Courageous!

Conventional wisdom says that because pensioners vote in large numbers, they can only ever be given more and more.  Not, generally speaking, increases to the nominal value of the pension, but rather the extra benefits package.  So I guess it took real courage for the Chancellor to announce he will be phasing out one of those extra benefits for those pensioners rich enough to benefit from an extra tax break.  Kudos to him for that at least!

The big question over the budget is of course whether it’s consistent with reducing that outrageous deficit.  If it is, then the minor reductions in personal tax are to be welcomed.  Definitely to be applauded (if it happens) is the reduction in paperwork promised .by the integration of different elements of taxation (headline tax and NI) in a single system.

One to watch is the falling rate of corporation tax.  My first reaction to that was why not reduce the jobs tax instead to try and stimulate employment?   On reflection, maybe what he’s done will bring in better returns, which could in turn support economic activity including not least employment.  That could have potential to attract business to site headquarters here, and domicile here for tax purposes, which could in turn do very nicely for the overall tax take – so long as we’re not in a competitive race to the bottom.  But in a country that resents successful businesses, that could bring its own political trouble.

On the downside there seems to be more complexity and obfuscation in some areas.  The much-trailed changes to child allowances is a classic of gratuitous complexity.  Can’t see how the measures to stop tax avoidance on very high value properties are going to work: surely it can’t be too hard to work around the rules?  E.g. put the property in a UK shell company, which is in turn owned by a company in an offshore tax haven which can then be bought and sold at will.  And the ‘tycoon tax’ seems slightly at odds with existing higher limits on the kind of tax-efficient vehicles I use, so only the real ultra-rich (like premiership footballers) will be able to use their  VCT and especially EIS allowances.  Not that I’ll get anywhere near that limit myself!

I do wonder about possibly-unintended consequences.  We now know (as we could already guess) that those on the highest incomes brought forward their tax liabilities ahead of the “50p” rate, thus very substantially flattering the pre-election figures.  Pre-announcing a reduction will likely do something similar in reverse, so tax take next year will be reduced as people defer liabilities.  More money printing to fill a hole?

Not sure how to summarise.  I guess we should be grateful there’s nothing worse amongst what’s new, and the daftest bits appear to be mostly on the fringes of it.

New year, new regime

The tax year just ended is the third and last in which I had substantial PAYE earnings to worry about.  So I’ve used the same three tax-saving measures as in the last two years, including my biggest ever venture capital investment.  I seem to be one day late for my annual review, so here goes.

I also need to consider better measures of performance.  As portfolios mature, so naïve measures of current value vs money paid in become increasingly meaningless.  But that’s beyond the scope of anything I want to publish here.  So how am I faring?

The ISA is the most conservatively invested, and is cumulatively showing +26%, against 24% last year.  Net of new money invested, that’s a modest 5% actual rise over the year (tax-free), so I guess it’s treading water.  Not complaining too loudly, since my priority there has been to preserve value and save tax.

The SIPP is up either 126% or 36%, depending on whether or not we include the tax breaks in the calculation.  That’s a moderate advance on last year (112%/27%), and better when you factor in the fact that most of the new money was put in at the end of the year and so is showing no gains beyond the tax break.  It’s now reached a level where, if I have a house by then, I can expect to be quite a lot richer as a pensioner than I have in my working life.  Even factoring in the demographically-inevitable loss of pensioner tax breaks and perks!  But it’s still worth building the fund, because the tax-free lump sum is my most likely route to paying for a house (or paying off a mortgage), and if I’m still paying rent it wipes out the pension and more!

Finally, the Venture Capital portfolio.  On paper it’s a capital gain of just over 27%, though due to liquidity issues I wouldn’t expect to be able to realise the whole of that paper gain.  More important is the rising dividend stream: over £1100, plus ex-divs worth another £300+.  That’s more than double last year’s income, and I expect another significant improvement this year as more investments mature (though the chances of all the funds contributing are remote).  Most encouragingly, the government has improved VCT rules in this year’s budget (along with even bigger EIS improvements, that I suspect will lead to EIS schemes being offered to retail investors alongside VCT).

As before, the element of ‘green’ in my portfolio is showing mixed results.  The ‘dark green’s continue poor, though losses have been much smaller than before.  The ‘light green’ portion continues to show excellent returns.  In terms of ‘dark green’, the government may already have pulled the rug out from under my latest substantial investment, by slashing the FITs scheme for investors and turning it into (almost) just another homeowner perk (hey, if I were rich enough to own a home, I’d’ve spent that money on my own solar panels – I only invested it in a fund because I’m too poor for that).  I’m no great fan of FITs (charging a more realistic and rising price for non-renewable energy would be a much better incentive), but I’m not happy about the government moving the goalposts retrospectively with regard to already-committed investments.

