Appendix 1: Chartered Institute
of Taxation
Principles of Tax Policy and Budget 2014
INTRODUCTION
The Treasury Committee has invited comments
on how Budget 2014 (and succeeding Finance Bill) meets the Committee's
tax policy principles, as expressed in its 2011 report on Principles
of Tax Policy. The Chartered Institute of Taxation (CIOT) is pleased
to submit some comments, which incorporate points relating to
the unrepresented from our Low Incomes Tax Reform Group (LITRG)
and also comments from our colleagues at the Association of Taxation
Technicians (ATT).
The Committee's report identified six
principles:
· Basic
fairness;
· Supporting
growth and encouraging competition;
· Certainty,
including simplicity;
· Stability;
· Practicality;
and
· Coherence.
We comment briefly under each of the
principles but would stress that we are not giving a full analysis
on the Budget/Finance Bill measure; indeed we cannot hope to cover
the whole plethora of measures in the Budget in a short memorandum.
BASIC FAIRNESS
As in previous years, much is made of
the increase in the personal allowance taking people out of the
tax net. However, if the objective is to improve the financial
position of low-income households, increasing the income tax personal
allowance is not the most efficient way of doing that, particularly
while the NIC primary threshold remains at £7,956.
In general, higher rate taxpayers stand
to gain more from any rise in the personal allowance than basic
rate taxpayers, while non-taxpayers gain not at all. The position
of low-income taxpayers who also claim benefits is complicated.
To anyone on most means-tested benefits, any tax saving from the
raising of the tax threshold will be offset by a diminution in
their entitlement to benefit. This is because means-tested benefits
are based on net, after-tax, income - accordingly any reduction
in the tax bill results in an increase in net income, hence the
reduction in benefit entitlement.
To illustrate, an increase in the personal
allowance by, say, £1,000 will mean a 20% tax saving for
a basic rate taxpayer - £200. But if that taxpayer is claiming
Universal Credit, their entitlement will be reduced by 65p for
every £1 increase in their net income. So the actual saving
for a taxpayer in this position is not £200, but 35% of £200,
or £70.
We have strong concerns about the announcement
that HMRC will have the power to take money directly from the
bank accounts of tax debtors who owe more than £1,000 in
tax or tax credits. This power is unprecedented in the UK and
the announcement contained no details of any judicial or other
safeguards that would protect taxpayers on low incomes struggling
with debt problems - apart from a stipulation that a minimum of
£5,000 would be left in debtors' accounts. We are concerned
that the proposed power could undermine confidence in the relationship
between taxpayers and HMRC and actually discourage compliant behaviour.
HMRC say they will use their new power
only where debtors 'have the financial means to pay' and have
been asked for payment many times. It is unclear how HMRC will
determine whether a debtor has the financial means to pay, or
by what criteria this will be judged. It is not uncommon for people
in straitened financial circumstances to put insistent demands
for payment on one side if they lack the means to pay, or to satisfy
the most pressing debtor at the expense of others.
People who owe HMRC £1,000 or just
over may simply be people on low incomes or low wages who have
come into difficulties and are in debt not only to HMRC but also
to others, notably public utilities. To let HMRC raid their bank
accounts without safeguards or recourse to the courts - or with
inadequate safeguards - would be to flout the rule of law in a
manner unworthy of a public service body. It is not the same as
seizing physical goods, it is depriving the debtor of the very
means to live.
We understand there is to be a consultation
on this measure. We sincerely hope the consultation document will
reveal some coherent proposals on safeguards which are absent
from the announcement itself.
There are some anti-avoidance measures
that score well under the fairness heading. We would highlight
the introduction of new powers for HMRC to tackle non-cooperative
promoters of tax avoidance schemes. However, we are disappointed
that the Government is to go ahead with proposals to demand that
users of existing Disclosure of Tax Avoidance Schemes (DOTAS)
pay the disputed tax in advance and without a right to appeal.
