The bold policy that could put Miliband in No 10

Ed Miliband could transform the UK economy and his electoral prospects at a stroke by adopting radical tax reform policies.

The thought occurred to me during the Labour Leader’s spat with Google over its policy of routing profits to low tax Ireland.  Miliband attacked Google’s legalistic defence, proposing tougher rules and increased international cooperation to make multi-nationals “pay their share”.

He will no doubt be pleased by the ensuing headlines but I don’t think this rhetoric on its own will do much to improve Labour’s chance of a return to power in 2015. 

The public will see it like they do banker bashing.  They may agree with the sentiment but talk is cheap and not entirely convincing coming from Labour which toadied up to banks and business something rotten during the Blair/Brown years.

But what if Ed turned the issue into something more than speech-filler and put tax reform at the heart of his manifesto?  Rather than promise a few tweaks to transfer pricing rules and an international conference, he could propose to scrap the bulk of company tax reliefs in return for halving the corporation tax rate to 10%.

Although the Treasury would lose out from a lower headline rate they would gain from the abolition of tax reliefs and, more importantly, remove any incentive multinationals have for funnelling profits abroad.  Indeed the UK would gain from multinationals shifting revenues and profits in the opposite direction.

The knock-on benefits are potentially even more significant: more foreign investment in Britain, more home-grown start ups and billions saved in accountants’ fees.

And why stop at corporation tax?  A similar, although somewhat trickier, deal is begging to be done on personal tax: simplifying the structure, perhaps including NI abolition, lowering marginal rates and abolishing reliefs.  Tax receipts overall should hold up if enough new income is declared at the lower rates and the more efficient system feeds through to economic growth.

There’s a snag of course and that’s why it will almost certainly never happen.  

Labour is traditionally dead-set against lower tax rates and made a lot of political capital by raising the top rate of income tax to a damaging 50% and calling the Coalition “the millionaire’s friend” when it partially reversed the rise.  The left has never bought the argument about lower tax rates paying for themselves by reducing the incentive to avoid and boosting the economy.

But it’s the very unlikely nature of Miliband promoting such a policy that would make it a master stroke equal to anything Blair came up with.  Tony was the master of stealing his opponents’ clothes.  

When he adopted an apparently right wing policy he wrong-footed the Tories and used the resulting opposition from within his own ranks to his advantage.  Standing up to his internal critics made him seem strong and non-partisan to moderate voters.

That’s exactly what Miliband needs to bury the Red Ed tag.  Facing down some left-wing carping about tax cuts for the rich would do wonders for his standing with the majority of the country.  He would also have a substantial economic policy which isn’t just about spending and borrowing more which would finally distance himself from the Brown legacy.

Most importantly he would sew dismay and discord in the Conservative ranks.  They would be shorn of one of their key arguments (Red Ed’s is weak and has got nothing new) and the right wing of the party, including already wavering financial backers, would be further disillusioned seeing Cameron outflanked on their territory.

There are a myriad different ways of reforming the tax code on a lower-rates-less-breaks basis.  Ed Miliband could pledge to do it in a more Labour-friendly way by focusing more on the closing of loopholes than the lower rates.  But I don't suppose he will which is perhaps just as well because Labour's return to power would in general be a nightmare.

From our website:  Spanish maternity benefit

Minimum alcohol price: Cameron’s dodgy dossier

My respect for the British government sunk to a new low with their recent proposal to set a minimum price for alcohol of 45p.  This would raise the cost of a normal strength can of beer to £1.12 and add around 70p and £2 to bottles of non-premium wine and spirits respectively.  Many cut-price drinks offers would effectively be made illegal.

The move is justified on health grounds. In the words of David Cameron, who is personally championing this  assault on the rights and pockets of consumers, “it is aboutpeople pre-loading on very, very cheap, heavily discounted drink from some supermarkets.”   We are told that research has shown that a 45p per unit minimum would save 2,000 lives and 66,000 hospital admissions over 10 years as well as reducing overall consumption of alcohol by 4.3% .´

These alleged benefits have been so often repeated in the media you would think they are cast iron certainties.  But they are based on some very dubious research which has been completely discredited by an Adam Smith Institute report on the subject (The Minimal Evidence for Minimum Pricing).  I will return to this “research” later, but I recommend anyone who cares about honesty in public life to read it in full.  It is a breath-taking example of government and lobbyists softening up the public with some dodgy headline-grabbing statistics.

