Autumn Statement 2014 - Treasury Contents


4  Taxation

Anti-avoidance measures

Table 6: Costing of avoidance, tax planning and fairness policies and OBR assessment of uncertainty costings
Policy Measure
£ million
Uncertainty
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Total
Corporation tax: accounting treatment of credit losses 00 +5 +10+240 +40 +295Medium
Corporation tax: bank losses restriction 0+695 +765 +705+695 +625 +3,485Very high
Non-domiciles: increase remittance basis charge 00 +120 +90+90 +90 +390Medium
Self-incorporation: intangible assets +5 +30+80 +110 +135+155 +515 Medium
Investment managers' disguised fee income 0* +160 +80+65 +55 +360Medium-high
Stamp duty on shares: schemes of arrangement *+65 +65 +55+50 +50 +285Medium-high
Special purpose share schemes 00 +45 +40+40 +40 +165Medium-high
Income tax: miscellaneous losses 0+5 +5 +5+5 +5 +25Medium
Venture capital schemes: restrictions on use 0-15 +30 +10+10 +10 +45Medium-high
Salary sacrifice and expenses, including umbrella companies 00 +120 +90+75 +75 +360Very-high
OFT: review of expenses 0-10 -5 -10-10 -10 -45Medium
DOTAS regime changes 0* *+30 +50 +70+150 High
HMRC: operational measures 0-10 +260 +365+145 +55 +815Medium-high
Accelerated payments and group relief 0+425 -345 -40-30 0+10 Medium-high
Total +5+1185 +1305 +1540+1560 +1260 +6855 

Source: HM Treasury, Autumn Statement 2014, December 2013

104. In Autumn Statement 2014, the Government announced further measures to reduce tax avoidance, evasion and aggressive tax planning. Separately, in his statement to the House, the Chancellor committed himself to delivering "at least another £5 billion" in revenue over the next Parliament as a result of further anti-avoidance measures, yet to be announced.[188] The individual policies are summarised in Table 6 above.

105. The Committee's Report on Autumn Statement 2013 recommended that the OBR should do "all it can to report on whether yields [from anti-avoidance measures] were attained as originally costed".[189] In response to this recommendation the OBR provided an evaluation of all anti-avoidance measures in the latest Economic and Fiscal Outlook. The OBR found that the performance of the anti-avoidance measures—those implemented between 2011-12 and 2013-14—has been mixed, with "some yielding more and some yielding less than expected".[190] They noted that:

      […] there has not been systematic bias across the costings: while the shortfall from the UK-Swiss tax agreement means the total yield from the measures considered was below expectations, across other measures there were both upside and downside surprises.[191]

Although it found no evidence of systematic bias across the costings, the OBR's analysis showed that in cash terms, owing to the large shortfall on the UK-Swiss tax agreement, "significantly less has been raised in total than originally expected".[192] Our Report on Autumn Statement 2012 had expressed concerns over the sums expected to be raised from the UK-Swiss tax agreement:

      In the case of the tax repatriation from Switzerland, the proceeds may not meet expectations if assumptions about the potential tax liabilities and expected behaviour of those affected prove not to be valid.[193]

106. Table 6 shows that the OBR's uncertainty ratings of tax avoidance measures are predominantly medium-high or above, with the largest measure—the restriction on banks being able to offset losses for tax purposes—being classified as "very high". We asked Mr Chote whether weighted adjustments should be applied to costings with particularly high uncertainty ratings. He told us:

      In effect, that happens already. With anti-avoidance measures, typically you apply something called an attrition rate to the central forecast, so I think if you take the example of the diverted profits tax, that has an attrition rate assumed eventually of 45%, so you basically assume that by the end of the forecast horizon, people will have found other ways of doing the things that they were doing at the beginning and that therefore eats away at the revenue that we expect these measures to raise.

He added:

      You are right to point out that avoidance measures tend to be at the higher end of that uncertainty spectrum, not least because you typically find it quite hard to understand the likely behaviour of people who have already demonstrated their willingness and ability to change their behaviour quite dramatically in response to the precise incentives set out by the tax system as well. So I do not think it will be appropriate for us to look at the uncertainty rating and then take something off that, because at the end of the day, although it is uncertain, it is still our best central forecast.[194]

Mr Chote noted that instead of eliminating uncertainty, the inclusion of an attrition rate could itself be a source of uncertainty:

      The attrition rate is built into the central forecast, and if a measure has a particular attrition rate, that may be one of the things that you worry about in terms of the uncertainty.[195]

107. Chart 6 below compares, on an aggregate level, the uncertainty of all revenue raising measures against all spending measures announced in Autumn Statement 2014:

Chart 6: distribution of OBR uncertainty ratings for all revenue raising and spending policies in Autumn Statement 2014

Source: Office for Budget Responsibility, Economic and Fiscal Outlook, 3 December 2014, Table A.1-A.2, pp 212-215

Note: some policy announcements are not included in the above chart because they have not been assigned an uncertainty rating by the OBR. The value of excluded measures is -£715 million.