We understand and sympathise with the
Government's need to strike down mass-marketed tax avoidance schemes,
but allowing HMRC to act as prosecutor, judge and jury based on
the DOTAS regime, which was not meant to be used for these purposes,
is going too far. It is our opinion that this measure will weaken
the DOTAS provisions and undermine confidence in the fairness
of the UK tax system.
SUPPORTING GROWTH AND ENCOURAGING COMPETITION
There are few positive measures for
businesses in the Budget. However, we think that this is understandable
given the steps taken in the last few years to improve the competitiveness
of the UK tax system, not least the significant reduction in the
main rate of corporation tax to 20% from 1 April 2015.
The headline announcement for businesses
was the doubling of the Annual Investment Allowance (AIA) from
£250,000 to £500,000. However, we believe that this
will have a limited impact on small and medium-sized enterprises
(SMEs). The Chancellor said in his speech that this measure will
mean that 99.8% of businesses will receive 100% up-front relief
on their qualifying investment in plant and machinery. We note
that when the Chancellor previously announced the reduction of
the limit from £100,000 to £25,000 with effect from
April 2012, the Government indicated that the reduction would
not impact 95% of businesses. Taking the two announcements together
suggests that rather less than 5% of all businesses will benefit
from the temporary doubling.
On a more positive note, the increase
in the rate of the payable R&D tax credit for SMEs to 14.5%
from 1 April 2014 will put more cash back in the hands of SMEs
and encourage further investment in R&D. R&D tax relief
is one of the most successful tax reliefs introduced in the UK,
having supported almost £12 billion of R&D expenditure
in 2011/12 alone, and the increase in the rate of the payable
credit can only boost R&D activity in the UK.
We would highlight also the announcement
that the Seed Enterprise Investment Scheme (SEIS) is to be made
permanent. The SEIS was introduced in 2012 to help small, start-up
companies raise equity finance. Investors can have confidence
that the scheme will continue for the foreseeable future. This
will increase investment in those small, high-risk companies identified
as being key drivers of growth.
CERTAINTY, INCLUDING SIMPLICITY
As noted above, the Government is to
go ahead with proposals to demand that users of DOTAS pay the
disputed tax in advance. By applying the rules to existing schemes,
this measure effectively has retrospective effect as it will apply
to taxpayers who at the time they entered into the schemes would
not have anticipated that they would have to make accelerated
payments of the tax unless their case was eventually lost.
Taxpayers should be entitled to organise
their affairs in accordance with the prevailing law in the certain
knowledge that it may be changed in the future but that its impact
cannot be backdated. Retrospective legislation creates doubt and
uncertainty to the detriment of the economy at large. We believe
that these proposals can only create uncertainty for taxpayers.
Certainty is essential if taxpayers
are to be encouraged to contribute to pension schemes. While we
welcome the changes made to pensions in the Budget, which we believe
will bring increased flexibility for taxpayers, we note that since
the fundamental reforms in Finance Act 2004, almost every subsequent
Finance Act has made changes to the tax system around pensions.
Further, we find it regrettable that some taxpayers, having made
decisions based on the rules in place at that time, may now regret
those decisions in light of the rules which are to apply in the
future. We hope that Governments will resist the temptation to
make further changes in this area, and so restore some degree
of certainty to the tax rules around pensions.
We welcome the announcement that the
Government will be implementing recommendations from the Office
of Tax Simplification (OTS) that will significantly cut administrative
burdens for employers. Employers are subject to a cumbersome system
for the reporting of employee benefits and expenses. Putting in
place a system of voluntary payrolling of benefits is long overdue
and will cut down on end of year administration.
We think that the proposals on ISAs
have the potential to enhance certainty and simplicity although
much will depend on how the relevant provisions are framed. It
will also depend on providers offering products that take full
advantage of the new rules and not profiteering from high charges
and low interest rates offered.