It is hard to know where to begin with how vehemently I oppose this proposal and how angry it has made me.  Here is a list of some of the ways I believe it is completely unjust and uncalled for (some of the arguments are lifted right out of the Adam Smith report):

• It is totally unfair to punish almost the whole country (except teetotallers) by forcing them to pay an estimated £700m extra  a year to retailers and the drinks companies just to tackle a minority problem.  How many people do you know who “pre-load” on cheap booze before going out?  Obviously some do but we must be talking a low single digit % of the country.

• Whatever this “research” says, it is very unlikely that heavy drinkers and pre-loaders will be deterred by these policies.  I know a few boozers (and used to be one in my younger, wilder days) and they are the last people to be put off by a price hike.  It is the moderate drinkers who have other priorities besides getting hammered who will cut back.

•  Is a policy to reduce drinking really needed?  Alcohol consumption has been falling steadily in recent years any way, in fact by many times greater than the 4.3% fall claimed in the propaganda, sorry research, that accompanied the proposal.

•  Even if we drink less because of the minimum will all the health benefits be positive?  Teetotallers die earlier than drinkers on average.  Home brewing and distilling will no doubt rise and may bring some unpleasant side-effects.

• By everyone having to pay more money for less product the economy will suffer in at least two ways – a loss of jobs in the drinks and retail industries and a draining of demand from the rest of the economy as it is redirected to pay higher drinks prices.

•  The government already hammers drinkers.  Between duty and VAT, half the price of a £5 bottle of wine goes to the state.  The so-called beer escalator has been one reason why so many pubs have closed their doors.  This policy will punish drinker and the economy again but this time without any of the additional costs flowing through to the government.

• It is a highly regressive measure.  The poor and modest-earners will be hit much harder than the rich who don’t buy cheap brands and, even if they did, would not notice the increase as  a proportion of their salary.  It’s easy to imagine children going  hungry in some households because their boozing parents have been forced to pay more for their fix.

• Most government busy-bodying and interference produces unforeseen and undesirable consequences.  Minimum alcohol pricing could for example easily lead to more crime – such as shoplifting and smuggling.  There may be other nasty knock-on effects from the increased poverty caused by this regressive measure such as child malnutrition.

But lots of lives will be saved right?  That’s where the The Minimal Evidence for Minimum Pricing report into the so-called research is so useful.  The evidence for the 2,000 saved lives is extremely scant and, in fact, a closer examination of the facts would suggest that this “trump card” is bogus in the extreme.    Here are a couple of snippets:

-          To support the idea that minimum pricing will reduce alcohol consumption by 4% and this will lead to many health benefits, a key assumption is that heavy drinkers will cut back more than moderate drinkers.  This is not supported by any analysis and actually flies in the face of what we all know to be true – the last people to cut down on their habits (like smoking) are the addicts.

-          The alcohol consumption data in the researchers’ model comes from 2006.  Since alcohol consumption has declined by at least 15% since then, these claims of 4% falls are ridiculous.  It’s already happened many times over.

-          The model also assumes that each % point fall in average consumption produces proportionate health benefits (reduced hospital visits, deaths etc).  In fact the NHS has recorded no such improvement in these figures since 2006 .  The clear implication is that falling consumption is due to the moderate drinkers cutting back (due to high taxes and recession perhaps) while the hardcore carry on regardless.

Please read the report.  You will never listen to any politician, lobbyist or reporter who quotes this kind of research in future without thinking back to it.

Spanish Wealth Tax Guide

Spanish families squeezed for €415 more tax

€415.  That's the estimated annual cost per household of the increase in IVA recently announced by the Spanish government to try and close the fiscal deficit.

The general rate applicable to anything sold in the country apart from reduced or VAT-free categories (see below) is up to 21% from the current 18%.

Beneath this headline-grabbing rise is a second increase to the "reduced" rate category of taxable goods and services which goes up from 8% to 10%.  This 25% hike in tax is important as it is the rate applicable to such things as some food and non-alcoholic drink, health products, transport, entertainment etc that ordinary people consume every day.  So it will really make everyone feel poorer and reduce spending power right through society.

