Appendix 2: Written evidence submitted
by ACCA
Comments on the Finance (No.3) Bill
1. On 15 March 2011, the Treasury Committee set out
six principles by which it recommended tax policy should be measured.
Finance (No.3) Bill 2010-2011 was laid before the house on 29
March 2011. This memorandum seeks to comment at a high level on
the extent to which the bill coincides with those principles.
2. The Principles are that tax policy should:
1. be fair. The Committee accepts that not all
commentators will agree on the detail of what constitutes a fair
tax, but a tax system which is considered to be fundamentally
unfair will ultimately fail to command consent.
2. support growth and encourage competition.
3. provide certainty. 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.
4. provide stability. Changes to the underlying
rules should be kept to a minimum and policy shocks should both
be avoided. 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.
5. The Committee also considers that it is important
that a person's tax liability should be easy to calculate and
straightforward and cheap to collect. To this end, tax policy
should be practicable.
6. Finally, the tax system as a whole must be
coherent. New provisions should complement the existing tax system,
not conflict with it.
3. The short interval between publication of the
Select Committee report and the Bill would make it unreasonable
to rate the Bill strictly on accordance with the Committee's principles.
4. However, the Bill was introduced by a government
which has already committed itself to a significant change of
approach to tax policy. As the Committee noted in its paper, there
is a high degree of agreement between professionals and academics
over the desirable features of "good" tax policy, and
these themes are reflected clearly in previous government statements
on tax policy, tax simplification and the administration of the
tax system. Accordingly, it should be possible to identify a clear
correlation between the measures contained within the Bill and
the Principles set out by the Committee.
5. As the Committee has observed, while principles
can be separate into "basic" and "procedural"
types, in practice there is considerable overlap between them,
and tax policy needs to follow all the principles to be "good"
policy. Given constraints of time on both the authors and the
readership, we have focused on a few key proposals to illustrate
the principles.
6. The first of the Committee's principles is that
tax policy should "be fair". ACCA agrees that those
charged with designing and operating tax systems across the world
must have regard to fairness, but as the Committee also observes,
there is significant political divergence over what constitutes
a fair tax.
7. Assessing the social and economic impact of tax
policy with a view to forming an opinion on the fairness or otherwise
of given measures is the purview of economists and sociologists.
Accordingly we have not directed specific energies towards "fairness"
as a separate concept from the cumulative effects of the other
principles, compliance with which will in itself go a long way
towards meeting a generally agreeable concept of fairness.
8. In the light of the Chancellor of the Exchequer's
affirmation that the budget is a "budget for growth",
the content of the Bill should reflect the principle that tax
policy should "support growth and encourage competition".
This should be tempered by recognition that tax systems in general
are cumbersome instruments of policy implementation, so while
use of tax as a policy instrument can be legitimate, it should
be exercised with care and restraint. Growth is best supported
by simplicity and removing the drain on productive time imposed
by unnecessary bureaucracy and complexity.
9. There are a number of measures aimed specifically
at promoting growth. These measures should by definition meet
the second Principle. In order to be "good" tax policy
they must also meet, or at the very least avoid conflict with,
the requirements of the other Principles.
10. Promoting growth through the tax system is inevitably
an indirect process. At its most direct, the system rewards specific
past behaviours by reducing future taxation, for example R&D
tax credits and EIS reliefs. More general incentives target sectors
of the tax community, regardless of their behaviour, and reduce
their tax burden, for example the small profits rate (which principally
benefits small companies).
11. "Direct" behavioural incentives can
suffer from a number of inefficiencies. Typically, behaviour is
rewarded rather than intentions, so businesses which would have
performed in the desired manner anyway get a free ride, picking
up the incentive as a bonus. Measuring the level of subsidy or
incentive is difficult, and the value of the measure to each business
will be different in any event.
12. If the level of incentive is too low to alter
behaviours then it will simply become a deadweight cost on government,
as only those actors who would have behaved in the desired manner
anyway receive the benefit. This does not necessarily mean that
the funds are absolutely wasted, as there is a better than average
chance that they will be reinvested into growth and improve the
economic performance of the beneficiary. However, from the perspective
of the government, there is an opportunity cost of diverting funds
away from other projects.
