Budget 2014 - Treasury Contents

Appendix 1: Chartered Institute of Taxation

Principles of Tax Policy and Budget 2014


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.


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.


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.


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.


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.


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.


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.


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 (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 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 (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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