Archives For Budget

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By Jason Piper, tax and business law manager, ACCA

History tells us that if communities are going to grow beyond a particular size then they will have to rely upon a level of infrastructure spending which can only be provided by the state. Philanthropy and altruism, on the part of private resource owners, get us only so far when it comes to providing sufficient quality and quantity of the pure public goods needed to support the sort of society that has developed over the last few thousand years.

There’s a lot of debate internationally at the moment on whether you can ‘tax yourself into prosperity’ with opinion clearly divided on whether it is possible. At one level, the concept seems to be nonsense. Taxation diverts privately controlled resources into state hands. Simply moving funds from one pot to another like this can’t possibly increase the overall level of funds available, can it?

It is what the various controllers of this revenue might do with those resources if placed in their hands that makes all the difference. After all, a bucket full of water can be left to stagnate by someone with no interest in gardening, or taken by a green-fingered neighbour and used to water their crops. By the same token, if a government can clearly identify resource owners who aren’t generating prosperity with their funds and take it from them to be put to some other use which might enhance prosperity, then it is possible that the tax system could be a mechanism towards that end. (nb that’s a really big “if” on identifying who can best use resources, and it’s keeping a lot of economists busy trying to work out how, or even whether, we could do it).

Taxation is an idiosyncratic and asymmetric process. At its core, it is about taxpayers more or less (mostly less) voluntarily surrendering resources which they could have used directly for their own benefit, to be used instead ‘for the benefit of society.’ That means clear parameters have to be created to help guide policymakers when they’re exercising this unique power, and perhaps even more importantly, to evaluate their success after the event.

Whether we agree with what a particular policy is trying to achieve is an individual value judgement. Regardless of this individual view, we can form an objective picture of whether the policy has been executed effectively, and measure the impact of the changes on the tax system.

When evaluation is done, changes should be assessed on the three core tenets of the tax system – simplicity, certainty and stability. While there is likely to be some compromise on at least one of those factors in any new measures, policymakers need to understand why they are proposing the changes, and what they could do differently to ameliorate any negative impacts without diluting the ultimate policy impact.

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By Steve Rudaini, PR manager, ACCA

This is ACCA’s response to the UK Autumn Statement 2013:

The UK Economy

Manos Schizas, ACCA Senior Economic Analyst, said: “Unlike previous Budgets and Autumn Statements, or PBRs, this Statement is aimed squarely at high-street businesses with plans for slow, steady or no growth. There is an irony in how talk of ‘rebalancing’ the UK economy has disappeared now. Growth is now once again meant to be fuelled by consumption, retail spending, and housing rather than by investment.”

Sarah Hathaway, head of ACCA UK, said: “Businesses, now more than ever, are looking for long-term, sustainable measures that extend beyond the term of Parliament or government. Quick fix, sugar-coated initiatives are not what the City and the wider UK business community are looking for and create uncertainty at a time when UK plc is looking to build on firmer ground. While many announcements in the Autumn Statement are favourable to businesses, their life span and breadth of impact will be critical for the economy. This sentiment is true for other government policies, for example apprenticeship funding, so that businesses have the foundations of both finance and skills in place to grow.

“The Bank of England has shown its understanding of businesses needs for certainty, first through its introduction of forward guidance and, just last week, its decision to make the Funding for Lending Scheme a business initiative rather than the home loan vehicle it had become. Businesses need that level of certainty about the long-term from the Treasury as well as from Threadneedle Street.”

Small and Medium Sized Business

Rosana Mirkovic, ACCA Head of SME Policy, said: “The Government has moved away from the previous focus of encouraging growth in the more dynamic SMEs towards supporting smaller enterprises through business rate inflation caps and a further promise of reforms on this front in 2017. Various measures announced for supporting the bricks-and-mortar high-street businesses show a welcome move back to supporting the smallest and micro businesses. However, braver decisions could have been made – business rates reform has been put off for 2017, when it is clear from previous, recent budgets that the system was just not designed to take spikes in inflation into account.

“Reducing National Insurance contributions for young people could help small businesses, however, whether this is aimed at helping SMEs or get young people off benefits is an important distinction. SMEs in the UK are calling for a more skilled workforce, not an unskilled one.”

Taxation and State Retirement Age

Chas Roy-Chowdhury, ACCA’s Head of Taxation, said: “Families across Britain will need to look in detail at what the Autumn Statement means for them. The married persons tax allowance is a welcome move in principle, but not everyone benefits. In having an allowance restricted to those who are basic rate taxpayers creates an even more complex tax regime as well as confusion around couples who eventually become higher rate taxpayers. It should be possible for all taxpayers living with a partner to benefit from the allowance.

“There is logic in the government increasing the state retirement age to 68 by the mid-2030s, as people live longer, but at the same time families looking to save for retirement are being penalised. The annual pension contribution limit is set to drop from £50K to £40K and the total value of the pot people can have will also drop by quarter of a million pounds from next April, so those trying to be frugal and not be dependent on the state are being squeezed.

