As with any Budget statement, it is best to take a few days before passing judgement.  That said, and even before all of the detail has been analysed, there are a number of issues that stand out even just 24 hours after the Chancellor sat down.

The first concerns the debate, for “debate” read “leak everything”, that has surrounded a large number of Budget issues over the last few months.  We have a come a long way from the days when Gordon Brown did not even tell Tony Blair what was going to be in the Budget statement.

The proposed reduction in the top rate of income tax has dominated the political news coverage over the last few months.  The debate over how much it has raised will not end with the Budget statement.  There is no doubt it has led to a great deal of tax avoidance, aggressive tax avoidance.  That was to be expected.

The changes to the personal allowance and tax rate thresholds, has already begun to dominate the news coverage.  The coalition government must be hoping that the news coverage concentrates on the increase in the personal allowance and not the 300,000 more people who will be drawn into the 40% income tax rate from 2013/14.  To put this in context.  In the 1980’s approximately 5% of people were higher rate taxpayers.  Now it is 15%.

The freezing of age related allowances is also likely to cause problems for the coalition government.  Somehow they need to show that this is a good example of tax simplification.

The claim that does stand out is that by reducing the top rate of income tax, combined with other avoidance measures, five times more tax will be raised from the richest.  The Institute of Fiscal Studies noted today that that this is the third worst Budget statement for measures relating to tax avoidance.  This is measured on how much tax the avoidance measures to be introduced are likely to save.

Now to an old Budget favourite, stamp duty and Stamp Duty Land Tax (SDLT).  The SDLT changes were not unexpected especially for anyone who buys a Sunday newspaper.  The Chancellor announced that the level of stamp duty on residential properties over £2m which were bought via a company would increase to 15% with immediate effect.  In addition, overseas companies that already own UK residential property worth more than £2m will be subject to capital gains tax (CGT) from April 2013.  The CGT point was less expected but nonetheless welcome.  This though should have been dealt with many years ago.  The Chancellor also made it very clear if avoidance of this kind continues, further measures would be introduced without warning which have retrospective effect.

That though is not the main issue with SDLT in Scotland.  In Scotland only around 10 properties a year are sold that are worth over £2m.  The jump from 1% to 3% of SDLT at £250,001 is a much bigger issue.  Hopefully that will be one of the first issues dealt with when this tax is finally under the control of the Scottish Parliament.

One change I was hoping to see, in vain I might add, was a targeted VAT reduction for home repairs and renovations.    

Now to the fiscal powers debate.

The UK and Scottish Governments have agreed a number of changes to the Scotland Bill.  Both Governments will now recommend that their respective Parliaments support the Bill.  A number of minor changes have been agreed.  The Scottish Government has secured changes to the sections of the Bill dealing with borrowing powers and the Supreme Court.  It was also agreed that the measures contained in the Scotland Bill would only be implemented with the agreement of the Scottish Parliament.

The proposed reservations of insolvency procedures and regulation of health professions will also be removed preserving the Scottish Parliament’s existing legislative competence for these areas.  More on this can be found on the Scottish Government’s website which can be found here.  The list of proposed amendments agreed by both the present, and previous, Scottish Parliament Scotland Bill committees is also listed.  These lists show how few changes have been made to this Bill.  A report from the BBC news website on this matter can be found here.

The House of Commons Scottish Affairs Committee has said that the Crown Estate’s control of 50% of Scotland’s coast and almost all the seabed should be devolved to Scotland’s local authorities.  The Scottish Affairs Committee said management of the marine environment lacked transparency and public consultation.  It is now difficult to find someone who is opposed to devolving this power.  Does that mean the Scotland Bill will be further amended to include this power?  I suspect not.  More on this can be found on a report on the BBC news website which can be found here.

I was intrigued to see the Secretary State for Scotland, Michael Moore, asking for tax clarity from the Scottish Government and in relation to the independence referendum.  There is a simple answer to this question, and which would provide a degree of certainty for individuals and businesses alike.  There should be no major changes for two or even three years to the tax legislation, and system of administration, that the Scottish Government inherits in the event of a “yes” vote.

