10 vote winning ideas for the Budget, George

With the Autumn Statement almost upon us, we asked the AngelNews team what they would like to see the Chancellor announce.  So here goes

1. Offer an enhanced income tax break for individuals who withdraw monies from their pension fund and invest it into a VCT.
2. Increase the investment allowance per investor per year for VCTs from £200k to £1m and allow VCTs to benefit from an exemption from Inheritance Tax.
3. Announce a strategy to bring income tax rates down to their original rate of 2 old pence in the old pound ie. 2/240 ie less than 1%! Or failing that at least bring it back to Sir Robert Peel’s time when it was about 3% in the pound for incomes over £150 (£12,320 in today’s money).
4. Increase Entrepreneurs’ Relief to £20m to encourage entrepreneurs to hang on in there for to achieve the extra growth their business could achieve before it is sold.
5. Investigate whether initiatives designed to encourage SME growth are in fact paid for with the taxes paid by other SMEs thus creating an unfair playing field.
6. Increase the Employers Allowance to £3,000 per company.
7. Encourage the whole nation to move away from the idea that the government pays for hand outs (whether in the forms of tax breaks, grants, subsidies or support) to the idea that their friends, family, neighbours and colleagues provide the money via the taxes they pay to fund the hand outs.
8. End PAYE and allow all employers to pay staff gross and then order HMRC to claim taxes directly off the individual on a monthly basis.  Imagine what that would do for voter engagement! And business owners would love you for taking a load of work off their FD’s desks.
9. Stipulate that first time buyers should only pay 1% stamp duty on home purchases regardless of how much that home is worth.
10. Allow graduates who join an SME or a social enterprise and who stay for five years, to pay no interest on their student loans OR, even better, absolve them from the loan.

The NAO - was it right to attack HMRC and HM Treasury about Tax Relief schemes?

Last Friday we published a news story about the National Audit Office challenging HMRC and HM Treasury to improve on its analysis and reporting on many tax relief schemes.  Backed up by a comprehensive research report on its investigations into this issue, the NAO broadly felt that without better reporting it was impossible to ascertain whether the schemes provided value for money for the tax payer.

The story is a fascinating one.  Although we in the investment world know of many schemes, VCTs, EIS, SEIS, SITR, Patent Box, Entrepreneurs' Relief, R&D tax credits and the EMI scheme, I can bet many of you will be staggered to hear that there are a total of 398 tax relief schemes listed on HMRC's website of which 196 are designed to support a particular behaviour to hit economic or social objectives.  Of these 46 "cost" the Exchequer more than £50m a year according to HMRC. 

The story, accompanied by a scathing press release from The Right Hon Margaret Hodge MP, Chair of the Committee on Public Accounts, inferring that there may be widespread abuse (or not!) of Entrepreneurs' Relief, was clearly designed to antagonise and make headlines. 

However the story needs to be set in context.  The National Audit Office is just that - the auditors of the public accounts.  In this role, I am pleased that they are identifying weaknesses in reporting in terms of tax.  Whether there is justification in making a large leap to the conclusion that reliefs such as Entrepreneurs' Relief, Business Property Relief and indeed Share Loss Relief (a vital component of EIS and SEIS) are being abused seems premature before such reporting has been done.

Clearly there has been a problem in the past with Share Loss Relief as many people much more famous than me have found out to their cost as their financial "indiscretions" have found their way on to the front pages of the tabloids and broadsheets.  Perhaps in light of this report, George Osborne was headed in the right direction when he attempted to limit loss relief a couple of years ago, even if he sort of missed the point.  I understand why loss relief is attractive to angel investors and have taken advantage of it myself when a small EIS company I backed in a very small way went bust a few years ago, but even so there are clearly inconsistencies in this particular Relief - not least the SEIS introductory period when using it would have enabled, in effect, an investor to invest and then let a company go bust within 12 months and be rewarded for that behaviour with a more than 100% tax break from the Treasury.  That is not creating a behaviour that any rational person would want to see happen.  Luckily this has now been correctred.  

I continue to worry about Share Loss Relief in the context of EIS and SEIS as I think a back-ended relief inevitably rewards (although some might argue it compensates for) failure and could encourage the artificial ending of a company's life when it is "walking dead", which may not be in the ecomonic interest of the taxpayer even if it is in the economic interest of the investor.  Loss Relief is, I guess, it's a bit like a switch on a life support system isn't it.  The question is not so much whether the switch should exist but who should be entitled to use it.  If you are going to make a change, maybe a better option would be to replace it with a further 10% annual tax break for investors if they continue to support a company for between five and 10 years - an option that would create a positive financial reward for staying invested in a business?

Business Property Relief is going to be an interesting one.  I look forward to seeing what the better reporting HMRC and HM Treasury provide about this Relief will uncover; likewise with Patent Box. It's good to know that none of EIS, SEIS or VCTs came into this study, suggesting that the teams at HMRC looking after these did not give the NAO cause for concern. 

Entrepreneurs' Relief is a very hot topic.  Essentially many, many more people are claiming it than HMRC estimated.  The "cost" to HM Treasury was £2.9billion in 2013/14; more than three times the original estimates.  That is significant and bears further investigation, but for Margaret Hodge to assume that there might be abuse in this scheme is unfair and unhelpful.  We need an investigation before such accusations are made. 

