Appendix 1: Written evidence submitted
by the Chartered Institute of Taxation
Principles of Tax Policy and Budget 2011
1. The Treasury Committee has invited comments on
how Budget 2011 (and the succeeding Finance Bill) meets the Committee's
tax policy principles, as expressed in its recent report on Principles
of Tax Policy. The Chartered Institute of Taxation (CIOT)
is pleased to submit some comments. We have incorporated points
relating to the unrepresented and tax credits from our Low Incomes
Tax Reform Group (LITRG).
2. The Committee's report identified six principles:
- Basic fairness
- Supporting growth and encouraging competition
- Certainty, including simplicity
- Stability
- Practicality
- Coherence
We comment briefly under each of the principles;
inevitably, some of our comments will be similar to those made
in the wake of the Budget.
Basic fairness
3. The CIOT's motto translates as 'Justice between
the citizen and the state' so fairness in the tax system is always
an important issue for us and especially our LITRG. In this context,
we have generally been very supportive of the modernisation of
HMRC's powers, though we have often expressed concerns about the
need to ensure the new powers carry a proper balance of safeguards
for the taxpayer.
4. The current small group of new powers in Clauses
85-87 is a case in point. The provisions are broadly sensible
but we are concerned about the administrative burdens imposed
by the data-gathering powers; also whether the 'Mutual assistance
for the recovery of tax' (MARD) procedures will require adequate
safeguards around the security of data sent to overseas tax authorities
comparable with those that HMRC guarantees. The MARD procedures
seem to be skewed in favour of the foreign tax jurisdiction and
lack help for those seeking to recover overpayments from overseas.
5. Anti-avoidance measures are a part of ensuring
fairness. Exposing many of the clauses in draft has been helpful
but more still needs to be done to the Disguised Remuneration
provisions (Schedule 2) to make sure the rules operate properly.
Employers still face spending considerable time and costs in
navigating through lengthy and complicated new legislation: we
still think a more principled-based approach would have been preferable.
6. Fairness also requires proper attention to tackling
evasion: we would urge the Government not to lose sight of evasion
and other criminal activity, which can have a far greater impact
on Exchequer revenues than avoidance.
7. HMRC should not only be concerned to collect more
tax from those who have paid too little, but to ensure that the
right reliefs, exemptions and allowances are given. Collecting
the 'right amount of tax' involves paying equal attention to both
sides of the equation. There is evidence that too little regard
is had to making corrections and adjustments in the taxpayer's
favour. For example, in 2009 the NAO estimated that 3.2 million
older people did not claim the age-related allowances, and HMRC
itself estimated that 2.4 million older people overpaid tax by
not claiming to have their savings income paid gross[4].
8. There is clearly a significant fairness issue
over the increased tax burdens imposed - whether they are being
borne fairly. We are more concerned with the workability of taxes
and tax changes than their impact but we do have to note a considerable
increase in the effective tax burden of those on incomes in the
£40-50,000 bracket when tax credit and (in due course) child
benefit are taken into account. Research by CARE has shown that
a considerable number of single-earner households where the earner
is a higher-rate taxpayer, are in the fourth income decile (i.e.
in the lower half of the income distribution) when the needs of
the household have been taken into account. The effective freezing
of the higher rate threshold, the proposed withdrawal of child
benefit from households containing a higher-rate taxpayer, and
the reductions in working tax credit - particularly the childcare
element - will result in those households falling further down
the income distribution.
9. For low-income households, and families such as
those just described (para 8), it is important when assessing
the fairness of any tax measure to take into account the knock-on
effects on welfare support available to the household. As shown
above, increasing the tax burden on middle-income households while
withdrawing tax credits and child benefit from them will result
in their being squeezed proportionately more than those on higher
incomes who are not in receipt of tax credits. Also, as shown
in LITRG's written evidence to the Committee on the Budget (Ev
103), taking low-income individuals out of tax by raising the
basic personal allowance does not necessarily make their households
better off when the resulting loss in housing benefit and council
tax benefit is taken into account and set alongside cuts in working
tax credit.
Supporting growth and encouraging competition
10. The further reductions in the main rate of corporation
tax are clearly welcome under this heading, as are the moves to
conclude the long-running CFC saga. Developing a long-term framework
for corporation tax, so giving companies assurance about their
future tax burdens, is an important contribution.
11. The extensions to Enterprise Investment Relief
and Venture Capital Trusts are not before time. Changes in recent
years have meant that the relief has become focused on too small
a range of business. The increase in the gross asset level back
to £15m and number of employees to 250 are sensible and realistic
and open up many more businesses to the possibility of raising
capital through these routes. In many ways, these extensions
are more important than the increase in the rate of income tax
relief. There is scope to simplify the definitions and operation
of these reliefs.
12. The doubling of the lifetime amount eligible
for entrepreneurs' relief is welcome; ideally, the 5% qualification
threshold (a constraint for widely-held family businesses) would
be abolished or reduced.
