The norm with a Gordon Brown Budget (no-one sees Chancellor Alastair Darling as more than an expensive amanuensis for his dominating predecessor) is that it takes weeks or months to find out what the true effect is of any measure. Sometimes this is because the rules are only roughly sketched – it took months, for example, before HMRC published any useful guidance on the changes to the Transferable Nil Rate Band. Sometimes the effect only appears with the first payslips of the next tax year – even the Treasury was taken aback by the slow-burning impact, political as well as fiscal, of the removal of the 10% band of the personal allowances.
Often, however, the likely impact of a measure is immediately obvious. The sudden increase in the top rate of tax to 50% for incomes over £150,000 will drive high earners away to less punitive climes. If they do not go, they will find other ways to avoid the burden – by working less hard, by retiring early, or by some rearrangement in their affairs.
The Times on Wednesday carried a report Treasury expects to lose billions as top earners sidestep 50% tax rate which suggests that the Treasury hopes to raise £1.1 billion from the new rates but expects to lose £2.5 billion from legal tax avoidance arrangements.
Some of us in this office are old enough to remember the last time a Labour government pursued a fiscal policy which was driven entirely by the motive of soaking the rich for political reasons. The chief beneficiary then was Switzerland and it is likely that Switzerland will again welcome those driven out by the 50% tax rate. It is, of course, not just those moving from Britain whose tax receipts we will lose – businesses, and particularly city businesses with mobile workforces, will not recruit fresh potential tax-payers into London.
Many of those who move will not necessarily seek out jurisdictions with the lowest tax rates. It is the relationship between what you pay in tax and what the state provides which counts for some. There was an observation by a banker in the Sunday Times last week that other high-tax countries actually provided something in return – “everything works there”, he said. It is almost incidental that the increase in the top rate of tax is a clear breach of a manifesto promise made in each of the last three elections.
We will be writing more about the 2009 Budget shortly. If you would like to discuss what steps you might take to mitigate its impact, please contact Felix Appelbe or Andrew Penfold on 020 7242 7000.
