Examination of Witness (Questions 1-19)
Mr Malcolm Gammie QC
23 APRIL 2008
Q1 Chairman: Good afternoon and welcome again,
as an old hand, to the Committee. This is the first public session
of the Sub-Committee on the Finance Bill for 2008 and, as you
know, we will be focusing on three main aspects of the Bill, that
is Capital Gains Tax for Residence and Domicile and Encouraging
Enterprise. In previous years you have been very good to us and
given us a good background to the topics we have been choosing
to look at, and I hope very much that we will be able to do that
again this afternoon. So after that brief introduction, let me
hand over to you.
Mr Gammie: Thank you, my Lord Chairman, and I am
very happy to be here again, although I feel this year I may have
rather less to say than I have in previous years because although
two at least of the topics which you have chosen to look at have
attracted considerable publicity and attention, of course that
has been on aspects of those proposals which are not principally
your concern, but I will obviously aim to cover the administrative
and simplicity aspects of those particular proposals. Of the three
which you have chosen perhaps I can start with Capital Gains Tax.
Clause 6, Schedule 2 of the Finance Bill introduced the very considerable
changes which are being made to Capital Gains Tax which were announced
in the Pre-Budget Report last year. The principal elements of
those proposals include the introduction of a single rate of 18%
for Capital Gains Tax, the abolition of taper relief for Capital
Gains Tax, which was introduced by the current Government in 1998,
and in 1998 when they introduced taper relief they froze the indexation
allowance which had been accrued on assets held at that time and
the frozen indexation relief is also being abolished. Under previous
reforms which were made by the Conservative Government at the
time most assets were re-based at 31 March 1982 (in other words
in calculating the gain one took the market value of the asset
at 1982) but there were still options to elect to take an earlier
value in calculating the gain and those rules are also being abolished.
With the clearing out of taper relief, the residual elements of
indexation relief and the few assets which could take an earlier
value than 31 March 1982, the rules for computation of Capital
Gains Tax for individuals and trustees have, of course, been very
considerably simplified and that also means that the special rules
which apply to what are called fungible assets, principally shares
and securities where it is not possible to identify a particular
asset from the disposal of a pool of assets, those rules for dealing
with fungible assets can also be very considerably simplified.
In effect, the reforms which are in this year's Finance Bill return
us to the situation of Capital Gains Tax which existed between
its introduction in 1965 and 1982 when the first elements of indexation
were introduced, although obviously the rate at 18% is considerably
lower than the rate which applied between 1965 and 1982 of 30%.
Of course, previously from 1989 the rate of Capital Gains Tax
was theoretically the income tax rate, although both indexation
and taper relief had the effect of reducing the rate of charge
on capital gains, and the link between the income tax rate from
the Capital Gains Tax rate is another element of the system which
can be abolished. So whilst the schedule dealing with the changes
is a very large schedule and the changes which are being made
to the Capital Gains Tax Act are very considerable, they do in
total, I think, add up to a very considerable simplification of
Capital Gains Tax computations. The one complication (if one wants
to put it that way) which has been introduced is, of course, the
introduction of entrepreneurs' relief in clause 7 of schedule
3 of the Bill. This, of course, allows claims to be made on disposals
of businesses, including shareholdings in trading companies and
groups and certain other business assets, to reduce the rate of
tax on gains on those assets from 18% to 10% subject to a cumulative
lifetime limit of £1 million. The provisions which are introduced
for entrepreneurs' relief look very similar to what was previously
known as retirement relief and which goes back again to the beginnings
of Capital Gains Tax but which was phased out by the current Government
when it introduced taper relief. The relief for business assets
taper relief and the entrepreneurs' relief do not entirely correspond,
but the provisions which are in schedule 3 have many common and
well-recognised features for these types of relief and while obviously
being able to meet all the various conditions and comply with
the requirements to get that particular relief involves some complication,
I would have said it is no greater complication than has previously
existed with retirement relief, or indeed with many of the reliefs
which have been introduced over the years for entrepreneurs or
to encourage entrepreneurial investment, some of which we will
come to when I talk about the third item which you have chosen
to look at. I think that is all I wish to say about the Capital
Gains Tax changes. If I could now turn to the second topic, the
changes to residence and the remittance basis. In relation to
the changes on residence, of course whether or not an individual
is resident in the United Kingdom is fundamental to their liability
to both income tax and Capital Gains Tax and the rules which have
been used over the years for determining whether or not an individual,
in particular individuals who move between this country and other
countries, are resident in the United Kingdom is based very largely
on case law with a minimal amount of statutory provision. In practice,
the Inland Revenue has developed over many years guidelines which
it published in a booklet known as IR20, which for practical purposes
has served for most people in this position in determining whether
they are or have become either resident in the United Kingdom
or non-resident. Those rules of determining residence are principally,
of course, determined by counting the number of days which an
individual is present in the United Kingdom during the tax year
and the change which is being made this year is principally as
to how you count those days. Up until now days of arrival and
departure have not been included in the count of days present
in the United Kingdom. Now under the new statutory rule being
introduced a day will count if the individual is present in the
United Kingdom at the end of the day, in other words midnight,
counting midnight as the end of the day rather than the start
of the new day, subject to some relief for individuals who are
transiting through the UK and who are not performing any other
function in the UK beyond that involved in their travel arrangements.
