Budget 2014 - Treasury Contents

Appendix 3: Association of Certified Chartered Accountants

About ACCA

ACCA is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people around the world who seek a rewarding career in accountancy, finance and management.

ACCA has 162,000 members and 428,000 students in 173 countries, with 64,000 members and 79,000 students in the UK, and works to help them to develop successful careers in accounting and business, with the skills required by employers. We work through a network of over 89 offices and centres and more than 8,500 Approved Employers worldwide, who provide high standards of employee learning and development. Through our public interest remit, we promote appropriate regulation of accounting and conduct relevant research to ensure accountancy continues to grow in reputation and influence.

The expertise of our senior members and in-house technical experts allows ACCA to provide informed opinion on a range of financial, regulatory, public sector and business areas, including: taxation (business and personal); small business; pensions; education; and corporate governance and corporate social responsibility.

Comments on the Budget

1. InMarch 2011, the Treasury Committee set out six principles by which it recommended tax policy should be measured. This memorandum seeks to comment at a high level on the extent to which the measures announced in the Budget comply with those principles.

2. The Principles are in summary thattax policy should:

·  be fair;

·  support growth and encourage competition;

·  provide certainty;

·  provide stability;

·  Tax policy should be practicable; and

·  Finally, the tax system as a whole must be coherent.

3. As the global body for professional accountants, ACCA welcomes the elements of this budget which embrace global principles for better taxation which support enterprise. The budget includes a number of measures specifically targeted to enhance investment, encourage compliance and foster a responsible attitude to spending. ACCA in particular welcomes the paper "Tackling aggressive tax planning in the global economy: UK priorities for the G20-OECD project for countering base erosion and profit shifting".

4. As has been widely acknowledged, the issues facing domestic tax authorities in addressing the perceived structural weaknesses in the interaction between sovereign tax jurisdictions and global cross border business forms require coordinated, coherent and consistent action from as many actors as possible. ACCA fully supports, and is committed to facilitating and contributing to, this process.

5. ACCA welcomes also the OTS paper published alongside the budget, "Competitiveness review: initial thoughts and call for evidence". The paper considers the relative performance of the UK in global terms, but also makes the very valid point that comparative performance is not the only driver. Simplification and improvement of the UK system is a valid and indeed a compelling driver in its own right.

6. This Budget has seen less in the way of undue complexity than has perhaps been the case in previous budgets, and to the extent that there provisions likely to cause significant practical difficulties for taxpayers, advisers or HMRC they are confined to the anti-avoidance arena.

7. However, the pace and nature of developments in the anti-avoidance field have given some cause for concern. The Government has continued to share a significant proportion of the draft clauses for the Finance Bill in December, and this is welcome. While the scope for detailed scrutiny is to some extent restricted by the Christmas break, there is an inevitable compromise between the interests of officials and Ministers preparing the policies and legislation and the interests of those stakeholders engaged in the consultation and review process.

8. It is notable that the clauses exposed for consultation in December included elements of anti-avoidance legislation, such as the onshore intermediaries rules and the revisions to partnership taxation. It is of course not always possible to consult widely on anti-avoidance legislation and any opportunity for compliant businesses which may be caught up in the impact of such provisions is welcome.

9. Even so, there have been a number of calls in respect of both these provisions and other aspects of the anti-avoidance legislation to allow more time for consultation and consideration of the legislation, and for compliant businesses and advisers to adapt to the proposals. The changes to the taxation of partnerships will impose on many genuine existing businesses a need to fundamentally revise their terms and manner of operation. Although there had been some prior consultation over the summer of 2013, the draft clauses which were published in December were a departure from the existing direction of discussions and have caused significant widespread concern among businesses and their advisers. However, while some minor changes were announced at the end of the consultation period on the draft clauses, the implementation of the measures is to press ahead.

10. In the complex area of employment status for tax purposes, the government consulted widely with interested bodies and has responded with a number of changes to the proposals for onshore intermediaries, and some revisions to the timing of their implementation. Nevertheless, there are still some fundamental areas of concern, particularly around the practicalities of the interaction with compliant PSCs. The process for managing information flow along the contractual chain is also an area of concern, with worries that the industry will struggle to set up ICO compliant processes which will satisfy both the commercial concerns of taxpayers and the information requirements of HMRC.

11. While the timing is an issue, another theme runs through the intermediaries and partnership measures. Both involve the government's reaction to taxpayer responses to tax measures which are themselves a function of the landscape of business form and corporate laws in the UK. Tax, as a matter of simple practicality, is aligned to legal form. Resolution of the underlying tensions between economic substance and legal form where the two might diverge is key to the efficiency of the system.

12. At the same time, the tax system is often used as a mechanism to encourage or reward certain legal forms. For example, while employees make a greater proportional contribution to the exchequer from their earnings than the self employed, they receive a greater return in social security protections. Conversely, the rate of tax on invested capital is (currently) lower, and measures such as the SEIS encourage further investment in equity.

13. The final proposals to revise the treatment of partnerships and provision of services and labour represent adjustments to aspects of the system which are fundamental to decisions about business form and commercial operation. They deserve more than 4, 8 or 12 weeks of consultation. The changes in each case are recognised by HMRC to potentially have significant impacts upon compliant taxpayers. The Finance Bill Sub-Committee of the House of Lords Economic Affairs Select Committee urged a delay in implementation of the partnership provisions to give time for business to react to the changed economic landscape, and ACCA supports that call for a measured approach to such fundamental reform.

