The Tories Want You to Buy A Lamborghini. Really.

Yesterday I wrote about how the main tax raising measure in Budget 2014 was a swizz. That it was an exercising in fiddling with the profile of tax receipts to enable Treasury to spend tomorrow’s receipts today. Yesterday’s swizz was a £4bn swizz. Today’s is a little less. But only a little.

You were probably bored by the pension annuity debate before it even started. It obediently casts a patronising left against a laissez faire right. But on its resolution hangs a yield to Treasury of a further £3bn (over the five year term for which they publicly forecast).

If you retire today with a 25 year life expectancy and a pension pot of 100 which you spend on an annuity the Treasury will have to wait a quarter of a century to take all its income tax rake from your 100.

If, on the other hand, you withdraw that 100 today, you accelerate the rake (moving it from years one-twenty five to year one) and you concentrate it in a single year meaning more of it will be taxed at your higher (marginal) rate of tax.

So the Tories want you to buy a Lamborghini. Because when you do, you generate an extra £3bn of revenue for the Treasury.

Of course, if you take your pot in year one, there won’t be any tax receipts in years two to twenty five. And we’ll already have spent the proceeds on beer and bingo. But why should we worry about that?

Spending Tomorrow’s Money Today

I haven’t written a blog post for a while. The project I set myself – of educating the interested public in tax matters – ran aground on the banks of a disinterested public. However, I was so irritated at a piece of chicanery in yesterday’s budget that I was moved to pick up the metaphorical pen.

The biggest tax raising measure in the budget is the extension of the so-called Accelerated Payments Regime pursuant to which those engaged in particular types of alleged tax avoidance transaction stump up the disputed tax upfront rather than waiting for the courts to declare it payable. Just hold on, it gets interesting I promise.

The so-called ‘yield’ from this measure over the five year term for which HM Treasury forecasts is about £4bn give or take. That makes it the biggest single revenue raising measure in yesterday’s budget. It pays – or is said to pay – for 1p off a pint, a freeze in cider duty and a halving of bingo tax five times over.

Except it doesn’t.

The measure merely accelerates payments which would have been received in later years to earlier years. Tomorrow’s money today. So over, say, a ten year time-scale the measure would be yield neutral.* But over a five year time-scale, which is the only time-scale HM Treasury (publicly) looks at, it has a £4bn yield. So manipulate the time-scales and shazzam! you’ve manufactured a four billion quid budget give away. Much of it going to wealthy savers and the elderly.

Of course, if HM Treasury’s time-scales were wrong, such that, for example, the tax collected today would otherwise have been paid in year two or five rather than in year six or after as the forecasting anticipates, the measure would be revenue neutral even over a five year term.

Which makes this line in the Budget 2014 Policy Costings Document: “The main uncertainties in this costing relate to the… payment profile” (see page 37) really rather telling. Translated it means, we think we’ve magicked up £4bn but there’s a real risk about that.

*Actually, on one view it’s even worse than that. Once you factor in that the failed tax avoider who gets his fiscal come-uppance in year six has also to bear interest at a rate which substantially exceeds the Government’s borrowing rate, and that interest is foregone by Government if it gets the disputed tax now, the measure may be argued to be revenue net negative for Government.