What of this tax year?  Well, I’m back to being my own boss, and I’ve no idea whether I’ll get any significant income.  If I do, I can once again take advantage of small-company tax management, so I should have much less need of tax-saving investments regardless.  Unless I end up in another PAYE job.

A budget for …. recovery?

Today’s budget seems to have some limited good news.

First, if there’s to be a real economic recovery, it needs to be generated by productive business.  Reductions in corporation tax and jobs tax are the best things a budget can offer, and it has done exactly that.  If the chancellor’s colleagues can match it with reductions in red tape, we’ll have an improvement.  On the other hand, it introduces new perverse incentives, such as the substantial concession to new businesses vs equivalent existing ones.

The other slightly-good news is the signal on housing benefit.  If they can gradually bring it down, it’ll help rents fall for the priced out, who struggle to compete and often have to make do with homes unfit for ‘social housing’.  That in turn will reduce yields for property pimps.  On the other hand (and it’s a big one), he’s done nothing to discourage hoarders, and encourage owners of empty properties to bring them onto the market either for sale or to let.

VAT up in January, timed for the anniversary of the last rise so it won’t make a sudden difference to published inflation rates.  No change to the absurd policy of tying bank interest rates to a meaningless price index, though that could itself prove interesting as China – whose cheap manufacturing has been perhaps the single biggest influence for a decade – changes.

What else?  Oh, right, a climbdown on CGT, to hand freebies to the idle rich – albeit moderated by the reduction in the public housing trough.  And a dual rate that might encourage some working rich to take a reduced income for a year in which they take big capital gains.  New complexity, new loopholes, new perverse incentives.

A disappointing lack of ‘green’ measures, though the hint of a change in airline tax might be a small positive.

Now we await the spending review ….

Tax return

Today I have submitted my tax return to HMRC.  Looking forward to a substantial refund – my biggest to date – and hoping it won’t be delayed without explanation like last year.

I expect a lot of people due tax refunds will be submitting around this time of year, just as soon as they have the relevant documentation.  I wonder if the level of tax refunds in the first quarter of the tax year might offer a measure of the Laffer effect?

Unfortunately it won’t, because it can’t tell us anything about revenue lost due to economic activity that simply hasn’t taken place because tax renders it worthless.  We know that low-income jobs (and voluntary work) are often taxed at effective rates in excess of 100% due to loss of means-tested benefits, which is why only foreigners can be recruited to many jobs.  I understand now a lot of high earners such as doctors are cutting down on work rather than pay marginal rates of 74% (rising to 76%), and for the same reason I’ve lost the appetite for a payrise.

A better year (on virtual paper)

Today is the last day of the UK financial year, so I’m taking a snapshot overview of my finances.  How have I fared?

Firstly on our ever-rising taxes.  Last year I made some considerable efforts to reduce my tax liability.  This year I’ve used the same three tax-saving vehicles as last year, but taken it further by investing considerably more in Venture Capital, to offset close to 100% (excluding, alas, the portion of the tax that can’t be offset).  This strategy is based on the premise that, while I’d like in principle to buy a house, our housing market is too buggered up by government meddling and bubble credit to get into for some time, and either buying a house or staying in cash is a sure way to lose very large sums.

The biggest investment is the SIPP.  Last year I reported that it was 65% up or 1% down, depending on whether we include the tax breaks or just the investment performance.  This year I’m happy to report it’s much improved: the corresponding figures over two years are 112% up (in total) or 27% up (investment performance alone).  A substantial majority of it is in non-sterling-denominated assets around the world, with an emphasis on emerging areas with the best prospects of delivering growth between now and my drawing a pension.

The venture capital is hard to value due to liquidity issues, but since all VCTs are listed on the stock exchange I can get a notional value.  Based on that I have a capital gain of 27% net of the tax breaks, plus £540 over the year in tax-free dividends.  The investment is locked up for a minimum of five years (else I lose the tax breaks plus illiquidity premium and make a stonking loss), but the income should rise in future years as more investments mature.

Finally, the Stocks-and-shares ISA is 24% up, despite being the most conservatively-invested (mostly in bond funds).  As against that, the cash ISA (which is larger because I’ve been saving longer) is losing heavily in real terms.  The only reason to keep it in cash is with a view to using it in a future mortgage offset account.