It was hoped that the legislation introducing
the small transferable tax allowance for married couples and civil
partners would have been crafted with simplicity in mind, given
that the sort of taxpayers who will benefit from it the most will
be on modest levels of income and unlikely to have professional
representation. It is therefore unfortunate that the procedural
burdens imposed by the legislation are extremely complex given
the very small benefit to be derived and this complexity may well
discourage take up of the relief.
We comment elsewhere in this submission
on the proposed doubling of the AIA. If the relevant legislation
is anything like that which was required to introduce the current
temporary £250,000 limit, it will be arithmetically complex.
The scheduled expiry date of 31 December 2015 for the enhanced
limit (at which point the limit will in the absence of further
proposals reduce from £500,000 to £25,000) does not
make for certainty.
As a more general point, we continue
to be concerned that taxpayers are taxed by statute and untaxed
by HMRC guidance. In particular, we feel that this may be an issue
with regard to the changes to the taxation of partnerships (which
are considered in more detail below) where the legislation is
possibly of wide application. HMRC have published guidance in
this area which gives some comfort that the legislation will be
applied in a reasonable manner. However, in our opinion this falls
some way short of giving certainty to taxpayers.
STABILITY
Last year, we commented under this section
on the changes to the AIA and to the tax system around pensions.
It is testament to the volatility of these areas that they fall
to be considered under this section again this year. The changes
to the pension rules are clearly positive, but we have demonstrated
above that the increase in the AIA will have little impact on
businesses.
As a result of the changes made in this
year's Budget, and previously, we have the illogical situation
that depending on the precise date when a business incurs eligible
capital expenditure over the next two years, the amount of that
expenditure that it can immediately write off for tax purposes
may in simple terms be £250,000, £500,000 or £25,000
(In fact there are many more permutations of amount depending
on the accounting date of a business). Just getting the purchase
date wrong by a single day could make a massive difference to
the business's tax bill. We are always concerned when tax considerations
get in the way of sound business decisions. Having a twenty-fold
cliff-edge drop in the limit at midnight on 31 December 2015 could
really distort decisions about capital expenditure.
It is regrettable that, despite the
many changes made in this area, the position beyond 31 December
2015 is unclear. We think that it would be helpful for the SME
sector if the Government indicated now what will happen after
31 December 2015. It is inconceivable that the limit will drop
from £500,000 to £25,000 but that is how things will
stand after Finance Act 2014 unless clarification is provided.
If the Government sets out now what will happen from 1 January
2016, businesses will be able to plan sensibly. Setting the AIA
at a sensible level - such as £100,000 - for the long-term
would have done far more to promote business confidence than another
temporary increase.
We would draw your attention also to
the many changes announced in the Budget regarding the taxation
of property, including: the immediate reduction in the threshold
for the 15% SDLT rate from £2m to £500,000; the phased
changes to the bands applying with regard to the Annual Tax on
Enveloped Dwellings (ATED); and, as announced at the Autumn Statement,
the proposed introduction of a charge to capital gains tax on
future gains made by non-UK residents disposing of UK residential
property. This is yet another round of changes to the UK's volatile
property taxes regime, following on from the introduction of ATED
and related changes to CGT and Stamp Duty Land Tax rates in recent
years.
We would caution the Government not
to over-react in its attempts to tackle abuse of Venture Capital
Trusts (VCTs) and Enterprise Investment Schemes (EISs). Although
we understand that this is part of a broader effort to crack down
on tax avoidance, it is equally important to recognise that those
schemes intended to increase investment in growing businesses
must not be hampered by an over-zealous attempt to combat avoidance.
It is a fine line between cracking down on tax avoidance and not
deterring those keen to take advantage of VCTs and EISs. We consider
that the objective of tackling abuse would best be achieved by
invoking the GAAR provisions. In that way, it would be unnecessary
to further complicate the VCT and EIS legislation.
