Memorandum from the Institute of Chartered
Accountants in England and Wales
1. INTRODUCTION
We welcome the opportunity to submit evidence
in response to the invitation published on 6 February 2008 on
the Committee's website.
Details about the Institute of Chartered Accountants
in England and Wales and the Tax Faculty are set out in Annex
A. Our Ten Tenets for a Better Tax System which we use as a benchmark
are summarised in Annex B.
2. FORMULATION
OF TAX
POLICY
We welcome the measures in the Budget designed
to improve on the original proposals in the 2007 Pre-Budget Report.
A key lesson that must be taken from the reaction
to the tax reform announcements made in the October 2007 Pre-Budget
Report is that the government must improve its tax policy formation
process. It is critical that tax policy formation—particularly
where simplification is the objective—must follow effective
consultation, whether open or informal. The ICAEW Tax Faculty
remains committed to assisting the government in creating good
tax policy. As a body we represent the largest group of qualified
tax advisers in the UK and can offer a unique assessment of the
likely behavioural impacts and unintended consequences that a
particular policy approach is likely to create.
In our submission to the Chancellor ahead of
the Budget (see TAXREP 16/08 http://www.icaew.com/index.cfm?route=154645),
we expressed concern that the major reforms proposed to the existing
tax system in the 2007 Pre-Budget Report (PBR), namely:
— Capital gains tax reform; and
had been announced without prior consultation,
with inadequate transitional provisions and with a lack of appreciation
of the likely behavioural impacts and compliance costs that they
would impose. Further, we were concerned that insufficient consideration
had been given to the potential damage that the measures would
inflict on the international reputation of the UK as a place to
live, work and invest.
Since the PBR proposals we have worked closely
with HM Treasury and HM Revenue & Customs to clarify the policy
objectives of the Government and to suggest improvements to the
original proposals. We are pleased to see that in the light of
the representations of the ICAEW Tax Faculty, and other representative
bodies, organisations and taxpayers, the following major changes
have been made to the original PBR proposals:
— Income Shifting—the proposals
have now been deferred until 2009;
— CGT Reform—entrepreneur's relief
was announced in January 2008; and
— Residence and Domicile—a number
of relaxations have been announced in the Budget, which we reflect
on below.
Notwithstanding these welcome changes, we remain
very seriously concerned about the approach to policy formulation
as shown by these recent developments and we repeat below what
we wrote in our Budget Submission this year:
" . . ..we believe that these highly controversial
changes have been announced without proper prior consultation,
inadequate transitional provisions and a lack of appreciation
of the likely behavioural impacts and compliance costs they will
impose. Further, the announcements showed a lack of appreciation
of the potential damage they could inflict on the international
reputation of the UK as a place to live, work and invest.
This whole process has seriously undermined confidence
in the UK as a place in which business can plan for the future
with certainty. Whilst we have been working with HM Treasury and
HM Revenue & Customs (HMRC) officials since the PBR to help
improve these proposals, this is far too late in the process and
there is a pressing need to build in adequate consultation at
a much earlier stage. It is essential that the views of taxpayers
and other stakeholders with relevant experience, for example the
ICAEW, are sought when policy ideas are being formulated rather
after the policy has been decided. If this had been done, we believe
that policies in these areas could have been formulated that met
the Government's needs but which also enjoyed the wide support
of stakeholders."
3. INCOME SHIFTING
AND SMALL
BUSINESS TAXATION
ISSUES
We welcome the Budget announcement to defer
the implementation of the income shifting proposals. This should
provide time for proper consultation and we think that this provides
an opportunity to reconsider the underlying policy objective.
We believe that these proposals were fundamentally
flawed and deferring the proposals for one year without a reconsideration
of the underlying policy will merely defer the considerable implementation
problems that will otherwise arise. We do not think the income
shifting policy has ever been properly articulated and that the
rules as drafted went further than the publicly stated position.
The proposed legislation would have caused considerable administrative
burdens upon businesses and a high level of uncertainty as to
whether people were caught or not.