I was not surprised to read that the Scottish Government is struggling to persuade HM Treasury that the new Scottish police and fire services should be exempt from VAT.  This is likely to mean an annual VAT cost of between £22 and £36m.  Under the current structure police forces are treated like local authorities and are exempt from VAT.  However, if they merge they may be subject to VAT.  A report on this from the BBC news website can be found here.  My earlier blog on this can also be found here.

The new definition of a charity will apply to all UK charity tax reliefs from April 2012.  More information on this can be found here.  I still find it odd that when it seems that everyone is talking about tax simplification, that bodies wishing to become a charity have to meet various conditions set by OSCR (Office of the Scottish Charity Regulator) and then by HMRC.  The reason for this is that the definition of a charity in Scotland is different from that used in England and Wales.  HMRC apply English and Welsh law.  This means if Scottish charities wish to claim the various UK charity tax reliefs then they also have to submit an application to HMRC.  What utter nonsense.  If the UK Government were serious about tax simplification, the fact that you are registered as a Scottish charity should be enough to allow a charity to claim the various UK tax reliefs.  The same issue applies in Northern Ireland as it now has its own charity regulator.

I was interested to see that the European Parliament has finally voted to approve the cross border inheritance law proposed by the European Commission to clarify which jurisdiction’s succession law should govern an international estate. The UK and Ireland remain opted out of the regulation.  A report on this from the BBC news website can be found here.

François Hollande, the Socialist candidate for the French presidency, has provided more detail of his plan for a 75% top rate of income tax.  He now says there will be a ceiling on the total tax paid by an individual in one year; and that the rate will be only temporary until the public sector budget is balanced.

Finally to Greece and some encouraging news.  The head of the European Union’s Greek task force, Horst Reichenbach, has reported the collection of almost €1bn (£830m) in back taxes.  Almost double the target figure.  A good start but still a fraction of the amount outstanding as they believe there is around €8bn in uncollected tax revenues.  More on this from a report on the BBC news website can be found here.

Have a good weekend.

I think I will start with VAT and the proposed new Scottish national police force.

It was reported this week that the proposed new Scottish police force may face an annual VAT bill of £22 million.  Under the current structure police forces are treated like local authorities and are exempt from VAT.  However if they merge they may be subject to VAT.  The Scottish Government is currently in talks with HM Treasury to eliminate or minimise this potential financial liability.

I suspect that the Northern Ireland police force will be mentioned during these talks and in particular the fact that it has VAT exempt status.   So what is the problem you might ask.  The same exempt status will surely apply to the new Scottish police force.

The “just because it happens in Northern Ireland” argument does not always work with HMRC and HM Treasury.  Northern Ireland already has borrowing  and welfare powers.  Anyone involved in the Scotland Bill deliberations knows how hard HMRC and HM Treasury resisted calls for borrowing powers to be included.  They succeeded in ensuring that only restricted powers were included.  Welfare powers were not even seriously considered.  Northern Ireland is also to get partial control over air passenger duty and also possibly corporation tax.

In addition it seems that HMRC and HM Treasury cannot help but react negatively to any policy proposed by the Scottish Parliament that deviates from or impinges on reserved matters.  Examples include free personal and nursing care, local income tax, the Scottish Futures Trust and minimum alcohol pricing.  A report from the BBC news website on this issue can be found here.

Now to a surprise cut in council tax.  Stirling Council has become the only local authority in Scotland to reduce its council tax after councillors passed a budget on their second attempt.  The 1% cut, effective from 1 April, will see Band D council tax go down £12 from £1,209 to £1,197 a year.  Labour and Conservative councillors voted the measure through in an “alternative” budget after rejecting the minority SNP administration’s proposals.  More on this can be found on a BBC news website report which can be found here.