This reduced rate also applies to new build construction so a new house will cost an extra 10% in tax on top.  This does not apply until 2013 as the previous government brought in a temporary VAT cut to 4% for new homes which expires this year.

And that's just IVA of course.  Spending cuts have targeted unemployment benefits and the pay of public sector workers.  The latter seems bound to lead to strikes.

Another move, specifically at the request of Spain's new fiscal masters in Brussels apparently, has been to abolish the offset of housing costs versus tax except for buyers of property post-2006.

Economists foresee the already shrinking economy declining further as a result of the new hits to demand, with forecasts of recession through to 2014.  No surprise there but there is a surprise, to me at any rate, in the size of the expected contraction.  For example the IMF is talking about a 1.5% fall in GDP this year and actually growth of 0.6% next year.  Hardly Greek style-collapse but the IMF have been wrong before.

If they are right and Spain can muddle through with the economy merely stagnant while these deficit measures take effect and the banks are sorted out then perhaps a full blown bail-out or euro exit can be averted.

I have my doubts.  Looking around the country it seems like there is an air of desperation and bewilderment among the population even before these latest tax rises and spending cuts.  Big price rises across the board, wage and benefit cuts, higher income tax, regional spending cuts etc will surely crucify what is left of economic confidence.  And I wouldn't rule out the Spanish people rising up and demanding that some of the measures are reversed as the pain becomes too great to bear.  We'll see.

From our website:  Allowable business expenses in Spain

How Cameron can save the economy and win the election

I am sure neither David Cameron nor his political advisers feel in need of some advice from a nobody but I am going to give it any way.  Just to get it off my chest.

Most on the centre and the right think Cameron is a reasonable Prime Minister and his chances of reelection are surprisingly good given the state of the economy and most people's personal finances.

However it frustrates me that his government is not more radical particularly when it comes to the economy.  Apologists often claim the government is being held back by their Lib Dem coalition partners but I sense an opinion poll led fear of straying too far from the centre ground.  Thatcher he 'aint.

But there is an alternative to centrist policies. Here's how he could be radical and position the Conservatives to win the next election at the same time.

His objectives should be to (a) cut a deal with the LibDems which achieves for them some of their cherished goals  but also gets through some more right wing policies that their rank and file won't like (b) wrongfoot Labour by accepting to some extent their argument about cutting the deficit "too far, too fast" (c) bring his own right wing back on side to unite the party (d) appear radical, decisive and like he is doing everything he can to boost the economy in a fair way.

This is the deal he needs to do with the Lib Dems to achieve these 4 goals:

1. Drop the 50 p higher rate of tax back down to 40p
2. Cut corporation tax as part of a package of measures to encourage multinational companies to invest/base in the UK (copying what Ireland has done).  Other measures to include making it easier to hire and fire, and make it easier to get permits for non-EU staff
3. Cut employers' National Insurance to boost job creation
4. Increase the personal income tax allowance to £10,000 (a key Lib Dem objective which Conservatives should have no trouble supporting)
5. Partially offset these tax cuts with a mansion tax (another key Lib Dem objective which will help undermine the argument that the package favours the rich)
6. In a similar vein to 5. close some tax loopholes used by rich people to avoid taxes; again a Lib Dem policy which will help achieve the fairness objective.  It is also good economics to cut high tax rates and close loopholes - Obama has just proposed something similar in the States.
7. Offset some of the tax cuts with benefit cuts.  Despite the outcry among the left-leaning establishment the benefit cap, cuts to housing benefits and crackdown on fake incapacity claimants are extremely popular and necessary policies, they just don't go far and enough.  What about asking the million young unemployed to do some work for their benefits?  Many will stop claiming.
8. Leave some of the tax cuts (1-4 above) unbalanced by spending cuts / tax rises (5-7 above).  Although cutting the deficit is vital, the markets will not be spooked by a loosening of the reduction target if it is in the cause of radically boosting Britain's growth potential which these measures will do.  This will steal Labour's main criticism of George Osborne: they will have to either applaud the move or look stupid criticising what they have been asking for for months.  The coalition should also argue that some of the tax cuts will be self-financing, particularly no 1.