I’m trying to base all investment on what I believe in.  So a proportion of the money is invested positively in things I support, notably clean energy, and companies that I’ve judged as more efficient than their sector peers (“light green”).  The dark greens are performing rather badly, but the light greens are among the best!  The remainder is mixed, but avoids sectors I can’t support such as the military, fossil fuels, animal abuse of any kind, or tobacco.  And of course our government: not so much point keeping the tax from them but then just lending it to them!

Other things being equal, will I do the same next year?  It’s too early to say.  I expect a correction to the housing market may happen after the election.  I don’t think it’s very likely I’ll buy within a year, but I’m not ruling it out.  If I do buy, it comes at the expense of no longer having the funds to invest as I have done of late.

You read it here first

Even economic news seems to have a pre-election flavour.

Today’s government borrowing: horrendous, but less bad than expected, due to tax revenues above predictions. Well, yes.  I made a couple of biggish purchases(1,2) back in December to get the lower rate of VAT.   A small effect, but we saw a mini-boom in spending at the end of last year deflate this year when the tax break ended.  Right now there’s a much bigger tax change looming: the huge rises in income taxes, particularly for higher earners.  I expect that means that among others, anyone rich enough to use a tax advisor has brought their tax liabilities forward, so as to pay at this year’s rates – hence the improved tax take.

Corollary: March will be better than expected too, ahead of a collapse in the new tax year.

Yesterday’s news: unemployment down (that’s the headline).  Also, employment down, but a rising number of people classed as economically inactive.  They’re moving unemployment off the balance sheet.  Should we call it Enron Unemployment, or now even Repo 105 Unemployment?

Actually that’s not entirely new.  We’ve long had a system that prevents you signing on as unemployed if you’re doing or attempting anything worthwhile, even unpaid/charitable work.  So if you have neither a living wage nor sufficient private resources, you’re stuck with a choice of enforced laziness on benefits or real poverty on nothing.  Or – perhaps the least bad option – benefits fraud.

Tax shackles

I’ve just received a notice of my next year’s tax coding (next UK tax year starts on April 6^th).  HMRC are famously messing up on many of these, but in my case I thought it could just carry through from last year – too simple to mess up.

Tax code D0.  Huh?  What’s that?  It’s a penalty rate!  Bugrthat!!!

In smaller print, I see it refers to my income from WebThing.  Well, my income from WebThing over the past two years (since joining Sun) has been a whopping £0.00, so I guess I can cope with paying a high percentage in tax 😉  But it does mean that if WebThing were to start paying me again, the government would take 66 pence for every £1 salary, from the very first pound.  Ouch!

No mention of what tax code they’ve told Sun and/or Oracle, so there’s hope they’ve got that right.  Guess it means I’m tied to Oracle with shackles of red tape, no matter what happens.

I should try to haggle a reduction, on the grounds of paying money into tax-exempt things!  Paying by the rules and claiming a rebate when they’re bankrupt is getting ever more scary!

How to stifle an economy

Following my little rant on Wednesday, it’s clear vet gets it (albeit with more cynicism than I had intended), but it appears none of the powers-that-be (including the mainstream meeja) have noticed a problem.

So let’s try again.  First, in the current world, with big tax breaks for empty properties:

Entrepreneur: I’d like to rent your business premises. Here’s my business plan: as you can see, it moves into the black in year 3. I’ll be bringing this great new service to the area, and I’ll employ 6 people there.

Landlord: Here’s our price list (it’s only 10% up on last year).

Entrepreneur: There’s no way I can afford that initially. How about a reasonable reduction for those critical first two years?

Landlord: That’s our price. Take it or leave it.

Entrepreneur: But you have a monopoly on business premises, and 30% of the high street is standing empty. Surely it’s in everyone’s interest for me to open shop?

Landlord: Goodbye.

Entrepreneur is unable to open new business.  The area doesn’t get its new service.  Jobs are not created.  High street just falls further into dereliction, as only charity shops (who enjoy good tax breaks of their own) can afford it[1].

Contrast a world where there is no tax break for empty properties.  Now the half-derelict high street is costing the owner real money, so it’s in his interest to come to a compromise with the entrepreneur:

Entrepreneur: I’d like to rent your business premises. Here’s my business plan: as you can see, it moves into the black in year 3. I’ll be bringing this great new service to the area, and I’ll employ 6 people there.

Landlord: Here’s our price list (it’s only 10% up on last year).

Entrepreneur: There’s no way I can afford that initially. How about a reasonable reduction for those critical first two years?

Landlord: We’re not a charity, and we have to consider our investment and overheads!