I do not think this will make any significant difference in terms
of the obligations it imposes upon individuals in this position
to count the days. It will obviously make a difference in the
number of days they may be present or counted as present in the
United Kingdom and they will have to change, perhaps, the basis
of their record keeping. To disregard days of arrival and departure
is relatively easy. There will be some slight change in perhaps
counting whether you are here at the end of a day. It may make
some difference as to whether you choose a flight arriving in
the United Kingdom early in the morning or leaving the United
Kingdom late at night, but I am sure that will not affect the
airlines significantly. The changes in the remittance basis are
obviously very much more fundamental. Of course, historically
foreign income for all persons, whether resident, domicile or
whatever in the United Kingdom, was on a remittance basis, if
we think back to the nineteenth century, and over the years the
remittance basis has by governments of all complexions been restricted
in one way or another until we reached the situation where it
is limited to individuals who are not domiciled in the United
Kingdom or not ordinarily resident in the United Kingdom. The
changes which are being made this year are perhaps the most fundamental
changes which have been made for some while to the remittance
basis and they restrict the ability to claim the remittance basis,
in particular for long-term residents who are resident in the
United Kingdom for seven out of ten years who to claim the remittance
basis will have to pay effectively a £30,000 toll charge
for the ability to keep their foreign income and gains outside
the scope of the United Kingdom tax. Of course, that is a toll
charge which will only apply to those extremely wealthy individuals
who have significant foreign income and gains which they wish
to shelter from the United Kingdom tax even though they are resident
in the United Kingdom. More significantly, individuals who want
to claim the benefit of the remittance basis will no longer be
able to claim their personal allowances or their annual Capital
Gains Tax exemption in a year in which they claim the remittance
basis. This may obviously affect a much wider group of individuals
who are resident in the United Kingdom but not domiciled here
and who have much smaller income and gains outside the United
Kingdom which otherwise they would shelter on a remittance basis.
A de minimis exemption is introduced of £2,000 so that individuals
who have foreign income and gains unremitted to the United Kingdom
of less than that amount will be entitled to the remittance basis
without the necessity to claim it. The other main changes which
are being made are of a far more technical nature and really account
for the significant amount of legislation which can be found in
the Finance Bill. There has been a variety of ways in which individuals
have been able to effectively enjoy the benefit of foreign income
and gains in the United Kingdom without technically remitting
them to the United Kingdom and therefore having to pay tax on
in. There are various changes to the rules to ensure that if somebody
does enjoy income and gains in the United Kingdom they will pay
tax on the basis that they have been remitted. There are many
other far more technical modifications being made to the taxation
of foreign income which are consequent upon these changes in the
remittance basis. Broadly speaking there is, of course, a large
number of rules which tax the foreign income of UK residents whether
they enjoy it directly or whether they enjoy it through offshore
companies or trusts and these are extremely technical rules. Most
of those provisions dealing with the taxation of foreign income
have embedded within them special rules for individuals who are
resident but not domiciled in the United Kingdom to give effect
to the benefit of the remittance basis within the context of those
particular rules. Of course, all of those technical changes, in
particular to trusts and to offshore companies, are having to
be modified to fit within the policy of this year's legislation,
and indeed the Finance Bill legislation is not entirely complete
in this respect because Her Majesty's Revenue and Customs are
still working on the details of some of those rules and amendments
will be introduced as the Bill passes through the other House.
