Memorandum submitted by Mr John Whiting,
The tax changes associated with the PBR this
year seemed, on the surface, minoreven if they do raise
£2 billion. However, the considerable volume of papers released
by HMRC & the Treasury shows that there is in fact quite a
lot to get to grips with. It also demonstrates the amount of consultation
going on, which is very much to be applauded.
Although one focus of the PBR was on environmental
issues, what did not feature was a clear framework for how the
UK is to use environmental taxes. Business needs a proper direction
setting, so it can plan/respond accordingly. The key issue, perhaps,
is whether the UK's environmental taxes simply raise money or
try to change behaviour. Both routes are currently in use; the
main change this time (the doubling of air passenger duty) seems
solely to a revenue-raiser, given that the change was not at a
level likely to change taxpayers' behaviour.
The zero-carbon housing move is interesting,
though it has to be said that giving a tax incentive here (clearly
a behaviour-change environmental levy) needs to consider whether
appropriate repair/refurbishment of houses should similarly be
tax-encouraged. Wouldn"t such actions be more carbon-efficient?
The discussions that have continued between
the industry and HMRC on the rules for REITs have been constructive
and there are some sensible points being brought forward now.
That said, given that the regime starts at 1 January, it is disappointing
that we do not have the final framework in placenor will
the guidance on the rules be issued until late January.
The extension of the REITs regime to new companies
wishing to become REITs is welcome. It might be better to allow
a two-year period for the new company to meet the REITs tests
rather than one year.
The announcements on the planning-gain supplement
In the past there have been a number of precipitate
announcements in PBRs (and Budgets), often poorly directed and
arriving without consultation. It is good to acknowledge that
the technical changes this year seem appropriate and targeted.
What has been less well-handled have been the
changes to the post-A day pensions regime. Whilst the direction
of the changes may well be appropriate (and the correction of
some technical defects from April 2006 was sensible), the manner
and timing of the main changes was much less so and are damaging
to the industry. The main changes in question are in two areas:
pensions/term assurance and alternatively secured pensions (ASPs).
The Treasury might argue that the placing of
term insurance in a pensions "wrapper" is inappropriate.
If so, why was the route allowed to continue until now? It is
an idea that was well flagged up in discussions on the new rules;
when no action was taken, can the industry be faulted for continuing
to market the idea? Blocking the idea from 6 December has caused
practical difficulties and uncertainties in view of arrangements
in hand. There are distinct shades of the announcement 12 months
ago about residential property and SIPPs here.
As for ASPs, perhaps inadvertently, the Treasury
raised hopes that ASPs could be used to preserve capital that
could be bequeathed in some way. The response might be that the
policy was set out in various documentsbut again the way
that hopes have been raised is unfortunate. If the ASP route is
to be tightened as outlined, the tax charges involvedwhich
could amount to 70% with a 40% scheme administrator chargeneeds
to be reviewed and made fairer.
As a final pensions matter, it is good to see
that HMRC are willing to look at the position of pensioners who
are, post-A day, taxed on their occupation of properties that
would have been tax-free whilst they were in active work. Such
peopleoften low-paid farm workersare often promised
continuation, post-retirement, of their accommodation rights as
part of their overall "package". It seems inappropriate
that they suddenly have a tax charge just because they have retired.
Such charges are the result of A-day changes that were not fully
Most of the anti-avoidance measures seem to
be targeted and a sign that the Tax Avoidance Disclosure regime
is working. The possible extension to the disclosure regime to
police situations where HMRC suspect inappropriate non-disclosure
is understandable but any change in this way will need careful
targeting. It must not become a proxy for HMRC fishing expeditions.
Consultation is particularly important here.
The moves against "Managed Service Companies"
are unsurprising. Tightening the "IR35" rules in this
area have been expected for some time. The route indicated seems
reasonable but there is a need to ensure valid administrative
arrangements are not unfairly targeted and also that the "look
through" powers to attach unpaid tax liabilities to those
involved in the wider arrangements are tightly defined. There
is understandable concern that this moving of a tax liability
to others not immediately liable should not become more widespread.
In Deutsche Morgan Grenfell v CIR, the
House of Lords ruled that where a taxpayer claimed repayment of
tax paid under a mistake of law (here, not appreciating that UK
law was inconsistent with EU law), the time limit for challenging
the decision was six years from the date of the ECJ's decision,
not the normal six years from the date the tax was paid.
The case was of narrow impact: it primarily
applies to cases about advance corporation tax (ACT); the law
has already been changed so that it does not apply to cases started
on or after 8 September 2003. The PBR announcement limits the
impact of the case still further. It will now not even apply to
cases started before 8 September 2003, unless the judgment is
given before 6 December 2006.
Whilst the government's wish to restrict the
impact of the case is perhaps understandable, the further restriction
does seem unfair to those who have paid tax under what has now
been established as a mistake of law. Also, this change is almost
certainly not compliant with European lawthe Court has
established that a taxpayer's treaty rights cannot be taken away
without adequate notice being givenso yet more litigation
It is also debateable whether the changes to
the CFC regime, announced in the wake of the ECJ Cadbury Schweppes
case, fully meet the requirements of the judgement.
THE UK TAX
As a final comment, there needs to be a continuing
focus on maintaining/improving the international competitiveness
of the UK's tax system and tackling complexity where possible.
The Varney report's recommendations, and their endorsement by
the Chancellor, are positive in this regard.
11 December 2006
2 This paper is a commentary on some of the taxation
measures contained in the Chancellor's 6 December Pre-Budget Report
(PBR) speech, associated press releases and other papers. It does
not attempt full analysis and cannot be exhaustive. Back