Looking back at tax

Lubbock Fine, 23 April 2019

Placeholder image

If we could travel back in tax as well as time, what would we find? Doubtless some of the same problems that governments face today, but we’d also find a system in rather different shape from the one we have now.

By the time Lubbock Fine was opening the doors to its first clients, the tax system had come a long way since William Pitt the Younger introduced an income tax (top rate 10%) on incomes over £60 to pay for the Napoleonic Wars.

Much of what Winston Churchill, as Chancellor of the Exchequer, was dealing with in 1929 was the legacy of funding the First World War. Government spending had spiked from around 10% of GDP in 1910 to more than 45% by the end of the war. By the mid 1920s it had stabilised but, at around 25% of GDP, remained much higher than pre-war levels. By contrast with the twenty-first century, this still looks low.

  • In 2016/17 the government extracted around 37% of GDP for public spending and, as we’re all too well aware, this after a period of austerity when the public sector still struggles to make ends meet.

In income tax terms this translated into a rise from a basic rate of 6% in 1914 to 30% by 1918 with a super tax on the wealthiest and excess profits duty to avoid profiteering from the war effort. It meant that the total collection could rise to over £580m – a more than tenfold increase on the £47m public revenues pre-war.

The make up of tax revenues looked rather different too.

  • Now over 60% of government revenue comes from the ‘big three’; income tax, VAT and national insurance contributions.
  • Property investors will be unsurprised to hear that property taxes claimed fourth place, with 9% of revenues in 2017/18.

Historically government revenues had been much more dependent on excise and death duties than we might recognise now. Prior to World War I the complex network of duties was considered too much for one organisation to administer and the excise part of revenue raising had been demerged from the Inland Revenue to form HM Customs & Excise.

  • The separate teams and cultures lasted around a century only to be remerged into HM Revenue & Customs in March 2004.

The founders of Lubbock Fine would not have had to concern themselves with capital gains tax, which didn’t arrive until 1965. That meant that, if a transaction wasn’t within the income tax charge, it could fall out of the tax net altogether. The stakes were therefore high when a certain Mr Rutledge purchased industrial quantities of toilet paper for £1,000 from a bankrupt German company. He shipped it back to Britain and resold it for £12,000, a fortune at a time when the average house price in Britain was around £600. By 1929 the courts were considering whether this deal constituted trading (and thus subject to income tax) or something else. Rejecting the argument that a one-off transaction could not be trade, the judges concluded that the profit motive made this deal an ‘adventure in the nature of trade’ and thus subject to tax.

  • The case is still cited today as authority for the idea that an intention to resell indicates the presence of a trade.

Any Lubbock Fine employees in 1929 would not have been subject to tax at source either. PAYE wasn’t around in the form we know today until 1944 when the next war led to the need for a more efficient tax collection system. Tax would have been collected direct from the taxpayer in annual or twice-yearly collections; given that there were some 15 million taxpayers by 1944, that exercise would have been pretty cumbersome.

  • By comparison, in 2017/18 circa 11.5 million self assessment taxpayers needed to file returns.

In other ways, however, things don’t change. The passage of time has done nothing to make income tax more popular since 1929, although technology and an overwhelming weight of anti-avoidance legislation have made it harder to duck. The 1920s Conservative administration was conscious of the growing complexity of tax law and set up a commission to attempt to consolidate a rag bag of historic laws and cases; the project took until 1952 to produce a consolidated Act which has been superseded by new attempts to consolidate and codify.

  • As each Finance Act arrives with new measures and counteractions, the result is that we now have the world’s longest tax legislation.

In 1929, as now, the government was Conservative and felt threatened by, amongst other things, the Labour party’s socialist vision. After World War I adult men and women over 30 were able to vote. The result was that many who could vote had incomes below the median average and, as the Conservatives saw it, this could make redistributive taxation highly appealing to the enlarged electorate.

  • One can think of parallels now with voting age students who might be unhappy with the student loan structure.

Then, as now, the government was trying to deal with high levels of national debt, a war legacy that lingered into the 1920s and beyond. Churchill was keen to pay off the war debt as quickly as possible and keep interest payments to a minimum but his proposals to effectively refinance with forced loans from taxpayers at a low interest rate were not taken up. By 1929, a general election was looming. Churchill was keen to present the Conservatives’ credentials as a party of productivity and enterprise and he went into the election campaign with promises to remove property taxes from industry. And, for the masses, he had already used the Spring 1929 Budget to remove the 4d duty on each pound of tea, a measure to assist the ‘humbler budgets of the old, the weak, and the poor’.

For Churchill and the Conservatives, cheaper tea wasn’t sufficient to swing the election and a new Labour administration came to power in June 1929. The new Labour government argued for putting more funds into the hands of the wage earners at the expense of those with ‘passive’, or unearned, income, using either raised death duties or an additional surtax on investment income.

Ninety years on, it’s easy to see the similarities, albeit that we’re now looking at the fiscal system against a rather different Brexit backdrop. The extent to which history might repeat itself remains to be seen, but Lubbock Fine’s tax team will be here to provide advice regardless.

For more information, please contact us.