Examination of Witnesses (Questions 100-119)
MR JOHN
WHITING, DR
MARTIN WEALE
AND MR
ROBERT CHOTE
17 MARCH 2008
Q100 Mr Dunne: Turning to the capital
gains tax changes, the announcement of the initial proposals in
the Pre-Budget Report without prior consultation, the re-think,
the subsequent delay of the announcement of the re-think, and
then the confirmation of the arrangements in the Budget we have
just had, what impact do you think that series of events has on
the confidence and economic competence of the Chancellor amongst
tax professionals?
Mr Whiting: I can only comment
in terms of how best to handle the tax changes, and I would always
argue that the way to do it is consult before and decide on the
changes afterwards. It would have been easy enough, surely, to
announce the intention was to simplify—which, let's not
lose sight of it, is a very good product, if we do have simplification
of a ludicrously over-complex tax—to say, "This is
the direction we intend to go", consult about the details,
debate those and then come out with a final product over a good
time frame which did not worry people too much. In the end, we
may have got to a reasonable result, but it has not been a very
good way of managing change. I am afraid you also have to say
that if you look at income shifting and residence and domicile,
you could apply the same sort of issues—"Could we please
have consultation first and decisions on the direction afterwards".
None of that precludes, of course, the Chancellor announcing that
there is to be a change in a certain direction; that is what Governments
can do, but can we then have consultation about how that should
be taken through.
Q101 Mr Dunne: There has been some
criticism that this amounts to retrospection in the way the changes
have come about. Do you think that is a valid criticism or does
that not matter?
Mr Whiting: Dare I say it, it
depends on your definition of retrospection. We do have one prime
example in the Budget of retrospection, where there seems to be
a change going back 20 years potentially affecting past tax bills.
Of course this, to slightly split hairs, is retro-active in a
certain way, that people were expecting something and that expectation
has been altered. Our tax system is always prone to alteration.
Was it reasonable expectation? Well, of course, people had anticipated
that capital gains tax would be levied at 10% in certain circumstances,
or even less, or that they would get an indexation allowance on
a long-held asset. That is no longer the case. You could argue,
they have had a few months of warning, but undoubtedly I think
it is a fair criticism that a certain amount of reasonable expectation
has been taken away from them. Is that retrospection? Strictly,
no.
Q102 Mr Dunne: Do you think it has
impacted business decision-making during this period which may
have impacts on the economic prospects?
Mr Whiting: I can certainly comment
from our own client base that, hardly surprisingly, we have had
a variety of clients and a variety of situations wanting to know
what was going to happen, what was likely to change, and taking
action before or after 5 April to make the most of the possible
changes or to avoid the tax increase. So it has distorted a certain
amount of business decision-making. At the end of the day, it
has not made a major impact because there have not been vast numbers
of people doing something just for the sake of it, but it has
accelerated deals, it has decelerated deals, it has taken people's
minds off perhaps just progressing the business they were doing.
Mr Chote: The process here is
key. Clearly there was scope for consultation here. The very fact
that the Chancellor said there will be time for people to arrange
their affairs, implies this was not something which needed to
be done at 6 o'clock on the day you announced it for fear of reaction.
But then to basically give people time to arrange their affairs
and then within a matter of days to cave in to concern from next
door and from the CBI and then to throw up uncertainty about what
the system will look like, promise clarification before the end
of the year, not give it until January, is not a process designed
to give a good planning environment for business or indeed for
anybody else.
Dr Weale: I think it is also important
to remember that when the Pre-Budget Report was introduced, it
was intended to be a means of consulting, and so if the Chancellor
had not wanted to consult you might have thought he could have
introduced it in the Budget.
Q103 Mr Dunne: On the simplification
measure, do you think the life-time entrepreneur's relief of £1
million is something which will be practical and easy for the
Government to keep tabs on?