Obviously there is no chance of the government doing anything half so bold but I would love to see them try!

From our website:  Massive tax rises for Spain in 2012

New corporation tax rate in Gibraltar

With talk of austerity and budget deficits in most parts of the world, it is refreshing to be able to report on some good tax news. Being based on the Costa del Sol, my firm of accountants and tax advisers naturally has a lot of clients with interests in Gibraltar so we have to keep an eye on what is happening on the Rock. This Summer a new Income Tax Act has come into force.

The Act is available for download on the Gibraltar government website http://www.gibraltar.gov.gi

For companies the news is pretty good, because the long-heralded reduction in corporation tax has come into force and at an even lower rate - 10% - than had been anticipated. The basis of taxation has also changed from prior year assessment to self-assessment and payment after the company's year end. Gibraltar companies are expected to file accounts and estimates of their liability to tax within 6 months of their year end and pay the tax at the same time.

Most importantly for companies who are not run in Gibraltar or active there, the scope of corporation tax is only on profits "accrued in and derived from" Gibraltar itself. So if the company is based on the territory or makes money there, only those profits are subject to the new corporation tax regime. In addition interest, royalties and capital gains are not taxed.

Gibraltar used to be a popular place for foreigners resident in Spain to set up companies because of the existence of "non resident" companies which did not pay any tax at all. These have been abolished and all Gib companies are subject to the new regime wherever they are managed from or where they generate their income. But provided the company has no Gib activities ( or these are incidental - less than 22 days a year) or locally generated income, the profits of Gib companies can still escape tax. For individuals with international activities and income that can be booked through companies based anywhere, the low tax rate and the exemption of non-Gibraltar income make the Rock look an attractive option.

In Spain and need tax advice for a company or business (or thinking of setting one up)? Check out our website ww.advoco.es which has a lot of useful articles like Contracting in Spain and Autonomo Guide (self employment in Spain)

Getting a Spanish tax refund

There aren't many nice things about being a tax accountant. It's not a great ice-breaker at parties and you sometimes feel a bit like a dentist or a doctor delivering bad news when you have reckoned up someone's liability and have to tell them. But then there are those lovely occasions when your client gets some money back and you get the "shoot the messenger" syndrome in reverse ("hug the messenger"?) because they are so surprised and grateful.

This scenario is particularly rewarding when you have come up with the idea that got the tax refund in the first place and the recent Spanish tax reporting season threw up some good examples of this.

Refunds can only occur when someone has paid too much tax during the year and they have submitted an annual tax return after the year is over which proves as much: the Agencia Tributaria will credit their bank account with the difference. What I mean by "paying too much tax during the year" is that the Spanish government take automatic retentions of tax from people's income as it arises and, as this is done on a flat rate taking no account of people's personal circumstances, too much can be taken. Examples of such retention payments taken by the government are:

- % deductions of bank interest

- retentions from salary (like PAYE in England)

- deductions from dividends paid by companies

- retentions paid on self employed earnings

- rental income retentions

The most common reason why people find they have paid too much out in retentions is that they have low income overall compared to their personal allowances (tax free income allowance). This often happens when people start work or start a business part way through the year so they get a full year's personal allowances to use against a part year's income. Also a married couple can claim the higher Spanish married couples allowance when only one of them is earning.

Such refunds are one good reason why it can often pay to do a tax return particularly if you take advantage of all the allowances available to you. There are allowances such as for young children (under 3) and against rent paid that can lead to a tax refund in the right circumstances.

Anyone wanting more details of how the Spanish tax system works should check out the Advoco page Spanish Income Tax 2010.

Spanish gift tax - a nasty surprise

No one likes taxes but some hurt more than others. One of the most unpleasant has got to be gift tax which strikes me as particularly unfair. If you have built up assets over the years it is normally because you have paid for them out of income that has been taxed once already. Why then should you have to pay again when you give those assets to your nearest and dearest?

I suppose the answer is because (1) the government finds the money handy to spend on vital projects likes billion pound computer systems that never go live (2) if you could give things away without a tax it would undermine inheritance tax takings and (3) the state doesn't want wealth to flow unhindered through the generations as that might entrench class structures.