An article from the Evening News reports that The City of Edinburgh Council wants to investigate the idea of creating a “business improvement district” for Edinburgh’s tourism industry.  This would involve businesses making contributions to promote the city.  The article from the Evening News can be found here.  This is the latest in a series of revenue raising ideas from Edinburgh Council and of which I have written about previously.  See for example my blog of 9 December 2011.

Now to the fiscal powers debate and the latest group to enter the fray.  “Devo Plus” is a creation of the think tank Reform Scotland.  I should declare an interest as a former trustee of Reform Scotland and one of the authors of Reform Scotland’s “Devolution plus” fiscal powers paper.  I am though not involved in this campaign.  The position taken by the Devo Plus group is that they are opposed to “devo max” and independence and do not think the Scotland Bill goes far enough.  Instead they argue that the Scottish Parliament should be able to raise an amount roughly equal to what it is responsible for spending.  VAT and national insurance would remain in the hands of HM Treasury to ensure that Westminster was also accountable for its spending in Scotland.  It will be interesting to see what impact this campaign has in the coming weeks.  More on Devo Plus can be found here.

Now to the debate over the top rate of income tax.  Those arguing for the abolition of the top rate of income tax will be analysing preliminary UK Government statistics which suggest that the 50 per cent top rate of income tax has not raised any extra revenue.  A press release from Grant Thornton on this can be found here.

The “fuel duty discount pilot scheme for remote island communities” comes into operation today.  I was not surprised to see a report on the BBC news website of how HM Treasury had warned oil suppliers against attempting to profiteer from this scheme.  The report also notes that over the past week rises in the cost of fuel supplied to Orkney, Shetland and the Western Isles have been greater than the proposed discount.  Petrol and diesel at island pumps can be 20p more expensive than mainland prices.  I also read this week that the UK has the highest fuel tax burden in Europe with 60 per cent of the cost of unleaded petrol and 58 per cent of diesel made up of fuel duty and VAT.  I will resist the urge to make an ironic comment about North Sea oil.  The BBC news website report can be found here.

The BBC has reported that Barclays Bank has been ordered by HM Treasury to pay half a billion pounds in tax which it had tried to avoid.  Barclays was accused by HMRC of designing and using two schemes that were intended to avoid substantial amounts of tax.  The schemes, described as “highly abusive”, enabled the bank in question to avoid paying corporation tax on the profits it made from buying back its own debts, and to reclaim tax credits from HMRC on certain investment funds. The BBC website news report can be found here.

Now to a good idea.  A new “Assurance Commissioner” is to be appointed by HMRC following criticism from the House of Commons Public Accounts Select Committee about the relationship between HMRC and big businesses.  The following is from an article in the Telegraph and nicely sums up this matter: “In a move that amounts to a humbling mea culpa, HMRC is set to admit it needs to improve “transparency, scrutiny and accountability” after being publicly lambasted by the Parliamentary Public Acounts Committee over deals with Goldman Sachs and Vodafone.”  The article from the Telegraph can be found here.

I think I will end with France.  I will resist the urge to talk about last weekend’s game and instead mention a report by Reuters.  According to Reuters there has been a sudden rise in the number of French residents asking their wealth advisers about tax exile. They fear that the socialist party’s candidate Francois Hollande may win the forthcoming presidential election and increase wealth taxes.  I have heard similar claims many times before.  I have often wondered how many people actually leave.  I suspect not that many and, of those who leave, many regret doing so.

Have a good weekend.

Let’s start with the highlight of my week.  This would have been the result of last weekend’s Gala v Melrose game but a try in the last few minutes put paid to that.  So instead it has to be speaking at Holyrood’s Scotland Bill conference.  The text of my speech can be found here.

I was very impressed with Malcolm Chisholm MSP and not just becuase he said some nice things about the fiscal power papers I had a part in drafting for Reform Scotland.  He also summed up nicely why is there is so little support for the Scotland Bill including it seemed at this conference.  His argument was a simple one.  Those who should be campaigning for this Bill are not doing so mainly because there is almost nothing positive to say about it.