Mr Whiting: That would be a very
interesting question for you to ask the officials from the Revenue
and Treasury tomorrow, how they are going to keep track of it,
because we certainly see a practical problem in keeping track
of where you or I in our own individual situations are on the
£1 million allowance. Conceptually it sounds easy but there
is a deal of record-keeping to be followed for this which does
create an administrative burden.
Q104 Mr Dunne: There has also been
some criticism from the life insurance industry, that a lot of
their products are now going to become uncompetitive. Do you think
they have some validity?
Mr Whiting: They have some validity
because what has been introduced—and it was something which
was not spotted when the first announcement was made, not until
some digging was done—is that now, rather than having a
broadly level playing field for how you are taxed on whatever
means you use to invest, you now have a different higher tax levy
coming out for an insurance-based product as against direct investment.
That may or may not be what the Government wants to encourage
but it is seemingly an unlooked-for consequence of the changes.
Q105 Peter Viggers: Turning to the
taxation of those who are non-domiciled, how much of an exodus
can we expect to see and what will the impact be on taxation?
Mr Whiting: That, if I may say
so, is a sort of $64 billion question, is it not? In all honesty,
nobody knows exactly how many people will leave. People are undoubtedly
considering leaving and some are leaving; the volume we do not
know. Undoubtedly the changes announced in the Budget have reassured
a cadre of people; they have been helpful. Whether they have gone
far enough to really stem any exodus remains to be seen, because
a bit like the point Mr Dunne was alluding to, one of the impacts
there has been is a loss of confidence and a feeling amongst the
non-domiciled community that the UK no longer wants them in the
way they once did. Here we are talking about various levels: we
are not just focusing on the very wealthy entrepreneur who feels
he or she might be taxed more heavily, we are also thinking in
terms of the American or other bank or finance house which employs
a lot of expatriates and can suddenly see their salary bill going
up because of the niggling little provision to deny the personal
allowance to such people in many situations. So it is not giving
a very good message to the non-domiciled community and the employers
of those people, that the UK is as welcoming as it once was.
Q106 Peter Viggers: Discussing this
at lunch time with a range of people, including bankers and others,
the most vehement commentator was an academic. Have you come across
that point?
Mr Whiting: I have certainly come
across it. There is a surprising number of academics, if this
is what you are alluding to, who are non-domiciled and who feel
badly treated by this. I think it is in part because there has
been a great deal of focus on this £30,000 fee, if I can
use that as a shorthand, for very wealthy people, and what has
perhaps been missed—or it has not had quite the same focus—is
that there is a much larger cadre of employed people, be they
in the city or in academia, for whom £30,000 is a huge amount
of money. Or, again to reiterate the point, the simple loss of
personal allowances is an unpleasant little extra cost to them.
Q107 Peter Viggers: Can I ask you
to comment on the practical issues of implementing and enforcing
taxation and the impact of the increased administrative burden?
Mr Whiting: I think it is going
to be an extremely difficult measure to run. Again, the very wealthy
who have their advisers will make sure they comply and they will
pay the £30,000 on a self-assessment basis. The middle rank,
very often employed, will be dealt with in many cases by their
employer who is going to have to shoulder the burden of asking,
"Have you made an election? You do realise you have to sort
out whether you are actually now non-domiciled, on a remittance
basis, whatever" and then start amending the PAYE code or
reimbursing, so there is a huge burden there for the employer.
Then the biggest cadre of non-domiciles are those who many of
us see every day—the archetypal Polish plumber or the Romanian
farm worker or the sandwich bar worker—who are employed,
paying their UK taxes but probably do not even know they are non-domiciled
because they do not know the term, they do not realise potentially
they are about to lose their personal allowance, they certainly
do not have any advisers, and if they were to go to HM Revenue
& Customs—and let us be realistic we are talking about
potentially millions of them—I very much doubt whether HM
Revenue & Customs are the least bit geared up to help them.
In other words, what we are looking at is unwitting non-compliance
by a large group of people at the bottom end of the income scale.
Q108 John Thurso: The Budget is full
of green rhetoric but I think from your comments at the beginning
you were somewhat all under-whelmed by the actuality. Is that
a fair assessment?
