because the Government is not very good at writing tax laws, and despite writing some of the most detailed and complex tax laws anywhere on the planet, with the Finance Act running into thousands of pages each year, they tend to make a mess of it and leave gaps in the legislation.

Wealthy individuals and organisations then employ accountants who are prepared to make use of these mistakes and gaps, claiming that they are merely making use of existing laws and that the Government should write tax laws properly. Well yes they are making use of existing laws and Government should write tax laws properly, but that doesn’t mean these tiny gaps and mistakes and extreme interpretations of wordings should be exploited and this is where the tax avoidance is morally repugnant.

Many reading this will have heard recent cases of organisations using offshore companies to avoid paying tax in the UK. In my view this breaches the line in the sand of acceptability. The Government could very easily resolve this problem by applying a simple principle to all UK tax legislation. That is by changing tax laws to state that tax should be payable where the duties or services are performed, not where the individual or organisation is based. This already occurs to a large extent with employment taxes. If individuals and companies want to do business in the UK, they should expect to pay UK tax where they do the work in the UK.

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The so called pasty tax, which doesn’t exist obviously, is related to the application of VAT.

I am sure you will have been asked whether you are eating in or out, when visiting fast food restaurants, like Burger King or MacDonalds. The reason for this is that there is different VAT treatment for food that is served in a restaurant and food that is served to be eaten off the premises. In most cases the takeaways don’t charge a price difference, because they have a global omnibus agreement with HMRC on what proportion of their turnover is subject to VAT, so it makes no difference to them whether you eat in or out. The restaurants ask you the question for purposes of keeping rough track of the actual proportion of turnover that is eaten in or out and so checking if the agreement with HMRC remains reasonable.

The so called pasty tax is yet another example of this application of VAT, but in the case of a store which supplies hot and cold food for consumption off the premises, hot food is generally subject to VAT, whereas cold food is not.

The Government has sought to clarify and unify the regulations in the field, and so there is a small chance that some pasties that a baker such as Greggs will serve some freshly baked pasties hot and some of the same item cold. The opposition Labour front bench, clearly not understanding the regulations, claimed this meant that there would be extra VAT on some pasties whereas other identical products would not be subject to VAT, with all sorts of nonsense claims about relative ambient temperatures inside and outside the shop compared to the temperature of the pasty. The fact is of course that Greggs has a global omnibus agreement with HMRC to declare a pre agreed proportion of their turnover for VAT, just like Burger King or MacDonalds, so there is in fact no VAT or price differential and hence no pasty tax.

Yet again this is simply rather petty headlining by Labour and has little to do with actual facts. It might be nice if Labour got off their backsides and actually challenged the Government on something worthwhile, such as removal of Feed In Tariff payments for solar energy, and until they do start tackling real issues, they will not gain credibility.

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The answers depend on your political leaning and how you want to interpret the changes announced in George Osborne’s 2012 budget. There are two aspects to the supposed Granny Tax.

Every UK taxpayer is entitled to a personal allowance – that is the amount of income they are allowed to earn without having to pay income tax. Personal allowances can differ from person to person depending on whether your employer pays you expenses or benefits in kind, or if you have arrears of tax to pay. The amount relevant to each person is indicated by their tax code. For most people their personal allowance is at a standard rate set by Government and for the 2011-12 fiscal year, the standard personal allowance was £7,475 per annum.

For a very long time, taxpayers of pensionable age have been granted higher personal allowances, known as age related personal allowances. For those aged 65-74 the amount for 2011-12 was £9,490 and for over 75′s was £10,090 (these rates are not on top of the personal allowance).

In the 2012 Budget it was decided to freeze the age related personal allowances from 6 April 2014 for those who already receive them, so that they do no rise in line with inflation. Those already in receipt of age related personal allowances at that date will continue to receive the higher allowance, but at the frozen rate. So it is argued by the Government that those of pensionable age are still getting age related personal allowances. The Labour Party argues that because the rate is frozen, the inflationary effect is that effectively therewill be a loss of income, albeit a tiny amount, to those of pensioable age and hence a “Granny Tax”.

The second aspect of the 2012 Budget announcement is that those who are not receiving age related personal allowances at 6 April 2014, when the changes take effect, will no be entitled to receive them in future. The Government argues that because it has massively increased the personal allowances for everyone, this in effect replaces the aged related personal allowances for those of pensionable age, and indeed the difference between standard personal allowances and the age related version will be small by 6 April 2014 and within a year of that there will be likely to be no difference at all. The Government also argues that because this section of pensioners had never received the (age related) allowances in the first place, then the Government is not taking anything away from them. Labour of course argue that there is a loss of income because of the withdrawal of the allowances for those who reach 65 after 6 April 2014 and hance the term “Granny Tax” was applied again.