We welcome the opportunity for further consultation
on this issue. We believe that this is an opportune time for a
considered review of small business taxation. The proposed income
shifting rules bore all the hallmarks of other recent measures
in this area, namely IR35 and managed service companies, which
are in the nature of "sticking plaster" changes, in
other words piecemeal changes being made in a reactive way that
are merely papering over the underlying problems rather than providing
a comprehensive solution and which are damaging confidence in
a key growth sector of the economy.
We still believe the solution to the problem
found in these areas is a reinvigoration of the small business
tax review, launched in 2004. The only tangible outcome form this
review that has been seen to date is to raise the small companies'
rate of taxation. It could, however, be used as a constructive
consultation process to identify some longer term answers to:
— how owner/managed businesses should
be taxed;
— how this should interact with the
taxation of—and social security (including tax credit) provision
for—the family;
— how this might be achieved in a way
which is workable in practice by, in many cases, unsophisticated
taxpayers; and
— is framed in such a way that it is
in accordance with our Ten Tenets for a Better Tax System (summarised
in Annex B).
The ICAEW welcomes the publication of the Enterprise
White paper, which sets out an impressive ambition. The central
themes of the paper, in particular the recognition of the often
acute burden of regulation on small businesses are an important
step forward. However, we believe that a high level, pan-government
commitment to delivery on the stated aims is vital.
4. CAPITAL GAINS
TAX REFORM
We have welcomed in principle the Chancellor's
move to make a significant simplification of the existing capital
gains tax (CGT) regime but we still remain concerned that the
initial announcement was made with no prior consultation and,
even now, we believe that some of the detailed impacts of the
proposed legislation are not well understood.
We welcome the introduction of entrepreneurs'
relief but are concerned that taxpayers should have been given
more time to understand the implications of this new relief before
it is implemented. The announcement of the new relief was not
made until 24 January, despite promises that this would be done
before Christmas, and the delay meant that the detailed draft
legislation was not finally available until 28 February 2008,
when the new rules will come into force on 6 April 2008.
We remain concerned that the proposed changes
have not respected taxpayers' legitimate expectations. To take
just one example, there are a number of situations where under
current rules disposals of business assets now will qualify for
business asset taper relief but if they are disposed of after
6 April 2008 they will not qualify for entrepreneurs' relief.
We believe that a fundamental principle of taxation is the preservation
of legitimate expectations. We believe that the move to a flat-rate
CGT would have been assisted by improved transitional rules, either
by grandfathering existing reliefs and/or providing taxpayers
with a longer period to reorganise their affairs.
5. RESIDENCE
AND DOMICILE
We welcome the changes announced in the Budget
to the proposed new regime for non-domiciled individuals and changes
to the residence rules.
Similar comments in relation to legitimate expectations
apply to the residence and domicile changes as they apply to CGT
mentioned above.
We are also concerned that the new regime is
highly complex, for instance the rebasing election available to
trustees of non resident trusts.
We remain concerned that the new rules will
impose considerable compliance burdens and costs on relatively
low earning non-domiciled individuals. Such individuals are now
much more likely to find themselves within the self assessment
regime.
The residence and domicile changes have highlighted
the need for the UK to introduce a statutory definition of residence.
The UK is now out of line with international practice in maintaining
a rule that is largely based on (often conflicting) case law and
practice that does not deal satisfactorily with increased international
mobility. A statutory definition of residence is needed to provide
certainty to taxpayers, their advisers and to HMRC.
6. TAX SIMPLIFICATION
We welcome the Government's explicit commitment
to a radical programme of simplification of the tax system.
We are concerned that the Government has "dived
into the detail" without first articulating an agreed tax
simplification strategy. The present approach looks like a "change
agenda" with many different initiatives, but we remain concerned
about the overarching strategy and principles that we believe
should underpin such a major work of simplification.
We believe that if simplification is to be successful,
there also needs to be recognition that not only does it take
time and thought if real progress is to be made but there should
also be some formal structure to guide the process and make sure
that simplification remains an ongoing commitment for Government.
We have previously recommended that the Government
set up a Tax Simplification body, similar to the Steering Committee
of the Tax Law Rewrite Project, to bring together representatives
of Government, business including employers, taxpayers and the
tax profession. This idea has not been taken up but we remain
of the view that the tax simplification agenda would be improved
by strategic guidance and input from committees that considered
specific areas of tax.