108. Estimating the yield from anti-avoidance measures is inherently difficult. In response to this Committee's recommendation from 2013, the OBR in the December 2014 Economic and Fiscal Outlook published its evaluation of all past avoidance measures since 2010. It found that there was no systematic bias across the costings—some produced higher returns, some lower. However, in cash terms, owing to the shortfall in the UK-Swiss tax agreement, significantly less revenue was raised in total than originally expected. The underperformance of a single measure with a large expected yield can more than offset better performance of a number of smaller measures.

109. The restriction on loss relief for banks is the largest revenue generating measure in the Autumn Statement, with an expected yield of £4 billion over the next Parliament. It has been assigned an uncertainty rating of 'very high'. The OBR should continue to monitor the performance of all avoidance measures against their original costings.

110. The assignment by the OBR of uncertainty ratings to each individual policy provides useful information to outside observers. The OBR's creation of uncertainty ratings could also encourage the Treasury to provide more information on their own judgement of the uncertainty of new policy measures. The OBR should compare its uncertainty ratings on policy costings of individual measures against the outturns, and report its findings in its Forecast Evaluation Report.

Restriction on bank losses

111. In his speech to the House introducing the Autumn Statement, the Chancellor said that the current rules allowing banks to offset all their losses against taxable profits meant that "some banks would not be paying tax for 15 or 20 years".[196] He added that "the banks got public support in the crisis and they should now support the public in the recovery".[197] Under current law, if a company makes a trading loss, which is not relieved against other income or surrendered to another group member, this "unrelieved loss is carried forward to subsequent accounting periods" and can be offset against taxable profits thereby reducing the amount of Corporation Tax payable.[198] These unrelieved losses can be carried forward indefinitely, as long as the company continues to carry on trading.[199] Autumn Statement 2014 states that:

      The government will restrict the amount of a bank's annual profit that can be offset by carried-forward losses to 50% from 1 April 2015. The restriction will apply to losses accruing up to 1 April 2015 and will include an exemption for losses incurred in the first 5 years of a bank's authorisation.[200]

112. This policy is forecast to raise £3.5 billion over the next Parliament—the single largest revenue generating measure in the Autumn Statement. The OBR has assigned this policy a 'very high' uncertainty rating. It explained that the yield from this measure was based on "uncertain assumptions around the profitability of banks over the scorecard period".[201] It added:

      If the banking sector makes higher or lower than expected gross profits over the next few years then the yield from this measure could be considerably higher or lower.[202]

113. We asked Paul Johnson, Director of the Institute for Fiscal Studies, whether raising £3.5 billion from this policy was realistic. He said:

      The first thing to say is, whether it raises £3.5 billion in the next five years or not, that is not, on the basis of the way the legislation is currently drafted, going to be £3.5 billion in total additional. That is just money brought forward because of the way the tax is designed. […] It looks a bit like a windfall tax on a particularly greedy bank.[203]

114. In its written evidence to the Committee, the ICAEW was concerned that the measure would create "uncertainty and lack stability". It added that "businesses relying on established law when planning cash flows may justifiably ask: who will be next in line for an unexpected levy?"[204] The Charted Institute of Taxation largely agreed, saying:

      The restrictions on the brought forward losses of banks amounts to a sort of 'windfall tax' on the banking industry. As has been observed many times before windfall taxes lead to substantial instability across the tax system, and should be avoided.[205]

115. Our report on the Principles of Tax Policy outlined the importance creating certainty and stability in the tax system:

      Tax policy is only one of the factors on which businesses and individuals make their decisions, but lack of stability and clarity about the direction of travel in tax policy will, over time, undermine the competitiveness of a tax system and make it impossible for businesses to plan. If tax policy is to support growth, then the direction of travel of tax policy should be clear.[206]