The Government also argues that because the amount payable for state pensiosn has been allowed to rise well ahead of inflation, that all pensioners will be better off.

So in reality, there is a tiny loss of allowance due to inflation for a few, and personal allowance instead of age related allowance for those who are not of pensionable age by 6 April 2014 who have never received the allowance anyway, and both of these changes are more than offset by increases in state pension.

There is no such thing as Granny Tax. There will be no tax charge called Granny Tax nor any new taxes on those of pensionable age.

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Young people looking to start up new businesses will be able to apply for loans to assist with this. Details of the plans are sketchy at best at present, but this should help young entrepreneurs to get a business started where they do not have the full financial ability to do so alone.

Slightly surprisingly the Chancellor announced a consultation on the possibility of allowing small businesses with turnover up to £75,000, to report their earnings on a cash basis. It is unclear if this will be restricted to self employment, or whether it will be extended to small companies as well. The purpose is allegedly to simplify the tax system, but the tax system is complicated not because of accounting on a cash basis or accruals basis, it is complex because the Finance Act runs to about 1500 pages and HM Revenue & Customs interpret legislation not for simplicity, but for tax raising efficiency. It is little more than a decade ago since cash accounting was abolished so it is very surprising to see this raising its head again, and this will almost certainly not comply with International Accounting Standards which are progressing to invade UK Accounting Standards, which cash accounting does not comply with either.

As we predicted in our blog “How To Budget 2012”, the Chancellor has announced a consultation on the possibility of merging National Insurance with Income Tax. This would indeed represent a significant reduction in complexity of the tax system, would save significant sums for Government, and would be a very welcome change.

This is the big gimmick of this budget. Essentially the Government will send taxpayers an annual statement of the Income Tax and National Insurance that they have paid, to which the Government will apply the percentages that each department spends, thus giving a notional idea of how much of your tax is spent on health, welfare, transport and so on. Completely pointless and an unnecessary cost.

The standard rate of Corporation Tax will be reduced faster than previously intended to 24% from 1 April 2012, 23% from 1 April 2013 and 22% from 1 April 2014. George Osborne also announced an intention to bring the standard rate of Corporation Tax into line with Income Tax and small business rates of Corporation Tax. This will be of no help whatsoever to smaller businesses who rely on the small business rates of Corporation Tax, currently 20%, which will remain unchanged.

A new rate of stamp duty on residential properties sold for in excess of £2 million will be introduced at 7%. This will no doubt raise a small amount of tax, but the number of properties sold at that level each year is quite small. Because this is really only for the most expensive homes, this will have little or no impact on the rest of the property market, which is desperate for a boost.
In order to counter tax avoidance on SDLT by placing a house into a limited company, especially where this is an offshore company, the rate of SDLT will rise to 15%. Quite rightly too. Furthermore, there will be a consultation on similarly taxing homes which have already been placed in a corporate environment as well as introducing penal rates of Capital Gains Tax on property held in offshore companies. Again, very welcome.

It is well known that the top 50p rate of Income Tax raises next to nothing in taxation because those earning at such high levels are able to afford measures to avoid the tax, or are able to move themselves and their finances abroad, which does much harm to the UK economy. Furthermore, they are often able to pay large sums into pension plans thus giving themselves huge amounts of tax relief at these high rates. The top rate of tax also costs a lot of money to collect. The previous Government introduced the 50p rate of tax as a tax on envy without any obvious tax raising reason to do so other than for political purposes. George Osborne has thus reduced the rate to 45p from 6 April 2013, which the independent Office for Budget Responsibility (OBR) has agreed will cost nothing and will likely raise revenue.

One of the most controversial stories in this heavily leaked budget is how the Government will take away Child Benefit from higher earners, without the inequity of families with combined higher earnings still retaining their Child Benefit. To resolve this, the Chancellor announced that families with one earner in excess of £50,000 income would represent the starting threshold for losing this benefit, but the benefit will only be lost at a rate of £1 of benefit per £100 of earnings in excess of £50,000. A family with an earner of £60,000 income, will thus receive no Child Benefit at all.

Almost replicating our prediction in our blog “How To Budget 2012”, the Chancellor announced a huge increase in the personal allowance to £9,205 from 6 April 2013. This will remove 2 million taxpayers from paying any tax, and we would agree that this is the best way to raise take home pay and increase wealth, with the knock on effect of a boost to the economy. This is a big deal for all tax payers earning less than £100,000 per annum, as this will result in a significant tax saving, and also provides an opportunity to look at tax saving measures for small owner managed companies, given that nothing was done for those vital businesses in this budget.