Dr Weale: I certainly have that
view, that things like auctioning a carbon allowance and so on
is a very good idea but looking at the particular issues over
road use and road fuel use, I find myself asking, "Yes, there
is some discouragement now to owning cars which use a lot of fuel"
but actually what does the Treasury, what do HMRC, think the implications
would have been if instead vehicle excise duty had been abolished
and the revenue entirely collected through fuel duty? My guess
is that that change would do a lot more to reduce carbon emissions,
perhaps not in the short run but in the medium term.
Q109 John Thurso: I wanted to ask
you about that because I saw your first best, second best comment.
That holds true if what you are seeking to do is actually change
behaviour, and what you want is people to say, "Gosh, this
is expensive, therefore I am going to get on a bus or a tube".
You made the point, if I remember rightly, that what you do is
you alleviate income tax so you help the poor by having less income
tax which alleviated the burden?
Dr Weale: Yes.
Q110 John Thurso: But is there not
a different problem which is the rural/metropolitan divide, which
is that there are large swathes of the UK which are highly rural
and have no public transport and people rely on their vehicles
and therefore end up paying a lot more and they tend to be the
rural poor. How would you deal with that aspect?
Dr Weale: I think that would still
be something that the policy towards the countryside would be
something that the Government—
Q111 John Thurso: So you would need
an opt-out in there?
Dr Weale: The Government needs
to address it on environmental grounds. If it is the case that
people who live in the countryside do more damage to the environment
because they drive around a lot, is it something we collectively
want to put up with because we like the idea of the countryside
not becoming completely depopulated? Once again the first best
would still be, if there are people in particular circumstances
who you thought deserved to be protected from the income consequences
of the change, then you would try and do something to improve
their income, perhaps by having council tax rebates in rural areas
or something like that, to recognise people who chose to live
there need to use more fuel. But the approach we have seen I do
not think is in any sense first best and probably will not be
very effective.
Mr Chote: One issue is, as well
as the imbalance, I think we have seen a sort of tentative resuscitation
of road pricing raised as a possibility. Clearly the issue then
about fuel duty being quite a good tax aimed at emissions depends
on the extent to which you think the issue is more of congestion.
A balance of getting more money through road pricing and less
fuel duty might be a more appropriate response to the fact there
are different sorts of externalities—
Q112 John Thurso: Road pricing must
the long term.
Mr Chote: --- and that presumably
has a different impact rural/urban to the current mix we have
at the moment.
Mr Whiting: If I can just add,
within this package there is a number of good and worthy environmentally
orientated measures. I continue to feel that what is lacking is
a clear statement, a clear framework, by Government which says,
almost going back to your own point, "Are we raising money
by environmental duties or are we changing behaviour?"—to
really set a framework and to give business in particular the
confidence that is the intention because, after all, business
needs a little time to adapt and to follow what Government wants.
Dr Weale: Could I come back on
the question of road pricing, because the measures, as I understood
them, would be likely to support rather local road pricing schemes,
and the idea that it might all be done by satellite monitoring
is not finding the favour that it did, so it is not clear how
far that will actually work to achieve the affects that Robert
was describing. I concede with satellite-tracking it could be
done.
Q113 John Thurso: You do not actually
need a satellite but I will not go there because I could bore
for Britain on road pricing. Can I move to aviation tax instead?
One of the things which everybody I think is agreed upon is that
aviation needs to externalise its environmental costs. We are
coming up to the point where we are moving from APD to a per plane
duty. Firstly, should freight aircraft be included and should
private aircraft be included? Do you think there is anything of
great importance that we have to get in, now the consultation
is nearly over? What are the key points to get that right? Given
that we have got most things wrong, how do we get that one right?