116. In our Budget 2012 Report, we recommended that:

      […] the Government restrict its use of retrospective legislation to wholly exceptional circumstances, which should be narrow and clearly-defined. The Treasury should set these out as soon as possible for consultation, along with an explanation of how gradual further extension of retrospection can be prevented. Any future retrospective tax measure must be justified against the agreed criteria: such justification must include clear explanatory statements to Parliament by the responsible Minister and should invite views from relevant professional bodies.[207]

Autumn Statement 2014 states that the restriction over carried-forward losses "will apply to losses accruing up to 1 April 2015".[208] In the light of this, we asked Mr Johnson whether this should be considered a retrospective tax. He told us that it "is effectively retrospectively changing the rules around the treatment of losses".[209]

117. Loss relief is an important element of tax planning for all firms across all parts of the economy. The Committee has previously highlighted the importance of certainty in the tax system in its 2011 Report, Principles of Tax Policy. Apparently lucrative tax raising measures against unpopular sectors of the economy, while attractive to governments, carry the risk of undermining the principle of certainty in the tax system. Uncertainty may well reduce the yield.

Diverted Profits Tax

118. The Government announced in the Autumn Statement a new Diverted Profits Tax (DPT) "to counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK".[210] The DPT will be applied using a rate of 25% from 1 April 2015 and is expected to raise over £1 billion over the next Parliament.

119. This measure will operate through two basic rules. The first rule counteracts arrangements by which foreign companies "exploit the permanent establishment rules"[211] with the specific intension of avoiding or reducing the amount of UK tax payable. The second rule prevents UK companies, or foreign companies with a UK permanent establishment, from creating tax advantages by using transactions or entities that "lack economic substance".[212]

120. In their written evidence to the Committee, each of the three professional tax bodies—the Association of Certified Chartered Accountants, the Institute of Chartered Accountants of England and Wales, and the Chartered Institute of Taxation—questioned the Government's decision to introduce the unilateral DPT ahead of the completion of the Organisation for Economic Cooperation and Development's (OECD's) work on base erosion and profit shifting (BEPS).[213]

121. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules artificially to shift profits to low tax jurisdictions, where there is little or no economic activity, resulting in little or no overall corporate tax being paid. Following recognition that the international tax system needed to be reformed to prevent BEPS, the G20 asked the OECD to recommend possible solutions.[214] In September 2014, the OECD published a 15-point Action Plan to address BEPS which will be completed in three phases—September 2014, September 2015 and December 2015. The aim of the OECD BEPS project is to:

      […] create a single set of consensus-based international tax rules to address BEPS, and hence to protect tax bases while offering increased certainty and predictability to taxpayers.[215]

122. The ICAEW welcomed the Chancellor's leadership in tackling international tax avoidance but questioned how this unilateral measure will fit in with the OECD BEPS project. It said:

      The target of this new legislation appears to overlap with the OECD BEPS Action Plan. The overall intention of BEPS is to align taxation with the location where economic activities take place and where value is created. It is also a key objective of BEPS that the 44 countries involved should act in concert and introduce the required measures in a coordinated way.[216]

CIOT largely agreed:

      We are concerned that the UK may well be developing a new tax in advance of agreement on new principles of transfer pricing and taxable presence […]. We would not welcome a tax which might be in conflict with internationally-agreed principles and which gives businesses no opportunity to modify their approaches in line with those new principles.[217]

123. In an explanatory statement, the OECD highlighted the importance of multilateral action in tackling base erosion and profit shifting:

      BEPS by its nature requires coordinated responses, particularly in the area of domestic law measures. This is why countries are investing time and resources on developing shared solutions to common problems. At the same time, countries retain their sovereignty over tax matters and measures may be implemented in different manners, as long as they do not conflict with their international legal commitments.[218]

124. The Committee asked the Chancellor what discussions were held with the OECD prior to the announcement of the DPT. He told us:

      We are heavily involved in the OECD work. […] I think these changes are absolutely with the grain of where the international community is moving. I think we have been careful not to get too far ahead of that international work but nevertheless act to protect revenues.[219]

125. Following the publication of the draft legislation of the Finance Bill 2015—released on 10 December—both the ICAEW and CIOT provided the Committee with additional written evidence on the DPT. The ICAEW described the draft legislation as "highly complicated" and that it is "likely to increase uncertainty".[220] It highlighted that the draft legislation consisted of "30 pages of draft clauses, nearly 50 pages of Explanatory Notes and a Guidance document of a further 50 pages".[221] CIOT agreed with this, saying that the legislation is drafted in a "very unclear manner".[222] It goes on to say that the DPT:

      […] potentially brings into scope a large number of transactions and it is unclear whether that is the intention. This structuring will mean that a large number of companies will need to be aware of the legislation and consider whether they fall inside it. Computation of the amount subject to the tax does not look straightforward to calculate, given that it is not based on any agreed international standards.[223]

126. The Committee asked the Chancellor how long the DPT had been in preparation and whether it would work as intended. He told us:

      I am confident it will work. We have spent a considerable period of time thinking about and planning this. By their nature, we are dealing with highly contrived tax arrangements that sometimes cover three or four different sovereign jurisdictions. By their nature, these are very complicated tax arrangements. […] I am confident that we will be able to tax genuine economic activity that happens in the UK, do it in a way that the UK remains one of the most attractive places in the world to bring your investment, to set up your tech business or other business and prosper.[224]

127. The ICAEW told the Committee that it is "still difficult to see how this new tax will fit in with existing international arrangements, such as the more than 120 treaties UK has with other countries".[225] The Committee asked the Chancellor whether the new DPT would have any impact on the UK's double taxation treaties. He told us he was "confident that that is not an issue".[226]

128. Tackling tax avoidance, specifically the problems associated with base erosion and profit shifting, is an internationally recognised problem which requires an international response. This is currently taking place in the form of the OECD's base erosion and profit shifting project. The Committee notes the Government's decision to announce a unilateral Diverted Profits Tax ahead of the conclusion of the OECD's work. This should not be permitted to destabilise the international effort.

129. The draft legislation is long and highly complex. This is undesirable in itself, and is likely to be a source of uncertainty.

Stamp duty

130. Autumn Statement 2014 announced major changes to stamp duty land tax on residential properties, which took effect from 4 December 2014. Describing the changes in his Statement to the House, the Chancellor said that the old stamp duty was "a badly designed system that has distorted our housing market for decades".[227]

131. The reforms abolish the 'slab' structure of stamp duty, whereby successively higher rates were applied to the entire property price, and replaced it with a set of marginal rates applying only to the part of the price that falls within each band. The effect was to eliminate sudden increases in stamp duty that occurred at each tax threshold. (Chart 7)

Chart 7: Comparison of 'old' and 'new' stamp duty land tax payments for residential properties up to £3m

Source: HMRC Guidance, Rates and allowances: stamp duty land tax, updated 3 December 2014

132. The reforms were also structured in a way that cut stamp duty payments for all properties below £937,000 (around 98 per cent of housing transactions), at a cost of around £800 million per year. The OBR forecast that, as a result, the level of property transactions will rise by 1.1 per cent and residential investment by 0.2 per cent.[228] Asked about the impact of the cut to stamp duty on house prices, Mr Chote said:

    we assume, or rather the costing assumes that for a one percentage point change in the average rate of Stamp Duty for a house or particular property there will be a 1.4% change in the house price, so it is geared by more than one.[229]

In effect, the savings to home buyers from lower stamp duty are expected by the OBR to be more than offset by a rise in prices. In a piece of written analysis, Mr Clarke, of Scotiabank, said that the stamp duty reforms would stimulate house prices, describing them as a "shot of adrenaline into the housing market [that will] give the housing market a softer landing, and more likely fuel a mini growth spurt through next year".[230]

133. The Institute for Fiscal Studies described the reformed stamp duty as a "clear improvement", but questioned why changes were not also made to non-residential stamp duty, which retains the old 'slab' structure. Arguing against any sort of transaction tax on properties, they said that residential stamp duty was "a very bad tax transformed into a bad tax".[231] The Institute for Chartered Accountants in England and Wales also welcomed the changes to residential stamp duty, but said that the retention of the slab system for commercial property would "create confusion, uncertainty and potential for arbitrage, particularly given the now higher rates for residential property as compared to commercial property."[232]

134. In its Report Principles of tax policy,[233] the Treasury Committee recommended as its first principle that tax policy should be fair. By imposing thousands of pounds of additional tax liability owing to a penny's difference in a property's price, the old 'slab' structure of residential stamp duty clearly breached this principle. The Committee therefore agrees with the Chancellor and the Institute for Fiscal Studies that the design of residential stamp duty was significantly flawed, and welcomes its reform in the Autumn Statement. However, the unfair and distortionary slab structure continues to apply to stamp duty for non-residential property transactions. The Government should explain the reasons for reforming residential stamp duty in this way but not making a similar reform of non-residential stamp duty.