Standing back and looking at all of those changes, inevitably
if one is going to bring within the scope of United Kingdom tax
a larger proportion of the income and gains enjoyed by individuals
in this position the likelihood is that their tax affairs will
become more complicated. In particular, for those wealthy individuals
who in particular may have trusts and offshore companies and a
great deal of offshore income there will have to be considerable
restructuring of their arrangements, and indeed much of that will
probably have gone on before 6 April 2008 in anticipation of these
changes. That is an inevitable consequence of the change in policy
which this Government has introduced this year. Whilst it will
complicate their tax affairs, I am not sure their tax affairs
will become, in terms of administrative and simplistic considerations,
significantly more complicated than they probably already were.
This is a highly specialised area in which most of the wealthy
individuals will have separate professional advice and they will
have been taking a great deal of that advice in recent times.
For those individuals with much smaller income and gains there
is, of course, a considerable question which surrounds the 2000
de minimis exemption. Essentially, as I have said, the position
will be that you will have to claim the benefit of the remittance
basis and if you do you will lose the benefit of your personal
allowances and the annual Capital Gains Tax exemption, but if
you can say that you have less than £2,000 foreign income
and gains which you have not remitted, then of course you do not
have to claim the benefit of the remittance basis, you just file
your tax return on the basis that you have not remitted that foreign
income and gains and you are not liable to pay tax on it. Precisely
how it will be possible actually to administer that exemption
and how Her Majesty's Revenue and Customs will actually be able
to check whether people are doing this correctly is, I think,
one of the more significant questions which arises from an administrative
perspective in relation to these arrangements. If I could then
just pass on to the question of the venture capital reliefs. The
changes which are made in the Finance Bill this year are in fact
extremely minor. It is an increase in the permitted amount of
investment in the enterprise investment scheme and one minor change
to the definition of "prohibited" or impermissible activities,
if you like, under the enterprise investment scheme and venture
capital trusts to exclude shipbuilding, coal and steel activities,
to comply with European law. The implementation of the increase
in the EIS limit is, of course, subject to European approval under
the state aids provisions, but in expectation that that will be
achieved the Bill gives the Treasury power to introduce the increase
in the limit from £400,000 to £500,000 per annum by
statutory instrument but with effect from 6 April 2008. The change
which has been made in the Finance Bill, though, has come with
the publication of three documents. The most relevant from my
own perspective and from the perspective of the tax legislation
is a consultation document published by the Treasury and Her Majesty's
Revenue and Customs with the Budget called the Enterprise Investment
Scheme: A Consultation Document, the aim of which is to examine
the requirements of that particular scheme to see in what way
the scheme could be simplified, the administrative and regulatory
burdens reduced and how awareness of the scheme could be raised
amongst potential users. The Revenue's consultative document provides
a very good outline of the scheme and raises a variety of questions
for consultation from interested parties with an eye to achieving
those three aims. Of course, the common feature of the Enterprise
Investment Scheme, venture capital trusts and also the Corporate
Venture Scheme, and also the entrepreneurs' relief introduced
for Capital Gains Tax, is that they aim to incentivise or secure
the raising of capital (in the case of the EIS, for example) for
smaller, higher risk companies by lowering the tax burden on income
and gains which are generated from investments in those companies.
So the investment under the EIS scheme provides tax relief on
the amount of investment, exemption for capital gains arising
from that investment and enhanced relief for any losses incurred.
