Here is the latest and most important tax news, courtesy of RSM:
1. US tax reform promises little for individuals but much for companies
George Bull
While individual income taxes are the biggest single component in US government funding, most attention is focused on the likely scale of cuts in US corporate income taxes. Will a reformed US tax system spark the biggest cash movement in the history of the world?
2. Which parts of the Finance Bill have survived?
Andrew Hubbard
We now know that whole swathes of the Finance Bill 2017 have been dropped in the pre-election ‘wash-up’. The main principle seems to have been that clauses which will apply to 2017-18 have been retained while clauses relating to future years have been dropped. Making Tax Digital is one election casualty, but the sugar tax has been retained in its entirety. If there is a return of a Conservative government we would expect that clauses left out of this bill will be reinstated in a summer finance bill but if there is a change of government all bets are off.
3. Zero hours contracts on election agenda
Carolyn Brown
We have yet to see the election manifestos but Jeremy Corbyn has pledged that his party will ban zero hours contracts in the event of a Labour victory. However, a question mark remains over how such a ban could be implemented.
4. VAT windfall on Government’s premium rate phone lines
David Wilson
The last scheduled debate of this Parliament will be an ‘adjournment debate’ on Thursday 27 April to discuss the cost of premium rate telephone calls to the Department of Work and Pensions and other advice lines by Government Departments. The likelihood is that Parliament may prorogue before the debate – no doubt as a result of time constraints and nothing to do with any VAT windfall the Government receives from premium rate numbers…
1. US tax reform promises little for individuals but much for companies
He may not have been the first to use the phrase, but in 1789 US Founding Father Benjamin Franklin famously observed that ‘in this world, nothing can be said to be certain, except death and taxes’.
With less than 24 hours to go until President Donald Trump replaces executive tweets with a more formal announcement of the possible shape of the future US federal tax system, the certainty identified by Benjamin Franklin seems to be moving into and out of focus.
Before we consider what this means in practice, let’s have a quick look at how taxes funded the US government in 2015:
Tax                             %
Individual income taxes          47.4
Payroll taxes                     32.8
Corporate income tax             10.6
Excise taxes                      3.0
Other                            6.2
TOTAL Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 100.0
Source: Pew Research Center
For all the emphasis on corporate taxes, the biggest contributor to US government funding are individual income taxes. Data from the Pew Research Center indicates that in 2014 Americans with adjusted gross income of $250,000 or more filed 2.7 per cent of tax returns but paid 51.6 per cent of all income taxes. For comparison, the nearest equivalent UK figures show that the top 1 per cent of taxpayers pay 27 per cent of all income tax.
Calls for fundamental reform of the US tax system have echoed around the corridors of Washington for many years, but deadlock in government meant that the prospects of reform were zero. With tax reform as a major plank of his pre-election commitments, Donald Trump was determined to seize the initiative. Key components of his promises to the electorate were to:
- reduce income taxes with the expectation that everybody will benefit
- cut corporate taxes from a headline rate of 35 per cent to something much lower, perhaps 15 per cent, so boosting the domestic economy while encouraging the repatriation of profits held offshore by US-based multinational corporations
- impose a border-adjusted tax to penalise imports of goods and services, encourage domestic production and favour exports.
As they say, that was then but this is now. While we still expect the President to announce the overall shape of his tax reforms before his first 100 days in office have expired, tomorrow’s announcement is unlikely to include specific tax rates and details of many measures. We do expect some clarity on the range of possible rates which might be considered, along with some of the key features of the new system, but much more work will be required before precise details are published in the summer.
Who will be the winners and who will be the losers?
Commentators think there probably isn’t much in it for low-income groups because there simply isn’t the scope to manoeuvre: those with adjusted gross income of less than $50,000 account for 62.3 per cent of tax returns but only 5.6 per cent of income tax paid. But high-income groups would welcome tax cuts with open arms.
And what about companies? An encouragement to repatriate profits with a low rate of federal corporate income tax would potentially provide a 2-3 year window of very high tax yield as companies moved profits back to the US in what would be one of the biggest transfers of cash the world has ever seen.
The question of the sustainability of the measures will be paramount. Including a border-adjusted tax had the potential to raise approximately $1 trillion, aiding sustainability and taking the pressure off the federal budget deficit. We now understand that the White House has moved away from this proposal, raising concerns that the overall reforms will not be fiscally neutral. Everything will then depend on the extent to which tax reductions boost growth within the economy. To say that opinion is divided on this would not do justice to the depth of disagreement.
The existence of taxes is certain, but the shape of the future US tax system is anything but clear.
2. Which parts of the Finance Bill have survived?
By the time that you read this is it likely that the Finance Bill will have completed all of its progress through the House of Commons – the usual process of scrutiny being a victim of the general election, with all of the normal stages that a Bill passes through being compressed into a single day.