Mr Chote: One attraction of the
per plane method is that does make incorporating freight an easier
proposition. Given the amount of freight-only flights there are,
it does not make a huge difference to the magnitudes we are talking
about here. One interesting issue is that when this was first
mooted there seemed to be a strangely precise amount of revenue
expected from this from what was a very vague plan at that stage,
and now we have a very precise number increased by 10%, for reasons
which do not seem very obvious. Clearly in terms of the structure
of this, there are issues about the fact that aviation like road
transport has different sorts of undesirable externalities and
you need to get the tax to work in a way which addresses that.
There is a local noise externality versus emissions, so what is
the charge? Do you change the charge depending which airport we
are talking about? How much of it is a per mile element as well?
So there are those issues which certainly deserve further thought.
In the longer term, how does all this mesh in with the expansion
of the trading scheme?
Q114 Chairman: I have a few tax avoidance
questions for you. The Government amended stamp duty three years
ago amid concern that people opting for Sharia-compliant mortgages
were paying stamp duty twice. It has been reported that commercial
property developers were quick to exploit the legislation which
allowed them to escape stamp duty altogether. How long has the
industry been aware of this loophole and how much do you estimate
this has cost the taxpayer?
Mr Whiting: I do not think it
is something which will have cost the taxpayer very much. It has
been an issue not just in the context of stamp duty but in the
general development of Sharia-compliant financing models which
has been looked at, both by the industry and by HM Revenue &
Customs, very carefully, because of course one cannot just make
these applicable on a religious basis, they have to be open. So
there has been very good consultation and discussion about these.
The idea that the particular stamp duty thing could suddenly be
generating a loophole is something which has become, I think,
aware of in the last year, so it is a pretty quick move to stop
it, so I do not think there has been any particular loss.
Q115 Chairman: The Chartered Institute
of Taxation describe the income shifting rules as "a sticking
plaster solution which did not address the real structural problems
inherent in the ways that small businesses are currently taxed."
Do you agree with this assessment? Should the Government widen
the consultation on income shifting to address these concerns?
Mr Whiting: I confess I wrote
that phrase—
Q116 Mr Fallon: So you agree with
it!
Mr Whiting: It does not automatically
follow I agree with it!
Q117 Chairman: Two seconds to change
your mind!
Mr Whiting: No, I will stick with
it! Our preference would undoubtedly be that there is a good consultation
to take the opportunity to have a wide-ranging review of how a
small business activity, whether you are carrying it on as self-employed,
small partnership, or small company, is taxed. You might also
sweep into this a read-across to employees because a lot of it
just comes from the structural differences that you have, and
to put an income shifting sticking plaster on to something we
do not really know what we are aiming for is surely not the right
way forward; better to have a proper review.
Q118 Chairman: HMRC has introduced
a measure to stop the abuse of double taxation treaties, an agreement
which prevents UK residents from being taxed twice on overseas
income. What do you think of that measure?
Mr Whiting: The actual change
to prevent the abuse of double tax treaties is no problem at all.
The problem I have is that it does seem to be, I believe, clarifying—to
quote the press release—a change which took place in 1987
and is supposedly acting back to 1987. For all that it is changing
something which has apparently been abused and is an anti-avoidance
measure, to go back 20 years does seem to be a little too far.
Q119 Chairman: That practice was
popular with UK property developers who used it to set up partnerships
in the Isle of Man, with profits from UK developments made via
the trust in order to avoid UK taxation. Will HMRC be able to
tax every such developer on the income which arose? Can you give
us an estimation of the savings?
Mr Whiting: I have seen various
estimates of how much money is involved and I think we are into
the tens of millions certainly. Will HMRC be able to access the
amounts, well I assume they think they will be able to because
we are talking about people who are resident in the UK. It is
undoubtedly an avoidance technique which has been there. What
is interesting is that it has been known about for some years
and it seems strange it has only been moved against now. Not only
has it been known about but it has certainly been disclosed to
HM Revenue & Customs, and one of the concerning factors, whatever
one says about avoidance and unacceptable avoidance, it is something
which has been known about for long enough, it has been referred
to in seminars and talked about quite openly, and suddenly we
get a move against it after some years and is very retrospective.
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