A common feature of any of those schemes is that they have to
cast around with conditions so that the policy aims of the scheme
can hopefully be reflected in the detailed statutory conditions
laid down. Inevitably those conditions bring complication and
as the Revenue's consultative document highlights, one of the
problems with the EIS scheme is the accidental breaches which
occur in the conditions which then lead to the reliefs being withdrawn
and the aims of the scheme being confounded. It is very difficult,
I think, to suggest in what way these schemes can be simplified
in terms of reducing the conditions because, as I say, they effectively
reflect the policy aims which Government had in introducing these
reliefs. One can obviously focus upon the guidance which the Revenue
can provide and the clearances and other assistance which the
Inland Revenue can provide to the taxpaying companies and the
investors in seeking to obtain relief under these schemes and
those are certainly aspects of the consultation which Revenue
and Customs hope will produce improvements both in raising awareness
and ensuring compliance. My Lords, I do not think I should say
any more, but I would be happy to answer any questions which you
have.
Q2 Chairman: Thank you very much
indeed for a very comprehensive review of all three topics. What
we will do is we will ask questions on each of the topics in order,
starting off with Capital Gains Tax. I wonder if I can start off
myself? With Capital Gains Tax at the rate of 18% for all gains,
including short-term gains, there will be an incentive to turn
income which is taxed at 40% into capital gains taxed at 18%.
Do you think there is sufficient protection in the legislation
to prevent this happening?
Mr Gammie: My Lord Chairman, that of course
was a particular issue up until 1982, when although we had a 30%
Capital Gains Tax of course personal tax rates were very much
higher then and so there was a similar incentive. Since that time,
of course, there has been a great deal of other change in the
tax system which to an extent has reduced the opportunities which
were perhaps available in the 1970s and 1980s when, of course,
there were many artificial schemes implemented, particularly either
to convert income into capital or to avoid tax on capital gains.
I do not think these provisions in themselves contain a great
deal of added weaponry for Revenue and Customs to deal with that
sort of activity but there has been, as I say, change elsewhere
within the tax system which will ensure they have greater scope
to counter it than they did previously.
Chairman: Thank you.
Q3 Lord Barnett: Good afternoon,
Mr Gammie. It is nice to see you again. The Capital Gains Tax
changes, whilst controversial for the obvious reason of an increase
from 10 to 18% for some people, overlooked the reduction from
40% to 18% for others, like any major changes, but do you see
it as a simplification? Is it welcome in that sense?
Mr Gammie: There is no doubt that Capital Gains
Tax computations will be significantly simpler under this system
than they were before. As your remarks may have recognised, if
you make a change which reduces the tax rate for some but increases
it for others, the people you tend to hear from are those who
suffer the increase in the tax rate and to an extent when you
have a taper relief system, as we had, because that requires people
to hold assets for certain periods it builds into itself an expectation
that the rate is not going to change if people do actually hold
the asset for that period, which may have accounted for some of
the -
Chairman: This is what we all dread! I am afraid
we are going to have to interrupt briefly to vote.
The Committee suspended from 4.34 pm to 4.44
pm for a division in the House
Q4 Chairman: You were in mid-answer
to Lord Barnett, I think, so if we could ask you to resume?
Mr Gammie: My Lord Chairman, I think I had just
about completed it because I was giving Lord Barnett the assurance
that it does result in a simplification in the computations, even
though, as he noted, fixing a rate of 18% benefits some and disadvantages
others.
Q5 Lord Barnett: It is a simplification
but too high?
Mr Gammie: Well, my Lord, I think the choice
of rate is effectively a choice for the Government. I am not sure
that in making the proposal it was necessarily intended to find
some happy medium between the lower rate for non-business assets,
which was 24%, and the lowest rate for business assets, which
was 10%. If you aggregated them and divided by two it would not
come to 18.
Q6 Lord Wakeham: The Government have
made no attempt to conceal the fact that they want to raise more
money from Capital Gains Tax than they have in the past under
these changes?
Mr Gammie: Certainly they have indicated that
they expect to raise more revenue under this change, yes.
Q7 Lord Barnett: But it is so complicated,
an issue like Capital Gains Tax. Is it not rather difficult to
judge just how much revenue you are going to get, because nowadays
anything less than about £10 billion is petty cash? How can
the Government be sure that they are going to collect up to £500
million in three years' time?