13. The increase in the rate of research and development
allowance for smaller businesses is useful. The most important
feature of this relief for small businesses is its facility to
generate a tax repayment: it is unfortunate that the rate of repayment
is being reduced, to meet EU requirements, so the real net benefit
is modest. (We note in passing that point was not made clear when
the increase in R&D rates was announced.) We appreciate that
the R&D credits have to comply with the EU rules that cap
the relief but as the changes require approval under EU State
Aid rules in any event, the opportunity should be taken to investigate
changing the rules to maintain the rate of repayment. The removal
of the restriction on repayment relief by reference to PAYE/NICs
is to be commended.
Certainty, including simplicity
14. Almost of more significance than the reduction
in the rate of corporation tax is the confirmation of the conclusion
to the long-running discussions on CFC reforms. This is much
needed: it is all part of bringing certainty to the UK's business
tax system. The government is rightly aiming to make the UK's
corporate tax system as internationally competitive as possible
- but it needs to bear in mind that the most important aspects
of the system are that it is stable, consistent and delivers certainty.
15. A statutory residence test (SRT) for the UK also
has a part to play in giving more certainty and contributing to
simplicity, in that it has the potential to give the UK a modern,
workable rule. (The fact that it will inevitably lengthen the
UK's tax code - there being no current definition there of residence
- does not matter.) It is good to note that amidst the desire
to increase the tax paid by some non-domiciled taxpayers, the
government has recognised the need to simplify some of the remittance
basis rules.
16. In general, the early exposure of many of the
provisions of the current Finance Bill have helped under this
heading. Slowing the rate of change would also contribute to simplicity.
Stability
17. In many ways, the main contributions under this
heading are the proposals in the Tax Policy Making document and
its follow up; these have our strong support in general. This
makes the exceptions in the Budget/Finance Bill even more noticeable
and concerning:
- Oil taxation - the last minute
and precipitate change in Oil tax rates for an industry that is
particularly dependent on long-term planning seems wrong
- Bank levy - the constant changes to the levy
need to end: if it is to be brought in, it needs to be settled
and banks given some assurance about their long-term tax regime.
It is surely better to evolve changes to the way
sectors are taxed through consultation rather than pull the changes
out of the Budget box. That would allow time to assess international
implications - which seem, rightly, to be a major issue for the
developing corporation tax framework but which do not seem to
have been completely sorted out for the bank levy at least. The
steady evolution of tax changes may make Budget statements be
less dramatic but that is surely a small price to pay?
18. The proposed framework for corporation tax is
very welcome as a contribution to stability. A similar framework
for environmental taxes is much needed.
19. The possibility of Northern Ireland being able
to set its own corporation tax rate is interesting. With various
tax raising powers being devolved to Scotland and with Wales starting
discussions along similar lines, it does seem we may be heading
for a period of significant change and consequent instability
in the UK's tax landscape. This may impact adversely under a number
of headings within the Committee's principles.
Practicality
20. There are some good features (e.g. the gift aid
ideas for cash donations, the relaxations of the rules around
substantial donors to charities and the important pensions changes)
and others that raise concerns over complexity (e.g. the proposed
IHT relief for charitable legacies, disguised remuneration and
aspects of the childcare relief restrictions).
21. The key to ensuring changes are practical and
do not introduce unnecessary complexity is proper consultation.
For example, the new inheritance tax charity relief and the possible
gifts of art relief are interesting ideas but will clearly need
discussion and careful design to avoid their becoming over complex.
As the TPM approach sets out, the consultation should start with
a debate around some of the principles: it is unfortunate that
the '10% reduction in IHT is 10% of the estate is left to charity'
proposals is already seemingly a set plan as initial consultations
have suggested some practical problems could be obviated by a
more flexible approach.
22. There will always be concerned about reliefs
being hijacked for avoidance purposes; the risk is that too many
anti-avoidance provisions start to make a relief less practical
by making it too complex.
Coherence
23. We have already referred to the benefits of long
term frameworks that help bring coherence to the system. The moves
to integrate the operation of Income tax and NICs are very welcome
under many headings, including coherence.
24. The various changes to capital allowances do
not score well under coherence. The changes to short life assets
seem to be an attempt to solve problems created by the reduction
in writing down allowance rates at a cost of increasing administrative
burdens. It would be better to have a proper long-term commitment
to capital allowance rates. Reducing capital allowances to 'pay'
for corporation tax rate cuts penalise unincorporated businesses
and make the business tax system look as if it is lacking coherence.
25. We would observe that since the 2007 Budget the
last and present Governments have cited moving closer to commercial
depreciation in justification of tax changes. Closeness to commercial
depreciation is a valid policy objective; if that is the objective,
a system of tax deductible depreciation would give more coherence
to the tax system than capital allowances (and would add to stability)
rather than trying to replicate it through a complex code.
Conclusion
26. Overall, we think that the Budget and Finance
Bill score quite well under the Committee's policy principles.
However, if this were a school report card, we would not be awarding
a '10 out of 10'; there is a strong element of it being a '7 out
of 10' and a promising start, but with distinct areas for improvement
and care in the next 'school year'.
4 HM Revenue and Customs - Dealing with the tax obligations
of older people (NAO, October 2009) Back
|