13. If the level of subsidy is too high, quite apart
from the direct waste, it runs the risk of introducing distortions
to the market as businesses change behaviour away from that which
would otherwise be desirable. An often quoted example is the short
lived 0% corporate tax rate, which resulted in thousands of businesses
incorporating who on all other indicators would have been better
off unincorporated.
14. Given the potential difficulties in enacting
"direct" reward tax measures which are both effective
and efficient it is perhaps encouraging that relatively few measures
were announced in the budget, principally the reform of tax research
and development credits, and the bulk of the proposed changes
are to be subject to further consultation in the coming months.
15. The rates and allowances for EIS relief have
reverted to levels very similar to those in force up until 2007.
In terms of the Principles, both this measure and the R&D
changes score well, as they make incremental and widely welcomed
changes to existing regimes. They add no further complexity to
the existing rules in each area, and make no changes to the acknowledged
targeting of the measures.
16. There are a number of more indirect measures
within the Bill, although again much of the detail is left for
future budgets following further consultation. Though not directly
a feature of this Bill, this is nevertheless a welcome trend.
Public (as distinct from parliamentary) scrutiny is not a specific
feature of the Principles, but is undeniably a valuable tool in
meeting them.
17. Arguably, a reduction in tax rates is a growth
inducing measure. However, in order to remain fiscally neutral
this must be balanced by a corresponding rise in other rates,
or an expansion of the tax base. As a general rule, a low rate
on a wide base is likely to be simpler and less distorting than
a high rate on a narrowly defined base (which will tend to encourage
activities which fall outside the tax base).
18. With this in mind, the reductions in main rates
of corporation tax are clear, simple and were broadly expected,
although the pace of change has been increased. However, the increase
in the rate of tax on ring fenced profits (the North Sea oil levy)
was unexpected, and is understood not to have been subject to
any consultation. While the measure is clear, simple and targeted,
it fails on the Principles of Stability and Supporting Growth.
19. There may be a justifiable economic and social
basis for the rebalancing of oil taxation from final consumers
to producers. However, the sudden change in rate came as a shock
to those involved in the North Sea oil industry, and has been
widely condemned as reducing the competitiveness of the UK as
a target for investment.
20. The changes to capital allowance rates may prove
to be of mixed effect. The changes in rates from "simple"
fractions to less intuitive numbers might appear to increase complexity,
but will in practice have relatively little impact as most capital
allowance computations are completed with the aid of calculators
or computers anyway.
21. However it should be borne in mind that for large
businesses with significant investment in plant and equipment,
any changes to the tax cost of those assets will impact on long-term
investment plans.
22. The changes to the short life asset regime are
most significantly impacted by the Principle of practicability.
In theory, allowing the depooling of assets over a longer period
will increase the potential for businesses to reflect the actual
economic value of assets which have reached the end of their useful
life to the taxpayer in their tax returns.
23. In practice however, relatively few businesses
will maintain records to the level of detail and accuracy required
to benefit from the new regime. For example, the average age of
a work computer in the UK is five years (compared with three years
two months in France and two years seven months in Germany). This
contrasts with the typical UK accounting depreciation policy for
computing equipment, which will see its value on the fixed asset
register reduced to nil within three to five years.
24. The disposal for nil proceeds of an obsolete
computer with book value of nil after six or seven years will
now need to be recorded in order to benefit from the new regime,
but this will involve extra administration for the business, solely
to trigger a cash flow advantage of (tax rate X remaining tax
written down value) of the asset. For a £300 PC owned by
a small company and disposed of after 6 years, this would represent
around £18 worth of allowances taken in the year of disposal,
rather than spread over future years. Whether businesses find
this to be worthwhile in practice is open to debate.
25. The UK economy is a complex creature, and the
Bill, seeking as it does to address some of the most difficult
and important aspects of the economy, can perhaps be excused some
of its length if this is a result simply of attempts to ensure
fairness, certainty and coherence.