Mmm. But it's not for humble accountants to moan about the Whys of a tax but merely to advise on the Whats, Whens and most pertinently How Muches of them. Here in Spain the tax seems particularly harsh and all encompassing. We have just put a guide on the website call, er, Spanish Gift Tax. It's got all the facts and the all important rates which are quite murderous in some circumstances. Give a €1m house to a mate and it may cost them around €530.000 in tax (they pay not you). The taxes apply to Spanish assets even if you or the recipient of your generosity is not a Spanish resident. There are a few Spanish gift tax avoidance strategies, like setting up a company to own assets like houses, but these need careful thought and structuring to make effective. If this is an issue which is or might at some stage effect you then take a look at the guide as a starting point but also take advice.

Don't get trapped by Spanish tax penalties

When I first got interested in Spain and bought a holiday flat here (in Valencia) I never even thought about annual tax returns. Nobody told me about non resident tax returns and I didn't know to ask. I blithely went years without submitting a return until a few years ago when I had been a resident for a year or so and had some income to declare. I sold the Valencia flat in 2006 and there were no nasty consequences.

Some clients have not been so lucky. One had a nasty shock recently when they tried to recover the 3% capital gains tax retention taken by Agencia Tributaria when they sold an apartment in Spain. The amount of the retention was 3.000€ and despite making the proper claim for release of the money, the client was told that they had to produce tax returns for every year they had owned the property. It is possible to catch up taxes in these situations and do Form 210 returns in arrears and that is what they will have to do.

It is not just non-residents tax that can come back to bite you. Another case we are currently dealing with involves an autonomo who had been invoicing their clients for years without making quarterly or annual returns. Correcting this will be difficult as there are quarterly business tax and IVA returns to catch up and annual "renta" declarations. Worse of course there are penalties and interest payable on late returns.

The system is complicated and circumstances vary but this is the sort of extra expense that can be incurred:

late return penalty - less than 3 months late 5% surcharge

less than 6 months late 10% surcharge

less than 1 year late 15% surcharge

more than a year 20% surcharge

PLUS interest on amount owed - 5% in 2009 - for amounts paid more than 1 year late

If there is no tax to pay then the fine is a flat 100€

These are all assuming that the returns are made late by the taxpayer voluntarily(they have four years to do so), not because the citizen has been caught out by the Tax Office and ordered to pay tax. In this case the bill rises depending on the gravity of the offence uncovered:

Not serious: 50% extra payable on all interest and penalties

Serious: 100%

Very serious: 150%

The penalty for returns with no tax to pay rises to €200 if not made voluntarily.

Finally another consequence of not making Spanish tax declarations that can trap the unwary is that documentation gets lost. This makes it much harder to complete the returns and in particular difficult to claim any deductions that might have been allowed if things had been done on time.

If you have back tax issues or think you might have they are best tackled sooner rather than later however grim the prospect seems.

Why Spanish Income Tax is not as bad as it sounds

If you move to Spain from abroad it's probably for the weather, the lifestyle or for the opportunity to start again. Almost certainly not to get up close and personal with the Spanish tax system. But it's almost unavoidable: if you live in Spain you almost certainly will have to declare your income to the Tax Office and pay your tax here. There are exceptions and this guide will help clarify things:

Do I need to do a Spanish tax return?

So if you are like most of us and have to declare Spanish taxes then is it going to hurt? Well it depends on how much you earn of course but there are some reasons to be cheerful:

Exemptions:

Us foreigners have a few exemptions we may be able to call on. For example there is a 60,000€ tax free allowance for income earned and taxed abroad and another exemption for new arrivals who want to be taxed as non-residents. See details here.

Crown pensions (those paid by the government to for example civil servants, army, police) are exempt from Spanish tax and don't have to be declared.

Allowances:

You get personal allowances where no tax is payable in Spain as you do in the UK. The allowances for 2009 are:

Everyone €5.151 (€6.069 for over 65s and €6.273 for over 75s)

Disability allowance - up to €6.900

1st child €1.836 2nd child €2.036 3rd child €3.636 4th child €4.182 (plus maternity allowance of €2.244 for children under three)

Earnings related allowance - €4.080 for earnings up to €9.180 reducing to €2.652 for earnings above €13.260.

