The announcement by the Office for National Statistics that public sector accounts revealed a £3.74bn surplus in January was widely reported as a surprise boost for the government.
It was in fact no such thing. It was actually highly predictable because January is the month in which the balance of any tax due for the 2009/10 tax year has to be paid.
It is the biggest tax collection month of the year with income tax from the self-employed and capital gains and inheritance tax adding to the regular monthly receipts of PAYE and VAT.
In addition, small-business owners will have legitimately been incorporating limited company vehicles, crystallising capital gains on their goodwill and paying capital gains tax at the lower rate for entrepreneurs (10%). This will have bolstered capital gains tax revenues in January but will permanently reduce income tax receipts in future years.
These corporate vehicles will also have enabled taxpayers to switch to the payment of the considerably lower corporation tax rates (currently 21% for small companies and a full rate of 28%, falling to 20% and 27% respectively, with further reductions in the full rate expected) on their profits.
Flat growth
The quid pro quo is that both payments on account in July and tax receipts in January 2012 will be considerably less than expected, truly reflecting the flat economic growth percolating through the UK economy.
There is much evidence that high earners able to escape the UK tax net are doing so in their droves
We, along with most other proactive tax advisers, have been advising clients since April 2009 to bring forward, wherever possible, income and gains to be taxed in the 2009/10 tax year so as to minimise the impact of the new addition rate of income tax (50%) introduced with effect from the 2010/11 tax year, as well as the loss of personal allowances on income over £100,000 and the higher level of capital gains tax at 28%.
It is our contention that there has been a widespread acceleration of bonus payments, profit shares and dividends across all sectors, not to mention a substantial increase in the disposal of assets, all prior to 5 April 2010 – leading to a substantially higher than average January tax take.
Since the 50% additional rate of income tax was originally introduced as a temporary measure, is it any wonder that most taxpayers with any ability to manage their own affairs would be trying to minimise income during this ‘temporary’ period? There is also much evidence that high earners able to escape the UK tax net are doing so in their droves.
The sooner this penal rate is eliminated and tax rates revert to the 40% higher rate threshold, the sooner tax revenues will stop fluctuating and revert to regular January surpluses.