We welcome the publication by the Government
of a paper on the UK priorities for the G20-OECD project for countering
Base Erosion and Profit Shifting (BEPS). It is very helpful that
the Government has made a significant contribution to the debate
around BEPS issues through publishing its views on the matters
identified by the OECD. We anticipate that the BEPS process will
eventually lead to changes in UK tax law, and the earlier the
debate around the changes needed is begun, the greater the chance
of effective and proportionate change being the result.
PRACTICALITY
We are concerned that the proposals
to go ahead with changes to the taxation of Limited Liability
Partnerships (LLPs) will take effect from 6 April 2014. The House
Of Lords Economic Affairs Committee's Finance Bill Sub-Committee
(FBSC) recommended that the changes should be deferred until
2015 to give LLPs time to adapt. While it is right to review the
taxation of LLP members to ensure fairness in the tax system,
it is disappointing that the FBSC's recommendations have been
ignored. The proposed changes are not the same as that originally
consulted on last year and were further revised on 7th March.
As a matter of fairness and practicality, LLPs need time to consider
the legislation, in its final form, to determine whether the legislation
applies to them, seek advice where there is doubt and, where applicable,
to make appropriate changes.
The new Tax-Free Childcare scores well
under this heading. The use of online accounts, with assistance
provided for those who can't get online, and the fact that there
will be only one provider, National Savings and Investments, should
make it easier for families to access, and to benefit from, the
new relief. The decision to fix entitlement to Tax-Free Childcare
for three-monthly periods, rather than allow it to fluctuate with
changes in circumstances as in tax credits, is important. This
will avoid the difficulties caused to claimants by constantly
changing entitlement, with resulting overpayments and underpayments,
and the system will work better as a result.
We welcome the changes around the savings
rate also. It has been announced that from 6 April 2015 the starting
rate of tax for savings income (such as bank or building society
interest) will be reduced from 10% to 0%, and that the maximum
amount of taxable savings income that can be eligible for this
starting rate will be increased from £2,880 to £5,000.
We believe that this is great news for prudent savers on modest
incomes.
To address the criticism that the starting
rate on savings is administratively so complex that few people
claim it, savers who do not expect to be liable to tax on any
of their savings income in the tax year will be able to complete
a R85 form - the form used to register with a bank or building
society for interest to be paid gross (ie without 20% tax deducted
at source). Currently an R85 can only be completed by a saver
whose total taxable income for the tax year is below their tax-free
personal allowance. Without this change, the taxpayer would have
to reclaim the tax automatically deducted from their bank interest.
This is a welcome change which will enable more taxpayers to benefit
from the starting rate on savings.
However, we would caution that people
will only complete R85 if they know about it and understand that
they are eligible. As LITRG noted in a report published last year
, this is often not the case. The onus is now on banks and building
societies and HMRC to ensure that the R85 system is better publicised
- now more than ever if the changes announced in the Budget are
going to have the desired impact on savers' pockets.
We note that the process for an individual
to transfer part of their tax allowance to their spouse or civil
partner is most likely to be done by an on-line system. HMRC will
need to ensure that assistance is available to people who do not
have computer access (the digitally excluded) if the proposal
is to be practical and fair.
COHERENCE
The measures on pensions and savings
score well under this heading. Rather than tinker around the edges,
making small changes that are as likely to complicate matters
as they are to benefit taxpayers, the Government has announced
a cohesive package of measures which promise wholesale reform
of the rules and which give pensioners and savers the flexibility
to manage their money. With regard to the changes to savings,
we would urge the Government to keep in mind the critical importance
of simplicity and not over-complicate the new rules. On pensions,
we would emphasise the need for people to obtain good quality
advice on what, for many of them, will be the biggest financial
decision of their life.
Similar points apply with regard to
childcare where the Government intends to replace the current
scheme of relief (Employer-Supported Childcare) with the new Tax-Free
Childcare. This is a major new scheme of relief, open to significantly
more families than previously, and it is important that it is
simple to operate and flexible to the changing demands of childcare.