These represent our initial thoughts on the main aspects of Budget 2012. Clearly we will need to look at the measures in detail in the coming weeks.
The budget is fiscally neutral, meaning that all tax saving measures will be paid for by other tax raising measures.

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The economy is bubbling along at the bottom of a pit of despair and clearly needs a boost to get business moving again.

There are several factors which have a very significant effect on the British economy and we have focussed on a few of them:

With a stalling economy, it is vital to keep interest rates under control and at a low level. Increasing interest rates hit everyone in the pocket in many ways. Mortgages are affected, as are property letting prices, and these filter through to increased costs of products in shops. In very simple terms, mortgage interest rates are affected by the rates that financial institutions have to pay to borrow money themselves over the longer term, and those rates are affected by the interest rates that the Government pays on our national debt through bonds issued, which in turn are affected by economic outlook in reviews undertaken by credit ratings agencies such as Stand & Poor and Fitch. It is therefore absolutely vital that the government maintains control of the public finances to prevent our national debt growing. A significant mistake of the last Government was to borrow money in order to fund everyday public spending, which should really be funded by taxes raised, and that is how they grew the economy. The problem with that approach is that it requires permanent growth in excess of the rate of borrowing or the economy becomes akin to that of Greece. Therefore the first element the Government must do is not increase its borrowing targets.

Being a fairly crowded nation, the property market affects everyone, owners and tenants alike. In a recession, the property market is always one of the hardest hit sectors, but keeping the property market moving keeps a lot of people in work and raises a very large amount of taxation. With the property market struggling badly, taxes raised through stamp duty have declined significantly. A method of increasing revenue from stamp duty would be to cut the rates of stamp duty temporarily. The property market works by people moving up the property ladder, vacating space at the foot of the ladder for first time buyers. So any change in stamp duty would need to be done at all levels of the property market to have an effect. A temporary reduction for 1 to 2 years in all rates of 1% would help to kick start the property market and also help first time buyers to join the property ladder. Although the amount raised by each property sale would be reduced, because the number of transactions would increase significantly, the overall tax take would rise. This would therefore cost nothing.

To further bolster the policy on stamp duty, help given to the construction industry is vital. The construction industry is a huge part of our economy. Not only does it provide a lot of jobs, it also raises a lot of tax for the economy. With a stalled property market, no construction firm wishes to invest in new builds. This then has a detrimental effect on ground workers, bricklayers, plumbers, electricians, carpenters, surveyors, engineers, architects and many other sectors covering a wide range of wealth in the economy, as well as all the service sectors that serve the skilled workers and the supply chains to them all. A relaxation on the VAT regulations surrounding new builds would help encourage longer term investment, and reverting new build starter homes to a rate of VAT of 0% would also make the purchase of those homes much more affordable. This has a cost associated which should be funded by taxation of banks (see below).

Whilst it is not sensible for Governments to borrow money to fund everyday public spending, there is not a problem with borrowing money for capital projects which will raise wealth in the longer term. Work is progressing on Cross-Rail and the Government has approved HS2. Both very welcome. But what about capital investment in green energy and water? The Government recently reduced the feed in tariff (FIT) payments for solar panels, whereby those with solar panels could sell their excess energy produced by the panels back to the energy companies. This costs the Government absolutely nothing, as it is the energy companies that pay for it. But reducing the FIT payments, means that the solar panel companies no longer have a working model which makes it worthwhile investing in what is free energy for the future. There is next to no investment in wave technology and planning for wind farms is very difficult to obtain. As an island, we are ideally suited to these forms of green energy, and the Government should be investing in projects to develop these resources, rather than sitting in the pockets of energy companies controlled by foreign investors. Reverting the FIT payments back to their original level would cost the Government nothing. Investing in green energy could be paid for by avoiding the need to invest in nuclear technology, which is both very expensive and has very long term unknown costs and high risks. Furthermore, the Government should be looking at ways to distribute water more evenly across the country. the with South and South East having drought situations at certain points of every year, and the Northern parts of the country having ample resources, it would be sensible to introduce a system of canals in order to move water to the areas it is most needed. This could be funded by a tax levy on water companies who fall short of leak reduction targets.

Small businesses are suffering by banks refusing to lend even small amounts to enable assistance with cash flow. I recently had a case where a Government owned high street bank refused a small amount of short term borrowing to a good business with £¼ million turnover and a cash flow forecast that looked very positive in the short to medium term. This is totally unacceptable. Small business relies on having access to short term borrowing, such as overdrafts, to cope with cash flow issues which often arise when businesses expand. Banks are at present fleecing retail customers and sitting on large amounts of cash offered by the Bank of England at favourable rates, and they are refusing to lend it to the economy for which it was intended. And all the time whilst bank executives are receiving huge bonuses for improving the bank’s balance sheet, which has in fact been improved by the Government, not the executives. The banks should be given minimum lending targets and be taxed on any shortfall in the amounts that they lend. This would drive down the ridiculous interest rates that they are charging, whilst base rates are at a record low, and force them to lend as was intended. This would in turn help to get the economy moving and raise tax either through tax on insufficient lending or tax from the additional jobs created by expansion from the lending.