“ACCA welcomes the decision to exempt HMRC from further budget cuts. It is vital that it is properly resourced to keep the tax system running, and help give staff the promised crackdown on those who try to evade or exploit that system. However, ‘no further cuts’ actually means cuts in real terms, making life difficult for HMRC. The Government wants to tighten tax collection, but it needs to invest in HMRC to achieve it.”

The key points from the Autumn Statement can be found here

The live tweets from ACCA can be found at @ACCATaxation @ACCA_SME @ACCA_UK and @ACCANews

By Gillian Fawcett, head of public sector, ACCA

In the 2013 Budget, George Osborne told parliament that he intended to “introduce a new limit” on Annual Managed Expenditure (AME) that would “bring real control to areas of public spending that had been out of control” yet do so in a way “that allows the automatic stabilisers to operate.”

Therefore, it was no surprise the chancellor used the June 2013 Spending Review to announce reforms to AME and reign in the ‘out of control’ element of public sector spending.

AME currently stands at £350bn (€408.7bn, $533.4bn) and accounts for almost half of the government’s annual expenditure. While the chancellor has made the first tentative steps towards tightening the purse strings on AME, there is still much more to be done to make this part of public finance more accountable.

The measures announced include a cap on certain elements of AME, including tax credits, welfare benefits and a temperature test for the winter fuel allowance of pensioner’s living abroad. The chancellor also announced that he would be expanding the role of the Office for Budget Responsibility (OBR) to monitor AME spending and issue a warning when the government is reaching the agreed limit.

Consequences

While this is a welcome move, he failed to offer further detail on the consequences of this limit being breached.

Given the demand-led nature of AME and the right of every UK citizen and some non UK nationals living in the UK, to claim benefits and a state pension, it seems unlikely that there will be a hard cut off point.

As a result, regular breaches seem likely, much like in other areas of the public sector where targets are routinely missed.

In order to reduce the cost of the UK’s welfare system in the long-term, the chancellor needs to take a structural look at AME expenditure and the drivers behind every expense.

A future focus on investing in preventative services is the best way to achieve long-term savings and this can only come from understanding local demographics and implementing measures to tackle the AME cost drivers in each local authority.

On a more strategic level, there should be greater emphasis on the costs of life, from cradle to the grave in all areas of public spending, which is something the government has struggled with for many years.

Emulating the US and Australia?

The UK would benefit from longer term fiscal strategies, similar to the US and Australia, where fiscal policy is planned out 50-75 years ahead. AME would also benefit from this kind of future planning.

In addition to capping AME, the chancellor could have explored the possibility of devolving some AME spending decisions to government departments or local authorities. They would then be responsible for spending these AME budgets in the way that they feel is most appropriate for their local area – making AME a more accountable part of public expenditure. Currently there is no accountability or scrutiny of AME, despite its high expenditure.

AME was originally introduced to control public expenditure and avoid arbitrarily cutting public services. However, over the years, that purpose appears to have been lost and AME spending has spiralled out of control.

It is encouraging to see that the chancellor is making the moves to manage this unaccountable and expensive section of the public purse. But he may have missed a golden opportunity to once and for all take a radical approach to AME.

Only time will tell if the changes made in the 2013 Spending Review go far enough to amount a long term reform.

This post was first published in International Business Times, July 2013

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By Gillian Fawcett, head of public sector, ACCA

There is a risk that the Chancellor’s Spending Review is seen in isolation, but to appreciate the potential effects of some of the latest austerity measures announced by George Osborne, you have to look back to 2010.

There is a ticking time bomb of public sector cuts that have yet to be implemented from when they were announced early in the Coalition’s life. The full impact of the austerity measures have yet to be felt by households in Britain. However, the cuts of £11.5billion announced in the latest Spending Review for 2015-16, in addition to those from 2010, will be felt with full force when they are eventually implemented. The protection of critical frontline services can no longer be guaranteed. No one knows yet what the impact the cuts will be and yet Chancellor’s scythe keeps slicing away.

There were few surprises when it came to Departmental Expenditure Limits (DEL). Though there were some sweeteners in there, such as the welcomed emphasis on capital spending to stimulate growth, in reality that increase in capital spending looks good only on paper. When taken along with the widespread cuts to departments and local government, the extra money is nothing more than shuffling the deckchairs around.

There will come a point where the Government can’t cut the DEL budget anymore and public services will suffer. Frontline services are already at breaking point. ACCA’s current research Developing strategic financial leadership highlights that directors of finance in local government feel confident that they have delivered all that was asked to date, but are less confident about the future and the next 10 years. There is a general lack of a long-term strategy for public services.

Where there were positives in the Chancellor’s review was in the pooling of health and social care budgets for the elderly. This has been a long time coming and will allow greater flexibility and efficiency of service provision.

