Budget Stalemate

With the excitement (in the loosest sense) of the Budget moving from Spring to Autumn, the unveiling of the Budget by Philip Hammond on 22 November 2017 looks a pretty difficult one.

 

His intention is to increase spending on public services but there is the looming threat that the UK could see a cut in the forecast for productivity growth (and tax income receipts)……and at the same time address the deficit. There is only so much you can do when you are tightening your belt and I think the word ‘balance’ will be overused in the run up and beyond.

 

He has ‘gone large’ on stating that he aims to eliminate the budget deficit (the difference between the Government's everyday spending and the money it has coming in) by the middle of the next decade. Originally it was meant to be 2020 under George Osborne……remember him!!! That’s the same political party kicking the can down the road for a further 5 years!

 

Which brings me nicely on to an argument I have with myself repeatedly……does it really matter what Philip Hammond says or does later this month?

 

Firstly, he won’t be about (in the same way as George Osborne) when the grand master 2025 plan can be dissected. Secondly, there is Brexit. There are so many variables to be ironed out with Brexit that will impact massively on our economy that it is almost impossible to set a budget for the next 8 months let alone 8 years to 2025. And by extending the negotiations by a further 2 years after the 2 years notice period, we extend and prolong the financial guessing game.

 

I do feel sympathy with the Chancellor as he has been dealt a very tricky hand……but the sympathy will be short lived if the Budget Statement ends up being nothing more than a tool to spin things with ‘tax giveaways’ for cheap political wins.

 

Interesting times.  

Inflation Winners & Losers

 

Inflation has risen to 3.0%, the highest level since April 2012. Time will tell if this level is to hang around for long but there are always winners and losers from inflation in the short term.

 

The biggest loser will be benefit claimants due to the Government’s decision to freeze working-age benefits in cash terms until March 2020. Businesses are also bracing for an increase in rates, which will rise by £1.1 billion next year following the latest inflation data. Insolvencies are expected to rise over the next two years as a consequence.

 

The biggest winner has to be those in receipt of the State Pension. The annual rise in the State Pension is calculated using the rate of inflation for September and this will see the State Pension rise by 3%. The Government are also a big winner given the boost to the Treasury’s coffers by £4.6 billion from the freezing of working-age benefits!

 

If you are looking for a clear villain to blame for inflation……that’s an easy one. Brexit of course!!!! The value of sterling is down 12% against the dollar and this has increased the price of imports and created inflation.

 

That bloody Brexit has a lot to answer for!

Tax Needn’t Be Taxing

Fresh on the heels of the Government’s adverse publicity surrounding the amount of UK tax (or lack of it) that some of the world’s juggernauts (Apple, Starbucks, Google, Ebay, Amazon, etc.) have / haven’t been paying over recent years, the announcement of Ebay’s 2016 results have been eagerly anticipated……especially given the Government promises on cracking down on tax avoidance.

 

The results are in……

 

Ebay’s UK operations generated total revenues of £1 billion (and for dramatic effect……£1,000,000,000).

 

UK Corporation Tax paid……£1.6 million, which is essentially 0.16% of turnover.

 

Which begs the question, how can £1 billion of revenue generate so little taxable income for the UK coffers?

 

Well, it’s all quite simple and really clever at the same time.

 

Step 1: Choose your head office where tax isn’t really an issue (Switzerland in this case) and call it Ebay International.

 

Step 2: Use your UK branch (Ebay UK) as an ‘advertising and marketing agency’ that creates the £1 billion of sales in the UK on behalf of the Switzerland office. This then means that the £1 billion of sales created in the UK was really for your Switzerland office and is then taxed (or not in this case) outside of the UK.

 

Step 3: Get Ebay UK to invoice Switzerland for ‘advertising and marketing’ services and then only pay UK Corporation Tax on this far reduced amount rather than the £1 billion of sales.  

 

As I said, simple and really clever……and that is just one company.

 

What is not quite so simple is the action that our Government should take. If they come down too hard on these juggernaut companies, they will simply move operations outside of the UK and that will mean a loss of jobs and the economic benefit that they bring. If they continue to be ‘accommodating’, then we miss out on valuable tax revenues. Damned if they do, damned if they don’t.

 

At a time when the UK is going out on an economic limb post Brexit, I fully expect the Government to continue to be very accommodating. Just don’t expect them to admit it publicly.

Intended Or Unintended Consequences

If ever there was a contradiction in just 14 letters, here it is……‘MP Transparency’.

 

I wrote about the issues with the lack of transparency with MP’s business and family business interests (Tax Transparency: http://stevesmithlive.blogspot.co.uk/2016/04/tax-transparency.html ) back in April 2016. This lack of openness always leaves me questioning the real motives behind how an MP votes…….For the greater good? For their own good? For the good of their family?

 

There are always intended / unintended consequences of how an MP votes in that it will impact their own financial affairs or that of their family in an intentional or unintentional way.

 

A recent report from The Times has brought this topic right back on the agenda again with an article relating to George Osborne. Let’s be really frank here, if anyone needs to be transparent with their business and family business interests it has to be the Chancellor of the Exchequer. We have to trust without any doubt that tax changes, economic policy changes, stimulus measures, etc. are for the good of the UK.

 

Yet did you know that Osborne is a shareholder in a high-end wallpaper and furnishing company (Osborne & Little) and held the shareholding during his time as an MP and Chancellor of the Exchequer?

 

Osborne was part of the Conservative Prime Minister David Cameron's team that campaigned to keep the UK in Europe last year. The 'Remain' camp was slammed for scaremongering voters with warnings of mass job losses and tax hikes if the UK left Europe. Interestingly, ‘remain’ was also the right decision for his business interest in Osborne & Little due to their overseas trading.

 

Just one small example of how the lack of transparency raises questions and doubt. We have 650 MP’s that have a similar lack of openness.  

 

If we are going to restore faith in the political system and MP’s individually, let’s raise the bar on transparency and get MP’s to publish their business and family business interests on their websites. We can then all make educated judgements as to whether the consequences of their voting are intended or unintended.

 

Not too much to ask is it?

Pension Contradiction

Pension tax relief cuts are on the Chancellor's agenda for the Autumn Budget in November. In short, Philip Hammond needs to fill 'a huge hole' in the Government's finances and there are few options on where to obtain hard cash without putting taxes up or cutting public spending……pensions therefore seem a logical target from a political perspective.

 

The Lifetime Allowance is the maximum anyone can save in a pension without incurring tax charges and is currently set at £1 million. Cutting the Lifetime Allowance from its current £1 million level is an option because it ‘passes the Daily Mail test’……in that most of the public thinks £1 million is ‘a lot of money’. Patronising, but that’s politics.

 

There is also the threat that the tax relief on pension investments (the amount the Government pays in when we invest our own money in pensions) will be reduced / capped / stopped.

 

Which all seems a huge contradiction. The Government wants us to save for retirement so we put less stress on welfare benefits later in life and are self-funding our later years. So much so, that it is a legal requirements for employers to offer, run and invest in employee pension schemes.

 

Yet at the same time, any reductions in tax benefits on offer from pensions gives the message, “don’t save too much”. It’s a classic short term view that each Government takes on a long term savings vehicle.

 

Is it any wonder that trust in pensions as a viable savings vehicle is at an all-time low?

 

As long as you read the Daily Mail, you should be just fine though.