Finally, for the economy to move, people need to feel more money in their pockets to encourage them to go out and spend. Yet we have an economy whereby the divide between the haves and have nots is getting wider. The way to resolve this is to increase the personal allowance, the amount of income that a taxpayer can earn before being taxed, to £10,000 per annum. This is already a Government intention, but we would recommend that this idea be brought forward immediately. This would take a lot of people out of having to pay tax, and also give all tax payers a significant increase in their take home pay. This could be paid for by getting rid of tax credits all together. Tax credits are the extremely complex and inequitous system introduced by the previous Government to give money to lower paid only. The problem is that the system is very expensive to manage, and there are inherent numerous errors in the calculations of tax credits due and the system is unable to cope with changing circumstances of taxpayers. Getting rid of tax credits would save a lot of money by doing away with the public sector jobs in HMRC that are needed to apply the system. Overall this policy would cost nothing.

Finally, it is time to do away with the system of National Insurance. It is a fallacy to believe that the National Insurance that you pay counts towards your pension. It doesn’t. It goes to an overall pot of funding with taxation. NI is now a pointless method of taxation and a large amount of money could be saved by combining the National Insurance with Income Tax (or Corporation Tax for the employer’s element) and have a unified tax system. This would make tax calculations easier, it would make HMRC’s job easier, and it would do away with the need for separate NI offices. This policy would cost nothing.

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A mansion tax is a tax on the notional value of a taxpayer’s house. The value would be notional because it would be carried out by a valuer with a passing inspection, in the same way that Council Tax banding was originally determined.

Most of the proposals appear to suggest taxing only those houses with a notional value in excess of £2 million.

There are so many fundamental flaws with this concept that it doesn’t bear any scrutiny whatsoever and there has to be suspicion that those who agree with the proposal do so out of envy rather than a desire to raise taxes fairly.

As with Council Tax, the use of one time notional valuations creates appalling inequity. Any houses built subsequent to the introduction of the mansion tax are attributed a notional value at the time of completion which may be 10 years or more after the mansion tax was introduced. So in times of rising property prices, which in the South East is pretty much all the time, the houses originally valued retain their early low taxable value. However, new houses which may be actually worth significantly less than those originally valued, would be attributed an up to date taxable value and potentially charged tax whilst the more wealthy escape the tax.

Notional valuations ignore what could be fundamental problems that might be revealed by a detailed inspection, and would ignore that a house is worth only what a buyer would be prepared to pay for it (and what a seller would be prepared to sell it for) which would be reflected by a detailed inspection. As with Council Tax, it is left for the taxpayer to argue their case that the notional value is wrong. This is an inherently unfair method of determining values. If the state wish to introduce a tax based on property value, it should be up to the state to identify an accurate and up to date valuation. Furthermore, not everyone has the knowledge, wherewithal or toughness required to fight a stubborn and ignorant public sector which is all too often not prepared to listen and is more interested in procedure than accuracy.
The state largely get’s its hands on a significant proportion of the high value properties anyway as a result of Inheritance Tax.

If that were not enough, there are absolutely no grounds for arguing that a person living in a high value house has any money to pay more tax anyway. Very often it is the elderly, and often the infirm, who live in high value houses, having lived there for a very long time, or having bought the house with their life savings when values were lower, and now might be subject to a tax purely as a result of the change in house values from the property market, whereas they may have access to very little cash indeed.

There are many fundamental faults in the Government’s methods of means testing for benefits and taxes which result in the poor and needy missing out on benefits, or paying higher taxes. Measuring wealth by the notional value of a house is one of them.

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The difference with the Barclays Bank scheme is that HM Treasury have introduced retrospective legislation to claw back the previously avoided tax, as well as future tax.

The reason HM Treasury have (quite rightly) done this is because Barclays had previously signed up to a tax code of conduct to not implement tax avoidance measures.

Large businesses have a moral and ethical responsibility not to attempt to avoid taxes normally due. If they do not, tax rates for new businesses, small businesses and individual taxpayers have to rise to compensate for the tax lost to larger businesses and their avoidance schemes. This is particularly important at a time when the UK’s finances are so weak and many new businesses, small businesses, and individual taxpayers are struggling to stay afloat.

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