As expected, the Chancellor announced a series of measures aimed at cracking down on those who use legal or illegal means to avoid paying UK taxes, in a Budget that also establishes a new top income tax rate of 50%.
Among the new measures aimed at tackling tax evaders is a plan to publish the names of both corporate and individual taxpayers who incur a penalty because they have understated more than £25,000 of tax.
There is also a “carrot” aimed at luring tax avoiders with undeclared income sitting offshore into the tax-paying fold, in the form of what is being called a New Disclosure Opportunity (NDO).
This will give holders of offshore accounts “the opportunity to disclose, of their own accord, if they have unpaid tax or duties, and to settle [those] debts” through March 2010.
Economy to shrink
The focus on taxes reflected the dire state of the UK economy, which Chancellor Alistair Darling said he expected will shrink by 3.5% this year. Government borrowing was forecast to reach £175bn, while taxes were increased on fuel, alcohol and cigarettes.
An increase in the ISA limit from £7,100 to £10,200 will come into force this year for the over-50s, with up to £5,100 to be saved in cash. Everyone else will have to wait until next year to be able to take advantage of the new limit.
In its effort to go after tax evaders, the Government is introducing a provision to ensure that any individuals who have incurred a penalty for the deliberate understatement of tax of at least £5,000 must provide more information on their tax affairs for up to five years, in order to "to ensure they have proper systems to be able to make a correct tax return and allow HMRC to monitor future compliance”.
There was also mention of plans by HMRC to seek to issue notices requiring financial institutions to provide information about offshore account holders.
The Government estimates that these and the other related tax measures will help it to protect £3bn a year in tax receipts by 2010-2011 from “erosion by tax evasion and avoidance”.
Nod to asset management industry
In a nod to the UK asset management industry, the Budget contains a number of measures aimed at boosting the marketability of Britain’s Authorised Investment Funds (AIFs). These include a new so-called Tax Elected Fund regime, as well as a legislative change meant to clarify whether certain transactions will be taxed as trading or investment for UK AIFs and equivalent offshore funds.
A restriction of higher rate tax relief on pension contributions of people earning over £150,000 was also announced, to much consternation from the savings industry.
AXA Life chief executive Paul Evans said that while it was “targeted at wealthier investors,” it could have “unintended consequences, as entrepreneurial attitudes to pensions may be damaged”.
“In addition, the cost of implementing tiered tax changes into the current environment rides a coach and horses through the concept of pensions simplification, and will impose additional administrative and cost implications upon providers already battling to keep costs down in the current challenging market."
Legal & General’s wealth policy director Adrian Boulding said he welcomed the Chancellor’s decision to retain the tax relief incentive for the majority of taxpayers.
Chris Cummings, director general of the Association of Independent Financial Advisers, said the increase to the overall ISA limit was a positive step to encourage people to save for their future, but that the decision to reduce pension tax for higher earners sent "the wrong message" and will "further damage the pensions savings culture in the UK". He also called the huge level of public borrowing featured in the budget "a further worrying aspect".
"It is a shame that while the Government is committed to helping small firms the regulator, the Financial Services Authority, proposes significantly increasing its fees for IFA firms," he added.
Other key provisions for offshore financial advisers and other offshore financial industry executives:
• from April 2010, the income tax personal allowance will be restricted for those with income over £100,000;
• from April 2011, tax relief on pensions contributions will be restricted for those with incomes of £150,000 and over, and tapered down until it is 20 per cent;
• A new measure will establish a “statutory requirement” for senior accounting officers of major corporations to “certify personally that adequate controls to prepare accurate tax computations are in place”.