(pensions count as earned income for this purpose)

Deductions:

• * Credit is given for all tax deducted at source whether this be in Spain (e.g. “retenciones” deducted by banks on interest or employers on salaries) or abroad, if there is a tax treaty in force.
• * Any payments into the Social Security system are deductible.
• * There are important deductions allowable in the calculation of rental income – for residents but not non residents – and capital gains on property sales.
• * Homeowners can deduct 15% of their mortgage costs (subject to limits)
• * Pension contributions are tax deductible (subject to limits)
• * The first €1.500 of dividend income is tax exempt.
• * As a crisis measure the government introduced a €400 tax credit for all employees and self-employed persons in 2009. This is to be abolished from 2010.

If you want to learn how you can make your Spanish tax filing as painless as possible please come and talk to Advoco. If you like send me a private email at jb@advoco.es

Busy, busy - Spanish Tax season looms

It's all tax at the moment. Lots of enquiries responding to our Spanish Tax Advice page. I think it is the time of year, even though the actual deadline for annual tax returns here is the end of June. Once New Year is firmly out of the way you tend to feel it's time for a big push to get some unpleasant jobs out of the way; and it doesn't get much more unpleasant than sorting out your tax affairs.

But like most jobs you put off (cleaning the oven, bathing the dog, thank you letters) it's not so bad when you get on with it. And there's that lovely feeling of having achieved something when you get it done.

Being nice people at Advoco we have taken steps to ensure that the tax reporting season (May and June for residents, later in the year for non-resident property owners) is not too painful. For a start we have published a guide to whether or not you need to do a tax return:

http://www.advoco.es/services/39-do-you-need-to-submit-a-spanish-tax-return.html

Also we are aiming to contact clients before the mad rush in May to get everything together well ahead of time. If you are not registered for tax in Spain we are taking care of that by post so you don't have to go to your local Tax Office. Otherwise we are doing as much as possible by email so you can do everything from home and at your own pace. We are also trying to make payments possible without going into the bank.

Enough of the sales pitch; in future posts I'll publish some info about what sort of things you have to declare, allowances you get and the rates you will pay. Right, back to answer some of those emails.

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Avoiding income tax in Spain - part 3

Keeping the tax man's hands off your money is a preoccupation almost as old as money itself (I am sure taxes were proposed soon after money's invention). I have written before about avoiding income tax in Spain both in general terms - part 1- and by going offshore - part 2. Today I want to touch upon two important and substantial tax savings available to us foreign residents of Spain. They are both entirely above board and sound very enticing but are not quite as attractive as they seem when you dig a little deeper.

Tax saving no 1: Application to be taxed as a non-resident ("Beckham's Law")

As I am sure all you well-informed readers know, a Spanish resident tax payer has to declare all their worldwide income. But there is an exception for foreigners newly tax resident in Spain: they can apply to be treated as non-residents for tax purposes i.e. only have to declare Spanish income and once more at the low rate of 24% (the top rate for residents is 43%). This is what David Beckham did when playing for Madrid, hence the nickname for the law. If your application is successful then you can take advantage of this attractive option for 5 years. There are conditions (see this good explanation here) but it is great on the face of it; certainly foreign footballers have benefited greatly.

Reservations: Two really. One is that you have to read the small print in the conditions which will make a lot of people ineligible, particularly the stipulation that you have to have moved to Spain to begin an employment contract with a Spanish entity and perform most of your duties in Spain. Secondly non-residents don't get the tax allowances and exemptions that residents get so although the rate is lower you may lose out in total because of the lost allowances (depends how much you earn and what sort of allowances you are entitled to).

Tax saving no 2. : €60.000 overseas earnings tax free

Another eye-catching tax allowance which applies if you are resident in Spain but go abroad to work e.g. doing contracts back in the UK or elsewhere in Europe. The problem here is very fundamental: you need to have paid the tax in the country where you worked so it isn't tax free as such although could be very useful if you often work in a country with low income taxes.

Conclusion: depending on your circumstances there are often allowances and benefits available so it's worth getting a tax adviser to look at your Spanish tax position when your tax situation changes. On that self-serving note I will leave you with a link to Advoco's tax services page:

http://www.advoco.es/home/22-latest/35-spanish-tax-advice.html

Non resident tax payers might also be interested in a recent article of mine called "Making sense of Spanish tax form 210"