ABSTRACT
This is the sixth report in a series which began
in 2003 when the House of Lords Select Committee on Economic Affairs
first appointed a Sub-Committee to inquire into selected aspects
of that year's Finance Bill.
This year our Report focuses on three topics: capital
gains tax (CGT); residence and domicile; and encouraging enterprise.
It also considers two issues which cut across these and other
topics: first the consultative process around the first two changes;
and second how they affect the international competitiveness of
the United Kingdom.
On the first cross-cutting issue, consultation, there
was a widely held view amongst our private sector witnesses that
the consultation on both CGT and residence and domicile had been
very poorly handled and fell well short of the good practice they
had seen on other topics. Witnesses from HM Treasury (HMT) and
HM Revenue and Customs (HMRC) said consultation was a key part
of getting tax policy and delivery right and did not agree that
a clear policy statement had been lacking or that HMT and HMRC
had not worked well together.
We see no reason why there could not have been earlier,
better and more open consultation; we are particularly disappointed
that the progress which we welcomed last year has not been maintained.
We recommend that HMT and HMRC should critically consider why
the private sector was so unhappy and thought that their messages
were not getting through to Ministers; officials should learn
the lessons. We also recommend that they should look at their
record as a whole, learning from well-handled examples and striving
to apply uniformly the points of best practice. There should be
a dialogue between officials and the private sector to develop
a code of practice on consultation involving tax policy changes.
The second cross-cutting issue was competitiveness.
It is difficult to reach a definitive conclusion on this in relation
to CGT. We recommend that the Government and HMT should publish
their economic analysis of the case for the new regime, and now
work towards reassuring investors and potential investors of the
advantages of investing in the UK. We are very concerned by the
weight of evidence from private sector witnesses that the proposals
on residence and domicile seem likely to have a negative impact
on the UK's competitiveness. We think it vital that everything
which can be done is done to retrieve the position.
Private sector witnesses cast doubt on how far changes
in CGT had met the Government's aim to put the regime on a more
sustainable footing and help investors plan for the long term.
In our view it will take time for confidence in the system to
be restored and for it to be seen as sustainable. We make a number
of recommendations aimed at restoring the certainty and predictability
which investors need. Although we recognise that the new entrepreneurs'
relief is targeted at entrepreneurs, we nevertheless consider
that there is a strong case for widening the relief to include
the particular areas brought to our attention.
Private sector witnesses were harshly critical of
the way of the way the policy initiative on residence and domicile
was handled. We cannot support the approach of the Finance Bill
not being complete at the time of publication, particularly since
the proposals came into effect at the beginning of the tax year.
Despite officials' attempts to reassure us, we recommend that
they should carry out a full review of the reasons why there were
so many difficulties. We survey the likely impact on individuals
at different levels of income and make recommendations. We are
particularly concerned as regards compliance difficulties for
HMRC and for people of more modest means and we recommend a substantial
increase in the de minimis level for automatic entitlement
to the remittance basis and personal allowances. We also raise
concerns over detailed issues and recommend that the Government
should carefully consider the case for legislation in next year's
Finance Bill providing a statutory definition of UK residence.
We survey the clauses in the Finance Bill and related
documents which make changes to the tax rules for encouraging
enterprise. We recommend that in this and any future instances
the case for change should be made and published. We also survey
the targeting and complexity of venture capital reliefs, taking
into account the study by the University of Sussex, and recommend
further study.
Our overall impression from the evidence we received
was that this year the formulation of tax policy has been marked
by uncertainty of direction. This has been exacerbated by very
poor examples of consultation and has led to a concern that the
tax system is no longer sustainable or predictable. The feeling
that the system is unstable and subject to severe shocks cannot
be good for the competitiveness of the UK economy.
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