The Chancellor also took a step in the right direction with the annually managed expenditure (AME) budget, which totals £350 billion, over half of public expenditure. AME has for too long not been actively managed and controlled. The emphasis has been on ‘hands off’ management for too many years. So the cap is a good move but with the caveat that limits and caps are notoriously broken. So perhaps with that in mind, the Chancellor took the safety measure of a wider role and powers for the Office of Budget Responsibility, in particular its trigger of an early warning signal and monitor expenditure.

However, the Chancellor didn’t go far enough and missed further opportunities to take a more structural look at AME and review the drivers behind the budget headings and how they inter-relate. The lack of a long-term strategic review is evident. The cap is a short-term fix. There needs to be a longer term perspective that goes beyond the short-term political cycle.

Other countries, such as the US and Australia, have long-term fiscal strategies that encompass 50 years or more. Here in the UK, we seem wedded to the immediate future. There was no consideration as to whether the AME budgets should be devolved, exploration of the impact new policy initiatives would have on AME, or any focus on what the impact that further joint-working by government departments might have.

There needs to be more emphasis on whole life costing – cradle to the grave, across all public spending, not just AME. Perhaps then we will get a clearer understanding of the true cost of what public expenditure should be, rather than have a demand-led welfare system.

It seemed unusual and illogical to makes cuts in the Treasury where financial leadership is needed most. Managing public expenditure needs more, not less expertise. While setting an example might seem like the right gesture, government needs stronger financial leadership at a time of on-going cuts and greater financial management.

All in all, the Chancellor made some positive movements to getting public expenditure under control, but the potential impact of back-logged cuts from 2010 on top of some of these announcements today, as well as his reluctance to take a radical approach to tackling annual managed expenditure, outweigh those positives.

This was first published in The New Statesman, June 2013

 

By Iain Hasdell, chief executive of the Employee Ownership Association

IASB

The current level of UK fascination with, and enthusiasm for, employee ownership is unprecedented.

It is now the most prominent alternative to conventional forms of business ownership in the UK. Interest in it within business communities is increasing daily. The number of employee-owned businesses is currently growing at an annual rate of 10 per cent. And there is a growing realisation that employee ownership in its many forms drives economic growth, innovation and quality whilst spreading wealth and optimising the fulfilment of employees. It already contributes, according to figures from the Employee Ownership Association (EOA), more than £30 billion each year to UK GDP.

The fact that it is a growing economic force in the UK is partly a reaction to our economic context. This context has called into question the short-termism of conventional forms of business ownership and the consequences of that on the economy and our communities. But the emerging popularity of employee ownership is also a response to the compelling evidence of its economic benefits, particularly the high levels of productivity and innovation it delivers. The Deputy Prime Minister will be discussing this when he launches a key EOA report on the economic business case for more employee ownership at the inaugural Oakeshott lecture on 27 March. The Coalition has confirmed a capital gains tax break for employers who sell their company to their employees in the Budget.

Despite the current momentum there remains much to do to create the kind of future for employee ownership that the EOA, with our members and a range of partners, have consistently sought. A future in which there is far greater awareness of employee ownership, its benefits and implementation options; there is a simplification of those options; and there is better access to finance and advice for organisations that want to create and/or fund employee ownership.

Work on all of those strands continues apace, mainly under the auspices of the Government sponsored Employee Ownership Implementation Group Chaired by Jo Swinson, the Minister with responsibility for employee ownership. After the Budget the Group will start to execute a significant awareness programme that will include a specific focus on accountants and financial advisors.

The majority of accountants and financial advisors, with some brilliant exceptions, do not yet fully understand employee ownership, the various models that are available, how to finance transitions to employee ownership and how corporate financial governance needs to work in businesses that are owned by their employees. Consequently they do not introduce the option of an employee buy out often enough and are sometimes found wanting when it comes to serving the needs of clients who are pursuing employee ownership. The awareness programme will really help to overcome this issue. There are encouraging signs that the accountancy profession is picking up the gauntlet of employee ownership in a very positive way. As the profession does this it will be making a vital contribution to the future growth of employee ownership in the UK.

The Implementation Group will also soon be launching a series of standard legal documents that will make it far easier to implement employee ownership. This is the simplification agenda in action.  And the Group is making progress on the development of an asset class of patient capital and social investment that aligns with the financial requirements of employee ownership.

So employee ownership continues to blaze a trail. We really are in the decade of employee ownership. It is now becoming a core component of the UK’s economic growth agenda. It is a successful business model in every sector of the economy that constantly challenges the conventional wisdom of those who suggest business ownership always needs external investors. And a range of measures are being put in place for the longer term to support the current growth in the number of employee-owned businesses in the UK.

Businesses, professional bodies and a host of others need to put their shoulders to the wheel to keep up this momentum – indeed to increase it. I am sure they will.

Let us all grab this great opportunity whilst we have it!