Brown’s swansong

How will history judge Gordon Brown’s stewardship of the tax system, and what final changes might he want to announce? Mike Truman writes

I cannot think of another time in recent political history when it was certain that a Chancellor of the Exchequer was about to give his final Budget speech, although some in the past might have guessed their fate from the polls and a looming General Election. Even if, by some unforeseen disaster, Gordon Brown were to lose the Labour Party leadership election that will be called before the summer, it is inconceivable that he will be retained as Chancellor. He therefore knows that this is his swansong.

Legislative indigestion

Anyone practising in UK tax will be well aware that his legacy over the past decade is a vastly increased amount of tax legislation. The Yellow Book of direct tax legislation, published by LexisNexis Butterworths, has doubled in size since he took over at Number 11. However, in his defence, he could rightly point out that his predecessors were no less prolix. The move towards larger finance acts started in the late 1980s with Nigel Lawson, and no Chancellor has managed to get them under control since.

Where history may be less kind is in his attitude towards tax simplification. While most of the tax law rewrite plans have been carried through, with just a couple of bills left to complete, his record on achieving simplicity in the new legislation he has introduced has not been good. The one great attempt to achieve this was the introduction of pension simplification, which took effect from 6 April 2006. While it was originally conceived as a genuine sweeping away of complex rules and an acceptance of looser control by the Government in exchange for a much simpler system, it had descended into an all too familiar pattern of bolted-on anti-avoidance legislation attacking comparatively minor problems such as lump-sum recycling and stand-alone pension term assurance.

The human calculator

It is hard to escape the conclusion that Gordon Brown is a Chancellor who believes that small changes in tax can have significant effects on behaviour. This is, after all, the Chancellor who bothered to zero-rate adult cycle helmets for VAT, presumably expecting it to result in an explosion of prudently attired cycling commuters abandoning their cars.

My own belief, based on nothing more than the way the tax changes were announced, is that this expectation of rational tax-calculating behaviour was partly responsible for the fiasco of the corporation tax zero rate. Well before its introduction, the balance of advantage for a micro-business had swung back in favour of operating through a company rather than as a sole trader.

Most people, however, had not actually made the switch. The Chancellor may well have thought that introducing further relief for the smallest businesses would only have a small effect on incorporations. In fact it seems to have been the tipping point at which over a million additional businesses decided this was too good to miss, and formed themselves into companies. Mike Thexton, a tax writer and lecturer, has commented in his seminars that halfway through writing an article for Taxation magazine on the subject, he decided to stop to take his own advice and incorporate the partnership through which he had previously traded.

Squeeze the rich

That other well-known Labour Chancellor, Dennis Healey, is well-remembered for saying in the 1970s that Labour intended to ‘squeeze the rich until the pips squeak’. That was in the context of a proposed wealth tax which was never actually introduced, but he was also the architect of Capital Transfer Tax (CTT), which eventually became Inheritance Tax (IHT). Although there has been a great deal of press coverage of the supposed iniquities of IHT under this Chancellor’s watch, he has not in fact done what was originally feared and reverted to a genuine lifetime accumulation of asset transfers, as was the case under CTT.

However, what he has done is to make the tax regime on gifts far more complicated, first with the introduction of the Pre-Owned Assets income tax charge, and more recently with the changes to trusts made by Finance Act 2006. Chartered accountant firm Baker Tilly, in its comments on the proposals when they were announced in the Budget, pointed out that in 2003 the Government had accepted that trusts played an important role that was not based on tax avoidance, and that as far as possible it wanted a tax system that did not provide artificial incentives to set them up but, equally, avoided artificial obstacles to using them where they would bring significant non-tax benefits. They continued: ‘Then followed a period of two years’ consultation on the reform of income tax and capital gains tax for trusts. Chancellor Gordon Brown’s Budget Day imposition of a new inheritance tax regime on trusts completely contradicts the December 2003 policy statement.’

Although the main complaint was about the substance of the new rules, the impression of bad faith in the income and capital gains tax consultations significantly added to the level of anger felt by the tax profession on this issue, and many normally calm and laid-back advisers to high net worth clients were making some forthright comments about the Revenue needing to recognise the value of the advice it received free from the representatives of professional institutes on legislative consultation committees, and what the point of them was if measures like this were introduced with no consultation at all. The Chancellor will be leaving office with the relationship between the tax profession and HM Revenue & Customs and HM Treasury at a particularly low point.

Loose ends

The other main criticism of the Chancellor may well be that he has left several proposed changes flagged but not implemented. Ultimately, the most significant of these may be the review of small business taxation, but the one which seems the most important at the time of writing is the proposed change to the law of residence and domicile for tax purposes. Following the recent Special Commissioners’ cases of Shepherd and Gaines-Cooper it may be that the residence rules have to be revisited, at least to give more detailed new guidance than has been available so far, but the failure to tackle the status of non-domiciled taxpayers has drawn criticism. Andrew Goodall, writing in London’s Evening Standard about the continued failure in the 2006 pre-Budget report to announce anything substantive, said that: ‘You have to wonder whether “working and middle class” taxpayers will start to ask why they should comply with a tax system that favours a growing number of people purely on the basis of their “domicile of origin”.’

Budget predictions

I have the worst record of actually predicting what will be in the Budget, but the pre-Budget report certainly did not suggest that it would be one where he planned to take tough decisions. The much-trumpeted green tax increases turned out to be little more than ‘tinkering at the margins’, according to Friends of the Earth.

No doubt he will have kept some surprises back, quite possibly ones that benefit families and aim at lifting children out of poverty, an area where the Chancellor has been consistently prepared to spend money. But his successor is going to find that there are a number of intractable issues still left in the new Chancellor’s in-tray when Brown vacates his desk at Number 11.

Mike Truman is editor of Taxation magazine.