, Lawyers Budgeting for Change part 1: leadingcounsel.co.uk
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Lawyers Budgeting for Change part 1

The recent budget increased the top tax rate for the self-employed to 51 1/2 percent. (Although the tax rate is 50%, the National Insurance percentage rate for the self-employed was raised to one and one half percent, and this of course is income tax by another name since there is not even a pretence that it relates to correlated benefits). National insurance for the employed is of course higher, and given that once one exceeds 150,000 you lose your personal allowances the marginal tax rate is even higher than that. Perhaps the most vicious sting in the tail was the phasing out of top tax relief in respect of self-employed pension contributions. Although that is expressed to operate from next year, it in fact operates immediately save in the case of existing regular contributions. That means for those many people who have modest contributions but then wait to see their overall expenditure and income commitments before adding on a large lump sum each year, they will have lost potential relief in respect of those amounts.

It seems fanciful to suppose that these increases will produce sums for the revenue in anything like the amounts which the Chancellor has claimed, although in that perhaps they could differ little from some of his other forecasts. Indeed, as a result of a combination of direct effects (those who can relocating to less highly taxed areas, others foregoing income until the tax rate is lowered or they can move elsewhere, or those who can take receipts as capital or undertaking other tax avoidance methods, or other people simply deciding it is not worth working extra hours to keep less than half the money) or indirect effects (reduced consumer spending or willingness to take risks at the top end, or the fact that most people will simply defer putting tax into pension funds which the Chancellor may have been relying on in order to buy the large number of gilts destined to be issued and which pension funds now may find they have less cash to do so) this might reduce the overall tax take. Only the Chancellor/the Prime Minister will know how much this tactic was designed, rather than as a revenue gathering exercise, to both secure his/their position with the Labour Party faithful both generally and particularly in the event of an election defeat (a much safer career move than taking the axe to the public sector) and also to seek to wrongfoot the Conservatives by trying to get them to rubbish the change and hence be able to depict them as the party championing the rich in recession. Either way, although it will almost certainly not have the impact as regards revenue gathering that it was ostensibly intended to do, it will have significant impacts nonetheless.

Arsene Wenger has suggested that the impact on the Premier league could be considerable because this could affect the willingness of highly paid stars to come here unless they were paid substantially higher sums to compensate for the increased tax. He suggests that this will be some form of "double whammy" for premiership clubs because the fall of the pound means that transfer fees will be higher anyway, as would wages, yet simultaneously the recipients of the wages namely the foreign stars bought from abroad would want yet more to effectively mean that the clubs were bearing the tax consequences rather than the players themselves bearing them. That may or may not be true (highflying financier Amanda Staveley with strong links within football suggests that this suggestion does not take sufficient account of the availability and efficacy of top end tax advice, and certainly top end footballers from abroad are both likely to happen the benefit of expert tax advice and more opportunities to structure benefits in a tax friendly way: another issue might be how much foreign offers are attractive to English stars having regard both to tax and the decline in the pound). Nonetheless there is certainly likely to be an impact, even if not as substantial as Mr Wenger suggests. Similar thought processes will be being deployed simultaneously in a number of spheres. (For example certain high earning boxers may consider moving abroad, and although it is perhaps inconceivable that Ricky Hatton would leave Hyde let alone England, expect the two remaining big-money fights he anticipates after the May 2 showdown with Manny Pacquiao to take place before the tax increase next April). What is of concern to us is the impact this could have on the legal profession. Needless to say this falls into two categories. The first is the direct effect upon lawyers themselves, working practice, business structures, motivation. Also important secondly is the indirect effect namely what consequences this will have for the pattern and nature of legal work.

Next week we shall turn firstly to look at the likely direct effects.

Michael J. Booth QC