Why has Entrepreneurs' Relief rocketed though?  Is it a victim of it's own success?  One reason will be that it is because the amount you can claim under the Scheme has increased from £1m to £10m in recent years. In a world where you can exit and get £10m at a 10% tax rate, why wouldn't you strive to achieve that objective? And you only make £10m from selling a business because it is worth £10m to someone else; that means it will almost inevitably have decent profits of £1m or more, be employing lots and lots of tax paying employees and generating VATable sales and corporation taxes, let alone business rates, fuel duty etc etc etc.  You cannot look at Entrepreneurs' Relief on its own as a cost to the Exchequer, but must see it in the context of the above.  I hope HMRC and HM Treasury take this on board when designing the new "cost" reporting mechanisms that they factor this into account.

Overall, the NAO announcement is a wake-up call for the Coalition and any party aspiring to run our country from May next year.  Quite frankly the tax system is in a total mess.  Headline rates of tax are too high, which is why big companies and the wealthy pay tax accountants to help them find legal ways to avoid them.  And it's why the bottom of society finds it so hard to gain the mobility it so badly needs if our country is going to maintain its long standing tradition of social mobility through hard work and application of brains. Tax breaks are great in the context of a high tax environment, but I long for the announcement by a government that they are going to readjust our tax regime to a simple one where those earning £1000 a month or less pay no tax and those earning more are taxed at an affordable rate - somewhere between 10% and 20%, instinctively, feels right. Maybe we need to think hire Iain Duncan Smith to take on this issue!

We tend to forget these days that Income Tax was introduced as a temporary tax to pay for weapons and equipment in advance of the Napoleonic Wars in 1799.  It was abolished again in 1816 after the Battle of Waterloo.  It was reintroduced by Peel in 1842 and we have had it in our lives pretty much ever since.  The bad old days of 99.25% income tax (during World War II) are long gone, but rises in National Insurance and VAT still ensure that we the citizen pay again and again for the costs of government.  When it comes to business taxes the irony is that despite the cry of the American Revolution that there should be no taxation without representation, business is obliged to hand over Employers' National Insurance, Business Rates and Corporation Tax. It sounds like I am whingeing, but this is not really fair! 

I think the time has come for the Government to make clear to us all that they do not hand out tax breaks, our fellow tax payers do. When we do not pay tax, in fact we are making our neighbours, friends, families and employees pick up our share of the burden.  The Government is merely the intermediary in the process.  Complexity is costly and it is obfuscating - who knows who is "paying their fair share" - I certainly don't and more to the point I don't think it is my business to know this, but I would feel more comfortable if this simply was not an issue.

I hope that one of the big Election Debates will centre around how to simplify our tax regime.  Mr Cameron has admirably set out his position - that we need to be a low tax country if we are going to compete on the world stage, but it is just as important that we are a simple tax country.   When the world is simple, what is perceived by the majority to be "bad" behaviour, is easy to identify and easier to prevent.  I call on the other parties to tell us what they plan to do about it.

In the meantime, whilst we continue to live in the mad house of our current tax regime, we need to keep the tax breaks in place.  Anything to reduce the tax burden on us all!  So with this in mind, please Mr Osborne and Mr Cameron, until you sort it out, continue to increase the amount we can invest via tax break schemes, give entrepreneurs better reliefs on their sale proceeds to encourage them to grow their businesses bigger and bigger, take more people out of Income Tax and everything else you can think of.  And Mrs Hodge, please turn your attention to waste in government and exhort government departments to cut spending on anything, literally anything, that the private sector is already doing or could do better and cheaper.  You might like to start by taking a look at business support schemes!

Update on PatentBox - a Compromise with Germany

The Patent Box allows companies to pay lower taxes on profits from patented products. In effect, the current rate of 21 per cent can be reduced to 10 per cent by 1 April 2017.

Under the current scheme, companies can qualify for the Patent Box if they are liable for UK corporation tax and make a profit from exploiting patented inventions. However, Germany has been vocal in criticising the present arrangement on the basis that it encourages artificial shifting of profits from countries with higher tax regimes.

Under the new agreement, the UK will join other OECD countries in only granting tax breaks for patents directly tied to research and innovation at home. As such, the question of eligibility will depend on the location of the R&D expenditure associated with the development of the patent or product. However, where related outsourcing or acquisition costs are incurred, which do not qualify directly as R&D expenditure, it is proposed that companies will be able to obtain a maximum 30 per cent uplift of their qualifying expenditure (subject to a cap on the actual expenditure).

The existing regime is likely to close to new entrants (products and patents) in June 2016 but "grandfathering" will allow IP in the existing regime to retain tax benefits until June 2021. Companies should therefore consider applying for the patent box before June 2016 if they wish to benefit under the more relaxed qualifying criteria presently in operation.

This agreement comes just as the Irish government is considering introducing their version of a Patent Box - which they refer to as a "Knowledge Box". It therefore remains to be seen, as to whether application of the Irish scheme is similarly curtailed.

If you would like any further information please contact Pamela Bryer, patent attorney at our Oxford office, or say hello at the London Pitching 4 Management event on 2 December