We welcome the Government's proposals for the new relief, which
we find to be considered and detailed. The Government is to be
commended on its willingness to engage with stakeholders on the
design of the relief.
CONCLUSION
As in previous years, we have mixed
views on how well this Budget and Finance Bill scores under the
Committee's headings. Most of the categories have measures that
score well and others that don't. As noted above, we have significant
concerns over the Government's proposals to collect disputed tax
in advance from users of DOTAS. We believe these measures to be
retrospective and that they will weaken DOTAS, damaging confidence
in the fairness of the UK tax regime as a result. We regret also
that the Government has chosen to make another temporary increase
in the amount of the AIA rather than setting this at a sensible
level for the conceivable future. With these concerns in mind,
we feel that a rating of 7/10 is appropriate.
THE CHARTERED INSTITUTE OF TAXATION
The Chartered Institute of Taxation
(CIOT) is the leading professional body in the United Kingdom
concerned solely with taxation. The CIOT is an educational charity,
promoting education and study of the administration and practice
of taxation. One of our key aims is to work for a better, more
efficient, tax system for all affected by it - taxpayers, their
advisers and the authorities. The CIOT's work covers all aspects
of taxation, including direct and indirect taxes and duties. Through
our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular
focus on improving the tax system, including tax credits and benefits,
for the unrepresented taxpayer.
The CIOT draws on our members' experience
in private practice, commerce and industry, government and academia
to improve tax administration and propose and explain how tax
policy objectives can most effectively be achieved. We also link
to, and draw on, similar leading professional tax bodies in other
countries. The CIOT's comments and recommendations on tax issues
are made in line with our charitable objectives: we are politically
neutral in our work.
The CIOT's 17,000 members have the practising
title of 'Chartered Tax Adviser' and the designatory letters 'CTA',
to represent the leading tax qualification.
THE ASSOCIATION OF TAXATION TECHNICIANS
The Association is a charity and the
leading professional body for those providing UK tax compliance
services. Our primary charitable objective is to promote education
and the study of tax administration and practice. One of our key
aims is to provide an appropriate qualification for individuals
who undertake tax compliance work. Drawing on our members' practical
experience and knowledge, we contribute to consultations on the
development of the UK tax system and seek to ensure that, for
the general public, it is workable and as fair as possible.
Our members are qualified by examination
and practical experience. They commit to the highest standards
of professional conduct and ensure that their tax knowledge is
constantly kept up to date. Members may be found in private practice,
commerce and industry, government and academia.
The Association has over 7,500 members
and Fellows together with over 5,000 students. Members and Fellows
use the practising title of 'Taxation Technician' or 'Taxation
Technician (Fellow)' and the designatory letters 'ATT' and 'ATT
(Fellow)' respectively.
THE LOW INCOMES TAX REFORM GROUP
The Low Incomes Tax Reform Group (LITRG)
is an initiative of the Chartered Institute of Taxation (CIOT)
to give a voice to the unrepresented. Since 1998 LITRG has been
working to improve the policy and processes of the tax, tax credits
and associated welfare systems for the benefit of those on low
incomes. Everything we do is aimed at improving the tax and benefits
experience of low-income workers, pensioners, migrants, students,
disabled people and carers.
LITRG works extensively with HM Revenue
& Customs and other government departments, commenting on
proposals and putting forward our own ideas for improving the
system. Too often the tax and related welfare laws and administrative
systems are not designed with the low-income user in mind and
this often makes life difficult for those we try to help.
The CIOT is a charity and the leading
professional body in the United Kingdom concerned solely with
taxation. The CIOT's primary purpose is to promote education and
study of the administration and practice of taxation. One of the
key aims is to achieve a better, more efficient, tax system for
all affected by it - taxpayers, advisers and the authorities.
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