7. HMRC SERVICE
STANDARDS
We remain concerned that HMRC appears to be
under resourced for the wide range of tasks that the department
undertakes.
Given that compulsory electronic filing is being
extended to all taxpayers in some sectors, we continue to be concerned
about HMRC's ability to deliver efiling services that have sufficient
capacity and robustness. Efiling around the deadline should be
as easy and reliable as using a credit card on Christmas Eve.
We believe that HMRC should reaffirm its commitment to the Carter
principle that no new service should be launched until it has
been fully tested and that the date of introduction should be
deferred if the systems prove to be insufficiently robust and
reliable.
8. REVIEW OF
HMRC'S POWERS
Three major consultations by HMRC on their powers
ended on 6 March 2008.
We are disappointed that measures relating to
these consultations have been announced in the Budget, a mere
six days after the closure of the consultation period. We question
whether this was sufficient time in which properly to consider
all the responses received and make a series of suitable recommendations.
The hasty issue of these decisions shortly after the expiry of
the consultation period does little to encourage the perception
of the tax profession and taxpayers generally that there has been
proper consultation; rather, it suggests that Government has already
made its mind up and is merely going through the motions of consulting.
Two particularly controversial issues which
we consider need more careful consideration and continuing discussion
are visits by HMRC to business premises and record-keeping requirements.
17 March 2008
Annex A
ICAEW AND THE TAX FACULTY: WHO WE ARE
1. The Institute of Chartered Accountants
in England and Wales (ICAEW) is the largest accountancy body in
Europe, with more than 128,000 members. Three thousand new members
qualify each year. The prestigious qualifications offered by the
Institute are recognised around the world and allow members to
call themselves Chartered Accountants and to use the designatory
letters ACA or FCA.
2. The Institute operates under a Royal
Charter, working in the public interest. It is regulated by the
Department for Business, Enterprise and Regulatory Reform through
the Financial Reporting Council. Its primary objectives are to
educate and train Chartered Accountants, to maintain high standards
for professional conduct among members, to provide services to
its members and students, and to advance the theory and practice
of accountancy, including taxation.
3. The Tax Faculty is the focus for tax
within the Institute. It is responsible for tax representations
on behalf of the Institute as a whole and it also provides various
tax services including the monthly newsletter TAXline to more
than 10,000 members of the ICAEW who pay an additional subscription.
Annex B
THE TAX FACULTY'S TEN TENETS FOR A BETTER
TAX SYSTEM
The tax system should be:
1. Statutory: tax legislation should be enacted
by statute and subject to proper democratic scrutiny by Parliament.
2. Certain: in virtually all circumstances
the application of the tax rules should be certain. It should
not normally be necessary for anyone to resort to the courts in
order to resolve how the rules operate in relation to his or her
tax affairs.
3. Simple: the tax rules should aim to be
simple, understandable and clear in their objectives.
4. Easy to collect and to calculate: a person's
tax liability should be easy to calculate and straightforward
and cheap to collect.
5. Properly targeted: when anti-avoidance
legislation is passed, due regard should be had to maintaining
the simplicity and certainty of the tax system by targeting it
to close specific loopholes.
6. Constant: Changes to the underlying rules
should be kept to a minimum. There should be a justifiable economic
and/or social basis for any change to the tax rules and this justification
should be made public and the underlying policy made clear.
7. Subject to proper consultation: other
than in exceptional circumstances, the Government should allow
adequate time for both the drafting of tax legislation and full
consultation on it.
8. Regularly reviewed: the tax rules should
be subject to a regular public review to determine their continuing
relevance and whether their original justification has been realised.
If a tax rule is no longer relevant, then it should be repealed.
9. Fair and reasonable: the revenue authorities
have a duty to exercise their powers reasonably. There should
be a right of appeal to an independent tribunal against all their
decisions.
10. Competitive: tax rules and rates should
be framed so as to encourage investment, capital and trade in
and with the UK.
These are explained in more detail in our discussion
document published in October 1999 as TAXGUIDE 4/99; see http://www.icaew.co.uk/index.cfm?route=128518.
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