Select Committee on Treasury Written Evidence

Memorandum submitted by Mr John Whiting, PricewaterhouseCoopers[2]

  The tax changes associated with the PBR this year seemed, on the surface, minor—even 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 place—nor 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 seem sensible.


  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 documents—but again the way that hopes have been raised is unfortunate. If the ASP route is to be tightened as outlined, the tax charges involved—which could amount to 70% with a 40% scheme administrator charge—needs 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 people—often low-paid farm workers—are 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 appreciated.


  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 law—the Court has established that a taxpayer's treaty rights cannot be taken away without adequate notice being given—so yet more litigation seems likely.

  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.


  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

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