Memorandum submitted by Mr John Whiting,
PricewaterhouseCoopers
This paper gives a brief overview and commentary
on the taxation measures contained in the Chancellor's 2 December
Pre-Budget Report (PBR) statement and the associated press releases,
parliamentary statements and technical notes. It does not attempt
a full analysis.
Whilst the state of the economy naturally commanded
much of the attention in the PBR, there were some significant
tax changes announced. The moves on anti-avoidance, and in particular
the threat of retrospective taxation (which flies in the face
of the Rees rules and the way tax law operates in the UK) had
the highest profile but they should not obscure other measures.
1. CORPORATION
TAX REFORM
The commitment to take forward corporate tax
reform, as first mooted in August 2002, is welcome. Removing the
archaic schedular system and the irritant of charges on income
are both useful simplifications and overdue. Hopefully the (inevitable)
anti-avoidance measures around loss offsets will not be unnecessarily
complex.
The proposals for capital asset reforms are
interesting and will merit considerable study and discussion over
such matters as the way capital losses will interact with what
seems to be a future income-based system. Eliminating the £12,000
"expensive car" limit would be a welcome administrative
simplification.
The possibility of capital allowances on offices
and shops is a major step forward. However, the quid pro quo seems
to be income-based charges on gains on buildings, seemingly including
the land element, without the benefit of indexation. It is also
uncertain whether rollover relief would be available for reinvestment.
Whilst the modernisation is sensible, the price may be too high,
particularly as there is a proposal to move most fixtures to the
4% buildings allowance regime rather than the 25% plant and machinery
regime.
It is pleasing that there is recognition of
the need to give relief for abortive capital expenditure: there
needs to be a wider commitment to eliminate such "tax nothings"
as far as possible.
The plans for further changes to the leasing
regime are disappointing as they seem to stem from the Inland
Revenue's continuing view of leasing as a tax avoidance device
rather as the constructive financing arrangement it usually is.
Start up businesses (usually loss making in the early years) will
lose out from the proposals but at least changes are only going
to affect new leases.
2. IFRS AND RELATED
TAX CHANGES
The changes to the tax rules in anticipation
of the move to IFRS are generally welcome and constructive. The
deferral of some transitional gains is welcome. There needs to
be continuing dialogue with the Inland Revenue over issues arising
from some financial instruments.
Changes to bad debt relief are in part welcome
(removal of restrictions on sovereign debt losses) and part irritating
(trade debts between connected companies).
3. SMALL BUSINESS
MEASURES
It is good news that the Government has recognised
that differing business forms—sole trader, partnership and
company—give differing tax and NIC results. The discussion
paper on small business taxation is constructive, in that it appears
to open up all areas for debate. It is to be hoped that there
is a real will to rationalise the tax system, and thus try and
solve some of the anomalies within small business taxation (for
example, the lack of a disincorporation relief to parallel the
incorporation relief) and not just tackle perceived tax avoidance
(such as incorporating a business to take advantage of lower corporate
tax rates).
The setting up of a dedicated small business
unit within the new HMRC is a good move. The vision of HMRC taking
a "whole view" of their customers and not "assuming
we know best" is admirable and the sort of benefit that should
flow from the creation of the single tax authority. It is to be
hoped that it really can make inroads into the tax-related administrative
burdens small businesses shoulder.
4. THE EMPLOYER'S
PERSPECTIVE
The major administrative burden that businesses,
large and small, take on tend to be employee-related. That should
be a focus for the new small business unit.
Employers will view the PBR with mixed feelings.
The moves on training and support and skills development sound
promising. However, as with the family-related measures that formed
such a key part of the Chancellor's package, the concern will
be whether there will be an administrative burden to be carried
by the employer. Whilst the maternity/paternity leave extensions
sound admirable, will business be able to manage the increased
absences of staff easily?
Returning to the training incentives, those
with memories of problems over the Individual Learning Accounts
may want reassurances as to how this new system will develop and
its likely length of service. One wonders whether a simple move
such as an increased tax deduction for employee training costs
(paralleling the 125%-150% deduction for Research & Development
spend) would be more efficient, particularly for small businesses.
