Business Taxation - the UK Stealth Tax and Retrospective Legislation - Essay Example

Business Taxation: UK Stealth Tax and Retrospective Legislation Stealth Tax in UK The UK Government collects taxes in a peculiar way. This is called the Stealth Tax. It is levied without the taxpayers being aware of it. It goes by and large unnoticed and the government does not recognize it as a tax. The Stealth Tax is generally used by Conservatives as a weapon against the policies of the New Labour government. So in spite of lowest income taxes, the citizens pay more tax than ever before. The stealth taxes allow the Government to raise billions of pounds, at the same time making citizens feel that the ministers are their well-wishers who are doing everything to cut taxes. Some of the stealth taxes implemented in past or to be implemented soon are as follows: The Mortgage Interest Relief was phased out The Married Couples’ Allowance was removed The reclaiming of the share dividend tax credit on was removed The revenue from the National Lottery were diverted to fund public spending The tax-free savings were reduced every year The higher-rate tax threshold failed to increase at the same rate as earnings The nil-rate inheritance tax band failed to increase by the rate of inflation, making more inheritance tax to be payable - especially when the property owners die. The PEPs and ISAs were unable to recover the tax credit on dividends after 5th April 2004. The licences for blocks of transmission frequencies (previously used for public services) were sold to mobile service operators like Vodafone, BT, One2One and Orange for a huge total of £22,447,400,000. This amount will be recovered by stealth from the consumers over the 20-year contract period. The TV frequencies will be auctioned after the UK television digital switchover is complete will also raise stealth taxes Statistics about the impact of stealth taxation reveals the real picture of the taxation politics in UK. It shows that, though the Government reduced the tax rates, it expects a massive 45% increase its overall tax collections by taxing more people now and raise more cash by stealth taxation. Stealth taxes can be viewed as a form of regressive taxation e.g. State lotteries where rich people are less affected by VAT and it is evident that the lotteries are played more by poor people than by the well-off. The Conservatives accuse the Labour government by describing the increase in National lotteries, stamp duty tax paid on house sales, children's tax credit and the Council tax are simply another opportunity to impose a stealth tax on all hard-working families and pensioners. The stealth taxes result in a situation where average earning people pay the same taxes as those paid by the wealthy. It is predicted that by 2009-10 tax year, the higher rate tax threshold will be 133% of average earnings, thus covering 4.2 million people by the higher-rate tax. The stealth taxes mentioned here are some of the examples. Actually there are many more that are not mentioned. The Conservatives suppose to have identified 66 of them. With the next budget looming, the government is unlikely to increase any noticeable taxes. But the ghost of previous years may still haunt the Treasury benches. The Economic Angle of Government's Stealth Taxation Policy When the Labour Party won a landslide victory in 1997, Tony Blair campaigned that he had no plans to increase taxes at all. According to the economic think-tank of The Institute for Fiscal Studies, since 1997 Labour Party government has brought in about 157 tax-raising measures but at the same time Chancellor Gordon Brown introduced 215 tax-cutting measures. The irony of facts is that the Exchequer has benefited more by tax hikes than the cost of tax cuts it had to bear, resulting in the Government earning £26.4 billion, nearly 2.1% extra revenues for the national income than it was when Labour came to power. This plan worked out successfully for the first few years of Labour's rule. The Press was full of praise after the first Budget for the cuts in income tax rates, introduction of the winter fuel allowances and children's tax credits. But even a few days later when the real came to surface, negative stories started appearing in the personal finance sections but did not hit the front pages. While there is decrease in basic rates of income tax, “stealth taxes” have been "quietly" increased. People are a bit more suspicious these days, because of their complex nature many stealth taxes can be go unnoticed as they (the politicians) rely on the fact that most people don't and won't understand the outcome of technicalities involved in tax changes. The Government is implementing new stealth taxes. The Prime Minister hinted at individuals paying more for services they use. They have raised specific charges for transport and pension. Keen to address the balance between citizens' paying individually or collectively, the Government plans to raise billions of extra pounds by increasing charges and levying stealth taxes to fund public facilities like hospitals, schools and transport. But the British are now realising that no matter how the Government projects these tax hikes, they are still tax hikes. Beware of the wolf in the grandma's robes! Take a look at the figures of financial years1997-1998 and 2004/2005 given below: 1997 - 1998 2004 - 2005 Income Tax £77 billion £123 billion National Insurance £45 billion £78 billion Stamp Duty £3.5 billion £9 billion Inheritance Tax £1.7 billion £2.9 billion Capital Gains Tax £1.4 billion £2.3 billion Courtesy: http://myweb.tiscali.co.uk/garbagegate/item2/stealth.htm The Government should realise that people get annoyed if you are taxing and charging them at the same time. But fearing the risk of the Opposition parties occupying the ruling benches, the Labour Party is forcing its MPs, Union leaders and activists to support its public services reforms. They are ready to take painful decisions for the change towards a reformed welfare state that they think is the only way to social justice. They are convincing their party men not to look at short-term popularity by avoiding necessary changes, but to