26. It should also be noted that where in previous
years a Bill of this length would inevitably cause concern over
the lack of time available for Parliamentary or external expert
scrutiny, the majority of the clauses in the current Bill have
already been published and subject to review, debate and revision
prior to the Budget itself.
27. Much of the legislation remains extremely dense
and closely drafted. In some cases this may be a function of the
subject matter. For example, the contractual arrangements surrounding
trading in derivative contracts are naturally complex, and the
rules on accounting for them doubly so. It is inevitable that
the taxation of these matters will reflect that complexity.
28. However, the taxpayers who undertake these complex
activities tend to be relatively sophisticated. Frequently they
will be large corporations, or highly specialised "boutique"
service providers, whose business is to understand complex transactions
and processes. The desire for simplicity can be balanced by the
need for consistency and certainty for users of the legislation.
29. In this context, the anti avoidance legislation
on remuneration provided through third parties provides an interesting
case study. The legislation is ostensibly targeted at sophisticated
remuneration planning undertaken by a relatively small number
of employees to reward high earning staff. However, significant
concerns have been raised that the breadth of the legislation
will result in it potentially impacting on all employers.
30. The sophisticated taxpayers who are the target
of the legislation will typically take advice and will therefore
avoid the tax charges levied by the new rules. To this extent,
they could be considered effective. However, in order to reduce
the possibility of new products being developed which sidestep
the anti-avoidance provisions, they are deliberately widely drawn.
31. There is a significant risk that the only employers
who will be caught by the new proposals are those who stray within
their reach accidentally, either because they are unaware of the
need for advice, or cannot economically afford to take it eg SMEs.
32. There is concern that that the "rules based"
approach adopted by the clauses in the Bill will lead to the requirement
for annual review and possible changes to this legislation. A
"principles based" approach would have been more future
proof as well as not having unintended adverse consequences in
the first place.
33. The legislation is extremely dense and closely
drafted. The repeated use of the term "in essence" to
describe arrangements tends to drive the inference that the aim
is a purposive Targeted Anti-Avoidance Rule, but trying to use
language "untainted" by previous usage and case law
precedent - presumably with the aim of being able to spread the
net as wide as they can without being restricted by previous interpretations.
This inevitably reduces Certainty in the tax system.
34. As ever, the preponderance of exclusions and
limitations to the fundamental principle suggests that there is
a deeper underlying structural problem in the system which ought
at some point to be addressed.
35. The lists of excluded transactions are welcome,
but for exclusions to be included in guidance rather than the
legislation itself will never be as comforting for taxpayers,
and again highlights the fact that (as with previous employment
tax measures, such as Form 42) measures taken to counteract highly
specialised schemes end up having far wider unintended effects.
36. The Chancellor claimed in his Budget speech to
have taken over 100 pages of legislation out of the statue book
by abolishing redundant reliefs. However, the Remuneration Through
Third Parties provisions alone add 59 of those pages straight
back again.
37. The Remuneration Through Third Parties clauses
provide a clear illustration of the dangers of anti avoidance
legislation. The rules are complex. The rules are wide reaching,
and may have unintended effects. The target of the rules will
be well aware of their existence, and will modify behaviour accordingly.
In principle, revision of the underlying structures and legislation
would be preferable as a remedy for the ills. In practice, this
is neither politically nor economically practical in the short
term, and measures to prevent revenue loss in the mean time must
be implemented.
38. The Bill as a whole demonstrates clear movement
towards adoption of the Principles outlined by the Committee.
There is further evidence from other Budget announcements that
the government is committed to many of the Principles, and making
efforts to operate in a manner compliant with them.
39. To some extent, the scope to introduce policy
measures has been constrained by the difficult economic circumstances.
There has been little or no scope for giveaways or significant
expenditure. Though there are, and always will be, aspects of
the tax system which fall below the ideal, Finance (No.3) Bill
2010-2011 is an encouraging step on the road towards a better
tax system for the UK.
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