As we suggested in last week’s briefing the Chancellor has not attempted to get the whole of the Bill through and has dropped whole swathes of the legislation. We can’t give a complete list (which is available here) but we pick out some of the highlights.
The main principle seems to have been that clauses which will apply to 2017-18 have been retained but clauses relating to future years have been dropped. For example the clauses setting tax rates for 2017-18 remain but the clause setting the dividend rate for 2018-9 has gone. The new rules for salary sacrifice, which come into effect from 6 April 2017 are retained but the new rules for termination payments, which were to come into force from 6 April 2018 have gone.
Last week we speculated about the clauses giving effect to Making Tax Digital, in the light of the concerns expressed by the opposition. Perhaps as a result of this (we don’t know) they have also been dropped. We were also interested to see that the requirement to correct any offshore tax non-compliance, which we have commented on here before, has always been dropped, as has the charge on loans from Employee Benefit Trusts outstanding on 5 April 2019. Those of you with a sweet tooth should note, however, that the sugar tax has been retained in its entirety!
So what happens next? Royal Assent to what remains of the Bill will be received on Thursday before Parliament is dissolved and the Act will become law. As far as we can see this expedited enactment will not result in legislation taking effect earlier than planned because the surviving measures were due to come into effect from 6 April this year anyhow (though we have to confess that we have not scrutinised every line of the bill again this morning so there could possibly be some surprises). As far as the clauses which have been dropped much will depend on what happens after the election. If there is a return of a Conservative government we would expect that the clauses will be reinstated in a summer finance bill. If there is a change of government all bets are off.
3. Zero hours contracts on election agenda
We have yet to see the election manifestos but Jeremy Corbyn has pledged that his party will ban zero hours contracts in the event of a Labour victory.
The use of zero hours contracts has proliferated over the last five years. They are commonly used in the retail, hospitality and social care sectors where demand for work is uncertain and workers may be required at short notice.
Zero hours contracts place no obligation on the employer to provide a minimum number of hours work to the worker and the worker is not under any obligation to accept any work offered to them. However, employers in the past had placed exclusivity clauses in zero hours contracts which prevented workers from working elsewhere even when the employer had no work to offer them. These exclusivity clauses have now been outlawed. If an employer tries to enforce such a clause, the worker can bring a claim against them in the Employment Tribunal.
During any assignment the worker has accepted, they are entitled to the National Minimum Wage, holiday pay and sick pay. A zero hours worker will not normally have the full rights of an employee though (such as the right not to be unfairly dismissed or the right to a statutory redundancy payment). When the worker is not working on an assignment, they are not entitled to any pay from their employer.
While the Labour Party is seeking to ban zero hours contracts, there is a question mark over how this could be implemented.
The government has launched a review into whether employment regulation and practices are keeping pace with the changing world of work. In a recent interview, Matthew Taylor, who is leading the review, indicated that businesses in the future may have to pay a premium above the national minimum wage for staff employed on zero hours contracts where their hours are not agreed in advance. He added that this might discourage employers from pushing the risk of uncertain work periods onto workers. However, he stressed that this was one of a number of possible ideas being considered and that the downside to such a measure would be to complicate the simplicity of the UK’s National Minimum Wage system.
4. VAT windfall on Government’s premium rate phone lines
The last scheduled debate of this Parliament will be an ‘adjournment debate’ on Thursday 27 April to discuss the cost of premium rate telephone calls to the Department of Work and Pensions and other advice lines by government departments.
Whilst calls to 0800 numbers are free, follow-up calls, and calls to some departments direct are to 0300 or 0345 numbers, with calls to these costing up to 55 pence per minute when using mobile phones.
Last year, in answer to a parliamentary written question, a minister at the DWP claimed that the average length of a call to the universal credit helpline is seven minutes and 29 seconds
Although the PIP enquiry line is generally answered straight away, when the call is answered, the recorded message lasts for one minute and 12 seconds before the caller can even choose an option.
When previously challenged to change all such calls to a free 0800 number, the DWP claimed that it would cost £7 million pound to do so, and pointed out that online access is widely available through the network of jobcentres. But with the proposed closure programme for the DWP estate, it seems likely that the use of mobiles in the roll-out of universal credit is set to continue.
The Government does not receive any of the income from telephone providers, and we’ve no idea how much income the mobile operators receive as a result of consumers calling Government Departments.
It is however estimated that up to a third of the profit goes back to the Government in ‘additional services’; and it is a fact that one-sixth of all income received by the mobile operators from consumers is paid over to the Government in VAT.
As the last debate, on the last day, the likelihood is that Parliament may prorogue before the debate; merely as a result of time constraints and nothing to do with any VAT windfall the Government receives from premium rate contact numbers.
