The UK parliament passed a truncated version of the finance bill (budget) for 2017 last Tuesday after strong opposition to the original bill. The removal of 72 of the 135 clauses allowed the bill to glide through the UK parliament in just two hours. A significant number of the 72 clauses removed were related to taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform or new tax avoidance measures. The removal of the clauses and the swift passing of the finance act is due to a call for UK general elections on June 8.
The original finance bill had several strongly contested provisions which led to a truncated bill. The contested provisions that affected individuals included:
- Reducing the dividend exclusion from £5,000 to £2,000, which was expected to increase personal income tax revenue by almost a percent per year
- Taxing inheritance on worldwide assets and setting special rules for nonresidents in the UK.
- Removing the exemption of primary residences from the inheritance-tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
- Changes in the calculation of profits for trade and property businesses.
It also included several contested provisions relating to corporations:
- Changes in rules regarding carried-forward losses.
- Increased restrictions on the deduction of interest expenses.
- Revision of the cost-sharing agreements requirements to qualify as patent income.
The business community particularly objected to the anti-avoidance provision “make tax digital.” This would have required businesses, self-employed individuals, and landlords to complete multiple online forms every year.
Although many of the tax provisions were cut from the finance bill, several tax changes were kept. The truncated bill included:
- A provision that allowed the Scottish parliament to set rates for labor income of Scottish taxpayers as part of the English Votes for English Laws procedures.
- Changes in the labor income tax rates for all other UK residents.
- An increase in the tax rates for savings income.
- An increase in the limit of tax-deferred savings accounts.
In addition, the truncated bill added a tax and increased some existing indirect taxAn indirect tax is imposed on one person or group, like manufacturers, then shifted to a different payer, usually the consumer. Unlike direct taxes, indirect taxes are levied on goods and services, not individual payers, and collected by the retailer or manufacturer. Sales and Value-Added Taxes (VATs) are two examples of indirect taxes. rates:
- A new soft drink tax was introduced.
- Taxes on insurance premiums increased.
- Taxes on tobacco and alcohol increased.
- Air passenger duties increased.
For a complete overview of the tax provisions included in the finance act of 2017, click here.
Pushing structural tax reform until after the elections could be a strategic move by the Conservative Party in the UK parliament. If the Conservatives maintain control of Parliament after the June 8 general election, the party will have a mandate to push through the removed tax provisions.
However, others believe the details of the removed provisions were not sufficiently thought out; the delay was required to assess the impact of the changes on taxpayers and the economy.
Competition among countries in Europe has constantly forced European governments to evaluate their tax systems. If the finance bill had passed in its original form, the 762-page document would have been the longest finance bill in UK history. This signals the urgency with which the UK government is working on tax reform.
The United States must ultimately compete with nations like the UK. As these nations innovate their tax codes to match the needs of a modern economy, the United States must consider similar reforms or risk falling behind the rest of the developed world. Tax reform can no longer be a once in a generation event in an ever-changing global economy.
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