Next to a worrying story from BBC News.  I am not sure what is more worrying. The fact that MPs had to put a senior official under oath or that civil servants get paid bonuses.

Members of the Commons Public Accounts committee felt they had been unable to get answers from Anthony Inglese, HMRC’s senior lawyer, so they took the highly unusual step of making him swear an oath to tell the truth.  Parliamentary staff said that nobody had been asked to swear an oath by a parliamentary committee for more than a decade.

The session before the committee was part of an inquiry into tax deals negotiated by HMRC with Vodafone and Goldman Sachs.  The full story can be found here.  An earlier story from the Guardian on the background to this can be found here.

Back to the fiscal powers debate.  Not surprised to hear that the UK Government has already ruled out giving the Scottish Parliament even partial control over corporation tax.  Graham Gudgin made the claim while giving evidence to the Scotland Bill committee.  He said he had “reliable information” that the tax power would not be given to Scotland “under any circumstances”.

As I mentioned in my speech earlier this week it seems that the UK Government is just not interested in adding any powers to the Scotland Bill or dealing with some niggly issues such as a tax exemption  for the Glasgow Commonwealth Games.

I see that the Scottish Government are again asking the UK Government to reduce VAT on home repairs and renovations.  I am wondering why they are still not referring to the situation in the Isle of Man.  If anyone from the Scottish Government is reading this you might want to have a look at this.

Now to North Sea revenue and a report by Aberdeen and Grampian Chamber of Commerce. The 15th Oil and Gas survey said confidence and investment were still being dented by the changes announced in this year’s UK Budget. More than half of oil and gas operators surveyed believe the Budget’s £2bn industry tax hike has harmed North Sea investment.  The supplementary tax on North Sea oil production rose from 20% to 32% to fund a cut in UK government fuel duty.

Have a good weekend.

Always nice to get away from things for a while.  Islay gives you a different perspective.

Tax has only featured in three conversations here and as each also mentioned whisky I felt that made it acceptable.  The general sentiment seemed to be: “Islay gives a lot to the UK Exchequer every year and we get very little back in return”.

One person I spoke to told me that: “Islay’s whisky industry contributes approximately £100 million a year to the UK government in excise duty and value-added tax.”  To put that into context, and if that figure is correct,  that is about £30,000 for every man, woman and child on the island.

The main tax stories of the past week have a familiar feel to them.

The debate over devolving complete control over corporation tax to the Scottish Parliament has continued.  This week saw HM Treasury predicting doom and gloom if such a thing were to come to pass.  More ammunition for those wanting to see a Scottish Exchequer.

In a connected issue, Scotland’s First Minister said that the oil industry should be consulted on any new changes to offshore taxation.  The background to this is the proposal by the UK government to increase the supplementary charge on oil production from 20 to 32 per cent.

The other major political tax debate also rumbles on.  That being the top rate of income tax.  This still feels like a “phoney war” but you also get the feeling that a formal start to hostilities might just be round the corner.  The main warring parties in this case being the coalition partners of the UK Government.

This week saw twenty economists (makes you wonder what a group of economists is called), in a letter to the Financial Times, urging the UK Government to drop the top 50p tax rate.  They claim it is doing “lasting damage” to the UK economy.   The top rate is paid at 50p for each pound earned over £150,000 and affects around 310,000 people.  Opponents say cutting the top rate at a time of cuts would be “monstrously unfair” and “phenomenally immoral”.  UK Government Ministers continue to hedge their bets by saying that the 50p rate is temporary and that their policy is to first increase the income tax threshold to £10,000.

Although not as widely reported as the two issues above, I did like the council tax news item from the Courier.  The report explained how funds raised by increasing the council tax on second homes had helped to pay for affordable housing projects across the Perth and Kinross Council area.

In February 2005 Perth and Kinross Council agreed that additional money collected by reducing the council tax discount on second homes and long-term empty properties could be used to support the development of affordable housing.   The Council  reduced the 50% second home discount to 10%.  The reduction covers around 1,800 properties.

Back to the mainland tomorrow!

