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


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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