Entrepreneur: But you have a monopoly on business premises, and 30% of the high street is standing empty. Surely it’s in everyone’s interest for me to open shop?

Landlord: Well, we can’t meet your request in full, but maybe we can meet you halfway for the first two years.  I’ll put it to my board and see what we can do.

Entrepreneur: Thank you.

A better outcome all round, except for landlord who fears lower rents more than empty properties!

p.s. glad to see the chattering classes have picked up on how damaging the employment tax is (maximum marginal tax rate on earned income now rises to 76%[2] from April 2011).  Though it’s the fact that the increase also applies to middle-income people that’s mostly stirred things up: guess that’s where there are more votes.

[1] Nothing wrong with charity shops, but they tend to be remarkably similar to one another, and the demand for what they do is satisfied by one or two – not the ten or twenty we commonly see in a high street today.

[2] If you earn £100k, and get a rise to £101k, government will take £620 of that rise from your paycheck and another £140 employment tax from your employer, for a total of £760.

The most scandalous break of all

Today’s “pre-budget statement” (pre-election statement) brings no big surprises.  Taxes on productive work and employment up, some “stimulus” tax breaks ending.  Huge election bribe for pensioners.  Token attack on banker bonuses.

One announcement stands out as the biggest scandal of all[1].  Tax exemptions for empty business properties to be maintained.  So our property hoarders are to be rewarded, while productive business who might be bringing a product or service and generating jobs can be squeezed out, or forced to pay crippling rents in a rigged market.  That’ll do as much as anything of late to suffocate any prospective recovery in the real economy.

It’s bad enough in a small country where space is always at a premium that there should be no penalties for hoarding property.  But positive rewards for it are an absolute outrage!

There’s a parallel argument regarding tax breaks for empty residential property.  But it’s secondary: residential taxes are much lower, the breaks for empty property are smaller, and there are separate issues with how it is taxed.  On the other hand, there’s still a scandal of rapidly rising numbers of empty homes – and no pressure on their owners – in a country where many struggle to house themselves.

[1] Just in case anyone thinks I have a vested interest, I should perhaps clarify that I am employed by a big company and work from home.  So I’m about as far from being affected by this myself as it’s possible for anyone in the UK to be.

Tax Office Misinformation

Having made some efforts last year to keep my tax liability down, I submitted my tax return (online) on May 6^th. And recollecting last year, when nothing happened after submitting it until I returned to the system and asked for a rebate, this time I tried to ask for it straight away.

At first, it told me there was no rebate. OK, I guess it wasn’t yet in the relevant part of the system, a theory supported by its absence from the historical list of my tax returns. So I asked about it using their “ask us a question” form, which promises a reply within 48 hours.

After a couple of returns to the HMRC site, it appeared in the historical list earlier this week, and was also showing a refund had been sent on May 6^th (the day I submitted). Great! So it’ll be in the bank account sometime this week, right?

Nope, no sign of it, nor any reply to my message a full week after the 48 hours. So today I tried phoning them. Was rather hoarse with a mild lurgy, but wanted to find out what was going on, and dreading what might happen if they insisted they’d paid it – as stated – on May 6^th.

After spending a long time going through a menu of options with a long pause at each option, I eventually spoke to a lady. A barrage of security questions later – anyone listening in is now fully equipped to impersonate me – and she looked up my details. Apparently it’s been selected for some kind of security investigation, whatever that may mean. OK, kind-of nice to hear some kind of checks exist (at least for those of us who are neither bankers nor MPs), but I can’t see how they’d check up on most of it without asking me, which they haven’t done.

But this is where it starts to feel Kafkaesque. Could she give me any kind of ballpark figure for how long I can expect to wait? Nope, she stonewalled with a most infuriatingly meaningless when it’s issued. I tried different units – days? weeks? months? Within your or my lifetime? – but she was absolutely not going to be any more specific. And when confronted with why the website had told me wrongly that the rebate had been sent, and why they never replied to my message, she pleaded ignorance. OK that last one is credible, but infuriating when you’re talking to what is supposed to be the contact for it.

I did just get one piece of information from her: a (postal) address for complaints. That came only after I’d assured her my complaint wasn’t about her personally, and that I wasn’t going to ask her name.

OK, I can take the delay: it’s annoying, but that’s life. But I really do get seriously pissed off at the misinformation and stonewalling. The bloody system shouldn’t tell me it’s been paid when it hasn’t, and they should answer questions within the promised 48 hours.

Grrrrrr …..

On a philosophical note, I regard it as my strong duty to humanity and to my country to ensure my money goes to better places than HM treasury.