Interested to see that this campaign resurfaced this week.

Main protagonists appear to be the Scottish Building Federation, Federation of Small Businesses and the Scottish Government.

I was though surprised to see no reference to the Isle of Man when this was being reported.  This was because the Isle of Man reached an agreement with HM Treasury last December to make permanent its 5% VAT rate on repairs or refurbishment of domestic property.

More information on this can be found here.   An article on this from the Scotsman can also be found here.

A reminder that businesses, regardless of turnover, who registered for VAT on or after 1 April 2010 must submit their returns online and pay any VAT due electronically.

This will apply to all VAT- registered businesses by April 2012.

More information can be found here.

Gateshead Talmudical College v HMRC

Upper Tribunal Finance and Tax Chamber 2011 UKUT 131 (TCC) 

This is an appeal by Gateshead College against the decision of the First-tier Tribunal.

The Upper Tribunal concluded that Capital Goods Scheme (CGS) adjustments were required when rental payments and VAT accounting stopped less than two years into a lease and leaseback arrangement.

CGS is a mechanism for regulating deductibility over the “VAT-life” of a capital good.   For VATpurposes a capital good is a developed property.  The scheme operates by ensuring that the deductibility for a property reflects the use to which the property is put over the VAT-life (adjustment period) of the property.

Facts

The main activity of Gateshead College is the provision of education.   The background to this matter is the building of an extension by Gateshead College.  Gateshead College leased these premises to a property company called Starburst Properties Ltd.   Starburst on the same day granted a sublease over the same premises to Gateshead College.   Gateshead College had registered for VAT two months earlier and had described its business as that of “property letting”.   Both Gateshead College and Starburst elected to waive the VAT exemption over these premises.

Gateshead College then took credit for the input tax on its construction costs relating to these premises and this led to a VAT repayment for Gateshead College.   However, after an initial period of less than two years the lease payments and the VAT accounting stopped.   In addition, Starburst was dissolved and struck off the company register.  Gateshead College took no action to forfeit the lease the benefit of which became vested in the Crown as bona vacantia.

HMRC assessed Gateshead College for failure to make adjustments under the CGS and Gateshead College appealed to the First-tier tax Tribunal.

At the First-tier Tribunal HMRC successfully argued that the making of taxable supplies had been reduced to nil once Starburst had been dissolved (as it could not be the recipient of any supplies).  In addition the ceasing in the making of taxable supplies had given rise to the requirement to make a CGS adjustment.   Gateshead College unsuccessfully argued that the continued existence in law of the lease meant that taxable supplies continued to be made after the initial period.

The arguments  

Gateshead College appealed to the Upper Tribunal on the basis that the First-tier Tribunal had erred in law.

Gateshead College made two arguments.  Firstly, it argued that the First-tier Tribunal had been wrong to include that no supplies were being made under the lease because the parties has stopped abiding by its terms and one of the parties had ceased to exist.   Gateshead College contended that it had continued to make supplies despite its failure to seek payment of rent.

Gateshead College also argued that that the First-tier Tribunal had wrongly concluded that an adjustment under the CGS should have been made because of a decrease in the making of taxable supplies.  Gateshead College argued that CGS adjustments are triggered not by the reduction in the value of taxable supplies but by a change in the extent of the use of the capital item for making taxable, as distinct from exempt supplies.

The decision

The Upper Tribunal dismissed Gateshead College’s first argument.   The Upper Tribunal accepted the lease existed as an item bona vacantia but that did not alter the fact that no rent was paid and accounted for after a period of less than two years.   A supply, i.e. rent, was therefore not being made once Starburst was struck off.

With regard to the “change of use” argument.   The Upper Tribunal stated, as had the First-tier Tribunal, that it was “completely untenable” to maintain this argument.  The parties had stopped abiding by the lease and the payment of rent had been abandoned completely.  Gateshead College’s argument that the premises were used exclusively for leasing supplies, despite there being no actual rental charges or payment nor any intention of any being made, could not be sustained.