135. In Scotland, stamp duty land tax is being devolved from April 2015. The Scottish Parliament passed legislation in July 2013 for a new 'land and buildings transaction tax' (LBTT), which, like the reforms in the UK 2014 Autumn Statement, will replace the 'slab' structure of the old stamp duty with a marginal rate design.[234] The Scottish Government subsequently proposed rates and bands for the new tax in its 2015-16 Draft Budget in October 2014.[235] Since the announcement of the stamp duty changes in the Autumn Statement, the Scottish Government has proposed a new set of rates and bands for LBTT: the rates are lower than those originally proposed for properties between £250,001 and £325,000, and higher for those above £750,000.[236] The Committee notes this example of how fiscal devolution can lead one government to alter tax policy in response to the decisions of the other. With further fiscal devolution to Scotland, this is likely to be more common.


188   HC Deb, 3 December 2014, Col 309 Back

189   Treasury Committee, Autumn Statement 2013, Ninth Report of Session 2013-14, HC 826, p43, para 75 Back

190   Office for Budget Responsibility, Economic and Fiscal Outlook, Cm 8966, December 2014, p105, box 4.2  Back

191   Office for Budget Responsibility, Economic and Fiscal Outlook, Cm 8966, December 2014, p105, box 4.2 Back

192   Office for Budget Responsibility, Economic and Fiscal Outlook, Cm 8966, December 2014, p105, box 4.2  Back

193   Treasury Committee, Autumn Statement 2012, Seventh Report of Session 2012-13, HC 818, para 77 Back

194   Q193 Back

195   Q201 Back

196   HC Deb, 3 December 2014, Col 311 Back

197   HC Deb, 3 December 2014, Col 311 Back

198   Corporation Tax Act 2010, section 45 Back

199   Corporation Tax Act 2010, section 45 Back

200   HM Treasury, Autumn Statement 2014, December 2014, para 2.173 Back

201   Office for Budget Responsibility, Economic and Fiscal Outlook 2014, December 2014, p218, para A.6 Back

202   Office for Budget Responsibility, Economic and Fiscal Outlook 2014, December 2014, p218, para A.6 Back

203   Q103 Back

204   ICAEW, written evidence Back

205   CIOT, written evidence Back

206   Treasury Committee, Eighth Report of Session 2010-12, Principles of Tax Policy, HC 753, p21, para 60 Back

207   Treasury Committee, Thirtieth Report of Session 2010-12, Budget 2012, HC 1910, p39, para 89 Back

208   HM Treasury, Autumn Statement 2014, December 2014, p84, para 2.173 Back

209   Q104 Back

210   HM Treasury, Autumn Statement 2014, December 2014, p80, para 2.142 Back

211   A permanent establishment is created when a company carries out activities which create a taxable presence.  Back

212   HM Treasury, Finance Bill 2015: draft legislation overview documents, December 2014, p102 Back

213   ACCA, written evidence; ICAEW, written evidence; Chartered Institute of Taxation, written evidence Back

214   Organisation for Economic Co-operation and Development, Part 1 of a Report to G20 Development Working Group on the Impact of BEPS in Low Income Countries, July 2014 Back

215   Organisation for Economic Co-operation and Development, Base Erosion and Profit Shifting Project: Explanatory Statement, p3 Back

216   ICAEW, written evidence Back

217   CIOT, written evidence Back

218   Organisation for Economic Co-operation and Development, Base Erosion and Profit Shifting Project: Explanatory Statement, p3 Back

219   Q327 Back

220   ICAEW, written evidence Back

221   ICAEW, written evidence  Back

222   CIOT, written evidence Back

223   CIOT, written evidence Back

224   Q325 Back

225   ICAEW, written evidence Back

226   Q328 Back

227   HC Deb, 3 December 2014, Col 316  Back

228   Office for Budget Responsibility, Economic and Fiscal Outlook, December 2014, p221, para A.17 Back

229   Q224 Back

230   Scotiabank, UK Autumn Statement, 5 December 2014, p11 Back

231   Institute for Fiscal Studies, Personal taxes and benefits, Slide 7, by Stuart Adam, Autumn Statement 2014 briefing, 4 December 2014 Back

232   Institute for Chartered Accountants in England and Wales, Autumn Statement 2014 traffic light assessment, 8 December 2014, p2 Back

233   Treasury Committee, Eighth Report of Session 2010-12, Principles of Tax Policy, HC 753, para 60, p30 Back

234   Land and Buildings Transaction Tax (Scotland) Act 2013 Back

235   Scottish Budget - Draft Budget 2015-16, Scottish Government, October 2014, p14, table 2.01 Back

236   SP OR 21 January 2015 c21 Back


 
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