Abolition of the 10% starting rate – What a mess!

The Chancellor’s “about turn” in May this year when he announced that he would be increasing the personal allowance by £600 to help “low income customers affected by the change to the personal tax system announced at Budget 2007” resulted in a flurry of criticism in the press. Most of it was political and probably understandably so. However, for me, it further underlined the failure of our politicians to understand the full impact of their decisions on both businesses and individuals.

Apart from the fact that the “u-turn” is going to cost a further £2.7bn, the way it has been introduced, so as not to provide an unfair advantage to higher rate tax payers, has created a whole raft of additional costs and administration.

Despite HMRC stating that there would be no need to make adjustments to code numbers “at the moment” the fact of the matter is having issued new code numbers for 2008/09 at the beginning of that tax year in April, the £600 increase would in fact involve new personal allowances for every employee in the country. This in itself will mean that numerous staff will have to update systems and produce copious amounts of paper to be sent by post to millions of people at huge cost. Worse than that, all the software programmes that had been changed to deal with the new tax year will need to be re-visited. That’s not just all the tax systems used by accountants up and down the land, but affects banks, insurance companies – the list is endless. Because of the way the ‘u-turn’ has been introduced, these changes are unavoidable and will involve considerable additional programming. There are then all the tax tables produced by a multitude of bodies including our goodselves, that are now incorrect and have to be reprinted and re-issued.

In business, all of us have to make decisions and consider the “big picture”. Drug companies can’t launch new drugs until sufficient time has elapsed for side effects to become clear. We all do everything we can to minimise the adverse affect of our actions yet governments throughout time have introduced legislation which has apparently solved one problem and caused a multitude of others.

As long ago as the 1980s, when the Business Expansion Scheme was introduced; it was done in such a way that higher rate tax payers could effectively get an investment in certain risky schemes virtually funded for by tax relief. The mortgage relief rules in the 1980s whereby a change in the tax relief offered to people buying property brought on the recession at the end of that decade and the beginning of the next is another example.

This latest one is not on the same scale, but further illustrates the failure of governments, egged on by HMRC, to fully realise the impact of their decisions.

If only they truly consulted with those of us who are at the sharp end and could advise of the impact of such decisions, a lot of unnecessary costs and work could be avoided.