look forward in the long-term thus providing them a poll agenda of persuading the public that only they can bring about the change. The Government may also push through the controversial NHS reforms that include foundation hospitals to allow patients to have hospital options anywhere in Britain. The stealth taxation is making poor families pay three fold in hidden taxes than the wealthy. Families with annual incomes less than £11,604 pay more than 30% in form of indirect taxes to the Government. But for the affluent households, earning more than £31,321 per year, the figure is just 9.9%. The Labour Government has avoided raising income tax but has hiked the "stealth taxes" include hikes in alcohol and tobacco duties, Council tax, VAT, and fuel and fares levies implying Labour's tax system are unfair and unjust. Retrospective Tax Laws Tax avoidance is using the law selfishly in order to reduce taxes. Some examples of tax avoidance are setting up a charitable trust or foundation to change tax status, establish an offshore company, trust or foundation in low tax jurisdictions etc. In contrast tax evasion is evading taxes by illegal means. Some examples of tax evasion are deliberate misrepresentation or concealing the facts and true figures to the tax authorities in order to reduce their tax liability, dishonest tax reporting, declaring less income or profits, or overstating deductions. Tax evasion is a common crime in almost all the countries in the world, which impose fines or imprisonment on the guilty parties. In short, tax evasion is an illegal attempt to avoid taxes while tax avoidance is an attempt to use the law to reduce taxes. Retrospective laws are also called Ex post facto laws. It means "from something done afterward" in Latin or simply retroactive laws. A retrospective law "retroactively" changes the legal consequences of events happened or actions committed or changes the legal status of facts or relations that existed before to the enactment of the law. A law may have a retrospective effect without being technically so. E.g. repealing a previous law, where it no longer applies to the situations it once did apply. Taxes are usually avoided by contract workers. The government has drafted new laws to curb this tax avoidance. According to the Treasury, this move can save more than £1billion in the next three years. Managed service companies are liable for retrospective taxes for avoiding paying tax and national insurance - i.e. taxes can be levied from the previous years of tax avoidance. The Labour government started using retrospective legislation to counteract some tax avoidance schemes since 2004. Arguments in favour of using retrospective tax laws Using retrospective taxation for tax avoidance can be considered as teaching a lesson to guilty parties for avoiding their duties towards the society as a whole and can be termed as traitors. It is being regarded by the judiciary with increasing hostility. It is expected from every citizen to pay legally allowed taxes and to pay no more tax than required. Attitudes of citizens may vary from being regular tax payers to being tax avoiders depending on the tax rebate schemes or being tax evaders and avoid taxes by illegal means. Retrospective amendments of tax laws or criminal laws may decriminalize specific acts or events and lessen possible punishments, e.g. by reducing fines and imprisonment term or by replacing death sentence with life imprisonment. Arguments against using retrospective tax laws Among tax practitioners, while of course there is no unanimity, the view most commonly held is that tax avoidance is not at all immoral. This may be because tax practitioners are more aware than others how complex and sometimes unbalanced tax laws can be in certain situations, and they see avoidance in that context. Retrospective amendments of criminal law may declare actions that were legal when committed as criminal and increase the prescribed punishment for the crime by adding new penalties or extending imprisonment or prosecution. Sometimes retrospective tax laws may interfere with individual's right to enjoy possessions. In that case its consequences must serve a legitimate purpose that is justifiable. The consequences of retrospective legislation should not be disproportionate and unbalanced. That means that although the Government can theoretically introduce Retrospective tax legislation it must not do so in a way that results in unfairness to the taxpayer. The famous example is about the Task Force on taxation proposing to reduce the permitted tax deductions of "£3500" for the assessment year 2004-05, "£1750" for the assessment year 2005-06 and "Nil" later on. In the event a retrospective amendment of tax laws is made, it will have a negative impact on the net income of many house owners, who had borrowed big housing loans expecting larger deduction. This explains that even if the Government can introduce retrospective tax legislation "theoretically", it must not do so in a manner that results in injustice and unfairness to taxpayers. In the given example, the government should not apply such retrospective amendments to those tax-payers, who had borrowed huge money when the tax laws were favourable to larger tax deductions. References Economics of Stealth Taxes Retrieved Mar 17, 2007 from http://www.derbygripe.co.uk/realuk/stealth.htm Beware Gordon's stealth taxes by Emma Tyrrell dated 09 March 2005 Retrieved Mar 17, 2007 from http://uk.biz.yahoo.com/moneyweekly/stealthtaxes.html Stealth tax Retrieved Mar 17, 2007 from http://en.wikipedia.org/wiki/Stealth_tax List of Stealth Taxes Retrieved Mar 17, 2007 from http://myweb.tiscali.co.uk/garbagegate/item2/stealth.htm Brits will fail to avoid 'stealth taxes' Retrieved Mar 17, 2007 from http://www.freelanceuk.com/news/2136.shtml Pre-Budget Report: Laws to curb tax avoidance unveiled Retrieved Mar 17, 2007 from http://search.ft.com/ftArticle?queryText=retrospective+tax&aje=true&id=061207000669 Tax avoidance and tax evasion Retrieved Mar 17, 2007 from http://en.wikipedia.org/wiki/Tax_evasion Ex post facto law Retrieved Mar 17, 2007 from http://en.wikipedia.org/wiki/Retrospective_legislation Read More