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Key points * Budget Notes were changed without explanation. * Details of which notes were changed are now on the website. * £43,000 higher rate threshold depends on rate of inflation. * Would it have been better to be more open?
ON BUDGET DAY, as we were putting together our overnight commentary to appear in that week's magazine, Richard Curtis suddenly noticed that the file of Budget Notes on the Treasury site now had a note on it that 'this replaces the version published immediately after the Chancellor finished his Budget speech'. That was it, the only clue we had that there was a change. No separate press release on the HMRC site, no-one from the Treasury press office ringing us up to explain. Had we simply been working from files we had downloaded immediately after the speech, or from a hard copy pack collected from the Treasury as we did in the old days, we would not have realised that anything was different.
Knowing there were changes was one thing; knowing what they were was another. Fortunately we had printed out the budget notes as originally issued, and for a time the original file was still available on the HMRC site when the revised one was up at the Treasury. It was easy to see the biggest change — where once there had been a couple of pages of Budget Note 59, now there were just numbered blank pages. Again, how difficult would it have been to give a brief description of the note and say that it had been withdrawn?
Participation fees
Whilst I would love to be able to tell you that BN59 contained the details of a new tax which the Chancellor planned to introduce but had decided to withdraw at the last minute, the truth is more mundane. The release was about VAT and gaming, the continuation of certain exemptions for prize bingo, etc, and the treatment of participation fees (fees paid to casinos in order to take part in games, such as poker) for online gaming both on and offshore. We understand that it should never have been issued; it covered areas discussed by ministers, but not yet agreed. Even after having had the chance to look at the release in more detail, it is not immediately clear what was so problematic about it. Possibly it was the fact that it highlighted a different treatment for onshore and offshore Internet participation fees which some commentators think is wrong, but the subject is too specialist to go into here — a copy of the missing press release and some brief notes on what might be the problem will be on our website by the time you read this; all subscribers to the magazine are entitled to a free password which can be obtained by giving your name and full address to additionalusers@lexisnexis.co.uk.
Other changes
There were two other changes which were far harder to find; in fact we only spotted them by electronically comparing the two files of Budget Notes. One was a rewriting of BN40 paragraph 8: as far as I can see this mostly took the opportunity offered by the reissue of the notes to change it to something approaching readable English, although some feel it is now tougher. But the other change, while limited in scope, was much more significant. BN10 described a withdrawal of relief for losses 'bought' by Lloyd's underwriters in their final year, a change presumably arising out of a disclosure under DOTAS. In the original version of the note, the start date was given as Royal Assent to the Finance Act. In the revised version of the note it was said to be Budget day. There might be an interesting judicial review case if someone acted on the basis of the original note, bought losses after budget day believing them to be allowable, and then found that they were not.
It might have been expected that a press release would be issued the following day alerting people to the changes, particularly since several of the papers with detailed budget coverage did briefly mention the participation fees and the purchase of losses. But there was nothing. In fact, nothing changed until Taxation followed it up and pressed HMRC on the issue. They have now included an explanation in the text on the web page from which the notes are downloaded which specifies the releases changed and withdrawn, which is very welcome. Inevitably mistakes do happen; but it is to be hoped that if the same problem arises in the future the explanation of what has changed will be made more promptly.
The 43,000
The treatment of the changes to the Budget Notes was perhaps symptomatic of a Budget that was full of tricks. I spoke at our free Breakfast Briefing last week about the way that the rabbit out of the hat of a 2% tax cut was mostly paid for by penalising the lower paid, and I will return to that when we write the briefing up in a few weeks time. I want to look here at another aspect I mentioned at the briefing, which was brought to my attention by Rebecca Benneyworth.
The Chancellor announced in his speech that the higher rate threshold and the upper earnings limit (UEL) for NIC would be aligned by 2009/10 so that, considering tax and NIC together, there would only be two effective tax rates — 31% for income above the personal allowance, and 41% for higher rate taxpayers. The higher rate would be payable, the Chancellor said, on income over £43,000. This was repeated by many of the newspapers the following morning.
The Budget Notes, however, do not mention the figure of £43,000. Instead they give a rather confusing explanation of the amounts in excess of inflation that the various thresholds will rise. For 2008/09 the higher rate threshold will rise only by inflation. The UEL will rise by £3,900 above the rate of inflation. For 2009/10 the higher rate threshold increases by £800 over inflation, and the UEL will be aligned with it.
So how, asked Rebecca, does this equate to £43,000? Surely the figure cannot include inflation, because the rate of inflation is not known, and in any case that would mean a large part of the increase to £43,000 was simply the result of fiscal drag? But simply adding up the 2007/08 personal allowance of £5,225, the current higher rate threshold of £34,600, and the increase of £800 gives a total of £40,625, not £43,000.
The answer from HMRC is shown in Table 1.
Table 1
2008/09
Personal allowance £5,405 (indexed amount)
Basic rate limit ££35,800 (indexed amount)
UEL £40,040 (indexed £695 pw + £75 pw = £770 pw)
2009/10
Personal allowance £5,555 (indexed amount)
Basic rate limit £37,600 (indexed amount £36,800 + £800))
UEL £43,160 (indexed £5,555 + £37,600)
The first point to note is that the figures given by HMRC don't quite add up; £5,555 + £37,600 comes to £43,155. But more importantly, it means that the only real increase to the higher rate threshold, which saves 20% tax, is the £800. By contrast the real increase in the UEL, which costs taxpayers 11%, is £3,900 in 2007/08 and a further £2,000 or so in 2008/09. This is a long way from the impression given by the Chancellor during his speech. The £43,000 threshold for higher rate was highlighted, the aligning of the UEL was presented as a 'simplification' measure. Nor is there any guarantee that the figure is actually going to be £43,000 — it all depends on the level of inflation. Whilst the speech might not have been the place to go into detailed figures, the assumptions about inflation that lay behind the £43,000 figure could have been given in the accompanying press releases or Budget Notes.
Smoke and mirrors
The Federation for Private Business described the budget as 'smoke and mirrors'. Announcing the 2% cut at the end of the speech may have got the headlines on the news that evening, but by the time of the newspapers the following morning most had realised that what the Chancellor had given away at the end had been clawed back earlier. The best summary came from Anatole Kaletsky in The Times, which is worth quoting at some length:
'The question is why Mr Brown could not bring himself to lay all this out quite straightforwardly. Had he done so, he could have rebutted the accusations of stealth taxation that will now confuse his efforts to simplify the tax system and lower marginal rates. More importantly, he might have got some credit for being candid and trying to communicate his message directly to the voters.'
