Tax Doctor:
Mark McLaughlin
ATII ATT TEP

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February 2003

Q:

What is 2003 likely to have in store for taxpayers and for small businesses in particular?

A:

The only person with a definite answer to that question is the Chancellor of the Exchequer, and I didn't waste my breath asking him to volunteer the information to me! So here is 2003 as I see it.

New Year, new legislation

As a Chartered Tax Adviser, I have mixed feelings about the future. I despair at the amount of new tax legislation, the volume of which increases with each budget. Worse still, much new legislation is aimed at closing 'loopholes' in the tax system. At the risk of being castigated by some fellow professionals, in my opinion much of the blame rests with certain advisers, particularly larger firms with substantial resources, devising 'clever' schemes to exploit loopholes to save tax in order to appease greedy clients, many of whom already hold substantial wealth. This leads to legislation to block those loopholes, and further schemes to exploit loopholes in the loopholes! There seems no end in sight. Having said that, the complexity of the tax system is keeping me in a job, so it is not all bad news!

Tax Credits

Self Assessment for individuals and companies has worked very well on the whole. However, the new Tax Credits regime from next April is taking the self assessment concept a step too far in my opinion. Anyone who has not yet seen the application for Tax Credits should take a look at the Inland Revenue's website. The form can be completed online by visiting (https://www.taxcredits.inlandrevenue.gov.uk/Home.aspx). But make sure you have a little time to spare! This idea of passing on the administrative burden of the tax and benefits systems to individuals, whilst progressive in theory, has quickly become unwieldy and too complex for the uninitiated to fully comprehend. Reform is needed in this area.

Small Businesses

There seems precious little for small businesses to get excited about on the tax front in 2003, particularly sole traders and partnerships. Business incorporations apparently increased following the 2002 Budget. In many cases the tax system favours limited companies as opposed to unincorporated businesses (e.g. the 0% rate of corporation tax on profits up to £10,000, and a small companies' rate of only 19%). I expect that sole traders and partnerships will continue to incorporate their businesses in 2003, unless the Government does something to address this apparent imbalance. My worry is that newly-formed limited companies might suddenly find the tax system turning against them over the next year or two. However, the Government has not indicated that any such changes will take place.

National Insurance increases take effect from April 2003. In particular, the rate of employers' NIC increases from 11.8% to 12.8%. The NIC rate for employees also increases (from 10% to 11%), and Class 4 NIC for the self employed also increases (from 7% to 8%). Worse still, earnings of employees and the self-employed in excess of the upper earnings limit will be subject to an additional 1% charge. Those individuals affected should consider paying bonuses or advancing profits in 2002/03, rather than delaying until 2003/04.

There was precious 'good cheer' in the Chancellor's Pre Budget Report before Christmas. The freezing of personal allowances for the next tax year is hardly a welcome measure. Some initiatives to boost enterprise were announced including an extension to the 'flat rate VAT scheme' designed to reduce the amount of VAT administration for small businesses, and the abolition of Stamp Duty on non-residential property transactions in 2,000 Enterprise Areas. Unfortunately, the response of the majority of HBA members to these measures is likely to be "so what?"

A wish for 2003

I believe that the communications age and difficulties in travelling caused by traffic problems and shortcomings in public transport systems will result in even more people working from home in the future than at present. So my tax wish for 2003 is for the Government to embrace and encourage the concept of homeworking by introducing a flat-rate tax deduction from earnings. Employees and the self-employed would have the choice of claiming tax relief based on the actual costs of working from home or the flat rate allowance, whichever is the higher. This would certainly have the potential to simplify tax claims for 'use of home as office '. However, recognition of home based workers to date has been virtually non-existent, so don't hold your breath waiting to see this new allowance introduced!

Whatever the New Year holds, both on and off the tax front, I hope that it is a happy and prosperous one for all HBA members.

Mark McLaughlin

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