5. ANTI-AVOIDANCE
MEASURES
The PBR contained a significant number of changes
of an anti-avoidance nature. That was as expected, now the Tax
Avoidance Disclosure (TAD) regime is in full operation. Indeed
it is in some ways reassuring that there were such changes—this
presumably confirms that the TAD system is perceived as working
and that the considerable efforts made by the tax advisory profession
and its clients (and, in discussions, the tax authorities) have
been worthwhile.
There can be no objection to the principles
inherent in TAD (ie full disclosure to the tax authorities—which
is the only way firms such as PricewaterhouseCoopers have ever
operated) nor to the ability of the authorities to change the
tax system. However, three points need to be made:
(1) Changes announced by Press Release (as
with the PBR) need to be followed by discussions and draft legislation
as soon as possible so as to remove uncertainty.
(2) It is unacceptable to make significant
changes to the tax system as it impacts on a major sector of the
economy under the guise of anti-avoidance. To do so with negligible
consultation adds insult to injury. Within the package are proposals
to change the taxation of free assets held by life assurers. These
changes are being made by statutory instrument rather than primary
legislation and the industry has been allowed all of three days
for consultation. The impact on some companies is very significant
(some could suffer tens of millions of additional tax annually
as a result) and it is not clear why some of the companies have
been targeted in this way. One has to question why such a major
change has to be rushed through when the issue being tackled has
been a feature of life assurance taxation for many years.
(3) The possible use of retrospective taxation
needs to be considered very carefully. Whilst one understands
the Government's wish to stamp out what it sees as unacceptable
avoidance, it needs to be remembered that a cardinal principle
of the UK tax system is that people are taxed on the basis of
what the law says when the transaction is undertaken. If the law
is defective, case law has said countless times that the taxpayer
and authorities must abide by its effects. Cases such as the Ramsay/Furniss
line of cases have put boundaries on how transactions can be structured
tax-effectively; why is retrospection now needed?
Apart from the general principle, there are
two big practical issues:
— If retrospection is acceptable in
one area, is this just the start of a slippery slope? The possible
use of retrospection has been mentioned—admittedly informally—in
at least one other area.
— Businesses want as much certainty
as possible and a Damocletian sword of retrospection hanging around
gives the wrong message, particularly to potential overseas investors.
One has to wonder whether the threat of retrospection
is a means of introducing a General Anti-Avoidance Rule (GAAR)
by the back door. When a GAAR was rejected, after extensive consultation,
the key reason was, apart from its inherent uncertainty, the difficulty
for the tax authorities of staffing the necessary clearance system.
If retrospective legislation is to be used, it could be a GAAR
without the counterweight of clearances.
6. OTHER AREAS
To conclude, we would like to welcome a diverse
range of measures including:
— common commencement dates for regulatory
changes (whilst wondering how practical the commitment will prove
in practice);
— the changes to the tax treatment
of university spin-outs (whilst having to point out that better
discussion of the FA2003 schedule 22 changes could have obviated
the need for this change and prevented the apparent damage to
some of our scientific business plans in the interim);
— looking at maintaining the £7,000
ISA allowance (whilst wondering why this could not just be a commitment
now, so the consultations could look at the much bigger issue
of what happens after 2009 when ISAs may end); and
— the setting of personal allowances,
NIC limits etc for 2005-06, which helps employers and many others
(whilst wondering why the tax bands could not also be set now).
We are, however, disappointed with the lack
of announcements in the PBR on:
— Real Estate Investment Trusts (REITs)—much
needed in the UK; it is a shame that they were not committed to
in the PBR. The only mention was tucked away and it seems we will
have to wait another year for them.
— Trusts—it would have been timely
to give a progress report on plans following the consultation
on the modernisation of trusts.
— The impact on the increasing number
of European Court of Justice (ECJ) cases on the UK's direct tax
system—surely we should hear how the Inland Revenue plans
to make changes?
As a final comment, given the impact of the
ECJ cases, changing business patterns and generally lowering tax
rates among our trading partners, we do have to wonder about the
projected yields of corporation tax in the PBR figures.
December 2004
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