14. The field of marketed tax avoidance schemes has also been the focus of considerable government attention, with consultations starting over the summer of 2013. Again however, the scope of proposals has grown and changed over the course of the consultation process. There is universal agreement among the professional bodies that artificial and contrived schemes whose sole purpose is generation of a tax advantage through abuse of the rules is a legitimate target for focused and proportionate measures. However, the breadth and scope of the powers outlined in respect of high risk tax agents prompted expressions of concern from many that there were significant potential risks to compliant tax payers.

15. In December 2013, indications of a further extension of HMRC powers to tackle users of such schemes through the 'follower notice' mechanism were given, and again prompted expressions of concern from advisers. In late January 2014, at the height of the personal tax filing season for individuals and the yearend reporting process for big business, the detail of the follower notice regime and the related accelerated payment provisions were published. The consultation period was just four weeks. Despite the brevity of the consultation period, and the business pressures upon them, the proposals provoked an unprecedented response from ACCA members, unanimously opposing the radical extension of HMRC powers.

16. The budget itself saw the announcement of an HMRC power to take money directly from taxpayers' bank accounts. While we understand that there will be a number of safeguards around the measure to prevent abuse, or the infliction of consequential hardship on those relying upon the relevant accounts either directly or indirectly, it is vital that HMRC manages taxpayer expectations and operates any such power in a transparent and proportional manner. While it might be characterised as simply the equivalent of distraint powers, and exercised in similar circumstances, the fact remains that the potential side effects could be catastrophic for wrongly targeted taxpayers. As is noted elsewhere, HMRC is dependent upon the goodwill of taxpayers, and misuse of such powers would rapidly erode trust and goodwill.

17. Again, the speed of change raises concerns. In particular, the indications that much of the material has been developing internally for months if not years without any external consultation are a concern. The particular confluence of circumstances which contribute to the apparently compelling arguments for introducing these new powers are the result of temporary circumstances in a fast moving area. Introduction of permanent powers which would previously have been rejected by many commentators out of hand should be approached with caution and safeguards, and ideally in time limited form.

18. The Budget includes a number of measures designed to enhance investment, research and development. However it is notable that the measures in this budget, and previous budgets, can be characterised as displaying a piecemeal approach to incentives. Welcome as the incentives are, a more structured long term approach to them would increase the confidence of business in the long term stability of the tax system.

19. The continued extension to the scope of the Annual Investment Allowance is an example of a measure designed to encourage investment and growth but whose effect may diluted by complexity of application. As has been noted previously, implementation of the enhanced limit from 1 January requires businesses who do not have a 31 December year end to apportion their income. This is the fifth different rate of allowance in 7 years, hardly the stability called for by the Committee. The stimulus is welcome; the additional complexity, the burden of which will be disproportionately felt by SME businesses, is not.

20. There is of course a further aspect to the availability of the enhanced annual investment allowance, and that is that many businesses may have suffered uninsured losses as a result of flooding and other extreme weather conditions in recent months. While no more than a silver lining at best, the ability to replace plant up to £500,000 with immediate tax relief and no further administrative burdens will be welcome.

21. The last of the Committee's principles is that the tax system as a whole should be coherent. The introduction of the Corporate Tax Roadmap has been widely recognised as a positive step towards coherence of the system for taxation of incorporated businesses in the UK. However, the majority of active businesses by number in the UK are not incorporated, and in many cases the taxation of their profits is effectively assessed under personal tax rules.

22. Taxation for most individuals is a 'fact of life', and the interaction of the tax system with household budgeting is limited to the impact of changes in tax rates. The development of long term policy is of limited relevance, as in most cases individuals are unable to arrange their affairs so as to take any particular advantage of knowing what the structure of liabilities may be in two or three years' time.

23. For businesses on the other hand, prediction of after tax returns is a significant ingredient in long term commercial success, while modelling of cashflows is fundamental to short term survival, especially for smaller businesses which may not have reserves. What is needed is not so much a personal tax roadmap as a business tax roadmap - and ideally one which incorporates NICs as well. Changes in the approach to employers' NICs impact directly upon business profits, and while the setting of rates is beyond the scope of the Committee's work, and will always inevitably remain a short term political decision, any guidance for business would improve the ability to plan ahead.

24. In any event, the impact on a single business of rate changes in personal tax is likely to be lower than that of corporate tax. A 1% rise in income tax rates would deliver a similar amount to a 4% rise in corporation tax rates based purely on rates, but the impact of behavioural change would likely increase the disparity, as companies are more able and willing to plan to mitigate their exposure to tax rises.

25. The vast majority of tax receipts come in with no active intervention or management from HMRC, whether through PAYE or self-assessment for income or corporate tax. Even so, current projections indicate that by the end of this parliament the yield from HMRC interventions will have doubled. There is an increasing focus on potentially high yield taxpayers, and it is notable that in both the personal and corporate tax arena a significant proportion of all receipts comes from a comparatively small number of high value taxpayers.

26. It is vital that the voluntary compliance of the majority of taxpayers is not taken for granted. There is anecdotal evidence from practitioners that some small businesses are developing an attitude that if 'big business' is going to seek to avoid tax then they too will look for any opportunity to reduce the amounts paid to HMRC. Unfortunately it is of course the case that for many small businesses the lack of complexity in their tax affairs means that the only scope to influence the ultimate tax liability is to somehow suppress the reported profit. The erosion of taxpayer goodwill is a significant possible threat to wider revenues and must be resisted.

27. Overall, the 2014 Budget has delivered a coherent package of measures which for the most part continue the direction of travel towards the principles of good taxation. In order to maintain that movement, ACCA would welcome the extension of the corporate tax road map to business tax more generally, and the adoption of a more measured approach to fundamental changes to the environment for businesses.

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Prepared 12 May 2014