Unfortunate but Necessary
Andrew Gerrard, Director
It is comforting to see a programme of fiscal austerity intended to eliminate the deficit by 2015-16. The twin commitments to the business community and a balanced budget at the very start of the Minister’s speech were a welcome restatement of our economic priorities, even if oddly prefaced by a quote from a Marxist leader. Biting into the reserves in order to achieve this rebalancing is unfortunate but necessary.
The personal tax and benefits changes were relatively subtle, but clearly aimed at a shift of the tax burden onto higher rate tax payers in the name of fairness. As means of achieving this stated goal, the chosen measures should be quietly effective. This includes the elimination of tax relief in the higher tax band on deductions such as mortgage interest payments (but not interestingly for pension contributions) and the proposed changes to child benefits. In this latter case, the initial reduction should only be a first step and I hope it will be followed by a more comprehensive review. This system could be much fairer if it were appropriately means tested, which could be done relatively efficiently via the tax assessment system.
The removal of relief on maintenance payments, whilst exempting the equivalent receipt, should raise additional revenue for Treasury on the basis that a number of the recipients previously paid no or little tax. This is likely to prove quite costly to individuals who have been paying large amounts of maintenance under Court order and for which tax relief will no longer be available.
The reduction in personal allowance credit may seem to run contrary to this theme of supporting lower earners. However, as the Minister pointed out, it can be a disincentive for earners on or around the minimum wage and it has been widely disparaged as an inefficient method of welfare as it can and does often benefit people who have no need of the additional income. Indeed, I would be interested in seeing further reviews of this system in the years to come.
One major area of uncertainty in the budget is the proposed review of certain companies where ‘employment’ relationships exist. This is unexpected and, particularly in the area of financial planning, uncertainty and sudden change are cause for concern. The Minister’s comments in this regard were somewhat vague and I would expect the Assessor to clarify this.
Finally, perhaps the most potent of all changes is the withdrawal of concessions on distributions, the detail of which is not apparent from the budget speech. Further clarity is required here, as the practice note issued is not clear. However, it is evident that whereas distributions on wind-up/dissolution were previously potentially tax free to the Manx resident shareholder, they may no longer be. Also, other distributions which may previously have been treated as tax free, including onward distributions of foreign taxed income, may now be taxable. This potentially represents a significant change and one which may have a very noticeable tax impact.
Photo : Andrew Gerrard - Harding Lewis Accountants
