Politics likely to trump simplification in dividend income tax reform – Simon Whittaker

At the time the tax “Bible” produced by publisher Tolleys came to around 11,000 pages – it had been 5,000 in 1997, so clearly the situation was running out of control thanks to the micro-management style of Gordon Brown as chancellor.

Since then it has doubled in size again.

HMRC and the government may say that the above statistics are not a true measurement of how complex the system is to actually use as sometimes adding extra words may make the intent clearer.

But anybody involved in tax will confirm that it has become inexorably more complex despite the best efforts of OTS.

So why has this happened?

I believe that there are three main reasons for this – all associated with politics.

First of all, OTS has identified many pieces of tax legislation generally granting relief from tax where the number of people benefitting from the relief may be comparable to the number of pages of legislation created by the relief – I am exaggerating but you get the point.

And frequently the tax saving created by these pages of legislation is miniscule. A classic example being the reduced Basic Rate of Tax in Scotland of 19% that applies to just £2,000 of income – so the tax reduction is £20.

So in a rational world the reliefs would be scrapped. But we live in a world where the voice of the victims of such a change is sufficiently powerful to mean that no chancellor has dared to get rid of them so the legislation remains on the books.

Second, all chancellors since 1997 have had their pet projects that they wished to encourage through the tax system. For example, there is the recently introduced Apprenticeship Levy designed to encourage employers to train their staff.

And commonly all these pet projects have created additional legislation and complexity for little overall benefit.

Finally, chancellors have been seeking to raise money without being seen to raise the headline rates of tax.

In part this has been achieved through phasing out of reliefs for higher rate tax payers – the best example being the removal of personal allowance for those earning over £100,000.

Also, we have seen new taxes – the bank levy, sugar tax and so on. All of this creates additional legislation.

So, this is all rather a long way of saying that politics will come way ahead of the OTS in determining whether the taxation of dividends is “simplified” as stated.

Considerable clout

Generally speaking people in receipt of dividends do not attract much sympathy when it comes to making political decisions – but the impact of simply changing the rate of dividend tax (with no other adjustments) to 20% or 40% would be to reduce net after tax income for basic rate tax payers by 13.5% and for higher rate tax payers by 11%.

Such a hit would undoubtedly create quite a furore since it would affect all shareholders, not just those who have incorporated their buy-to-let (BTL) portfolio.

This includes many pensioners who, as we know have considerable political clout.

However, it does not undermine the key rationale for investing in BTL through limited companies – namely that in a limited company you are taxed on real profits and not on profit before interest.

So the arguments for incorporation are slightly less convincing – but investors should take proper tax advice relevant to their own situations.

My guess is that it may go through, but with a possible reinstatement of the dividend tax credit that existed prior to 2015/16 which reduced the impact of the double taxation of dividend income – first Corporation Tax on the company and then tax on dividends for the individual.

More favourable rent requirements

From an adviser perspective, we do not envisage any impact in the short term and our advice to landlords to take proper tax advice remains at the forefront of our sales process.

Mortgages for Business is still seeing over 70% of BTL purchases being transacted in a corporate capacity and at the moment it would appear to make sense for the majority of landlords.

Even if the treatment of dividends changes, the more favourable rent cover requirements for limited companies and increasing product availability should mean that this route will still be popular.