Finance (No. 3) Bill 2010-11 - Treasury Contents


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


 
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