Mr Gammie: My Lord, I think you would probably
have to ask Revenue and Customs or the Treasury as to precisely
how they have arrived at that figure. Inevitably with a tax like
Capital Gains Tax, which is dependent upon individuals making
disposals in particular years, there must be a great deal of uncertainty
as to precisely how much gain will be realised by the aggregate
of individuals across the year and that will also be dependent
upon the performance of, in particular, the Stock Exchange because
of the high proportion of share gains which would be in the total.
One can well imagine that those estimates which were made last
year and again at the Budget in March may not have factored in
significantly changes in the property market and the stock market
since, but precisely how those figures were arrived at I cannot
comment.
Lord Wakeham: I am very interested in this.
As a matter of fact, I put a written question down for the Government
when they brought in the concession for entrepreneurs and I asked
how much this was going to cost them, and if I remember rightly
they said £200 million. I said, "How do you estimate
it?" and they were very confident in their basis of estimation.
They were absolutely sure they knew how to do it.
Lord Barnett: They were getting their estimates
from the Revenue, but the Revenue had not got a clue either. That
makes it very difficult.
Lord Wakeham: The Government gave no indication
that they thought their estimates were in any way other than pretty
firm.
Chairman: Shall we pass on? Lord Paul, do you
have anything you want to ask on this topic?
Q8 Lord Paul: Yes. The press carried
a lot of reports about people selling assets before 6 April 2008
to obtain these benefits. Should this have been anticipated by
the Revenue and perhaps we could have had some legislation to
stop this happening?
Mr Gammie: It is always possible, of course,
when you announce a change well in advance to anticipate that
that will be the consequence and to introduce forestalling legislation
to deal with that. I suspect that because of the nature of this
change, in particular the increase in the tax rate for some from
10% to 18%, the view was taken that individuals should have the
opportunity to reorganise their assets and affairs if they felt
it was appropriate to do so, given the change, and of course although
they will be paying tax at a lower rate, if they have realised,
at 10% before 6 April 2008, they will have accelerated their liability
because they will now have to pay tax much earlier than they would
otherwise do.
Q9 Lord Paul: One of the main things
they said when they started with the Budget was that life would
be much less complicated after this Budget. How far do you think
they have succeeded in that?
Mr Gammie: I think from my previous remarks,
they have succeeded very well and I have no doubt that the aim
to simplify the Capital Gains Tax computations was one of the
principal factors underlying this reform and the complication
for some of entrepreneurs' relief is offset by the fact that they
get the benefit of a lower tax rate.
Chairman: Are there any other questions on Capital
Gains Tax?
Q10 Lord Sheppard of Didgemere: Let
me go back to the point you touched on earlier, the question of
avoidance and going back to pre-1982, when a lot of accountants,
and I suppose lawyers, made a lot of income by advising on switching
between the two income sources. Surely that complexity is bound
to come back again and all the avoidance legislation is going
to be complicated, is it not, by these changes?
Mr Gammie: Obviously in every Finance Bill in
recent years, over many years but in particular in recent years,
we have seen a large amount of anti-avoidance legislation and
this year's Finance Bill is no different in that respect. Her
Majesty's Revenue and Customs now have disclosure rules, of course,
which were introduced in 2004 and those disclosure rules at least
allow the Revenue to react more quickly to avoidance arrangements,
and that in part accounts for the increased flow of anti-avoidance
legislation in Finance Bills. So whilst your point may be absolutely
correct that the difference in rates will inevitably drive people
to look for ways in which they can get the benefit of the lower
rate and that may generate a certain amount of avoidance activity,
which will generate anti-avoidance legislation, that is a process
which is already going on within our tax system more generally
and it is one to which the Revenue has directed its attention
in particular areas to see if it can find a better way of dealing
with avoidance than current ways of specific legislation and it
may generate proposals from the Revenue next year, not specifically
in relation to Capital Gains Tax but in other areas, which if
successful may be adopted elsewhere. So I do not offer any sort
of optimistic reply to your question in the sense that there will
not be complication, but this has to be seen as a much broader
issue about how we deal with avoidance within the tax system.
Q11 Lord MacGregor of Pulham Market:
That is also the point which I think was causing us most interest
following the Chairman's question because I too well remember
the period when some of these schemes were coming forward and
I think it was one reason why Capital Gains Tax was put at the
same rate as the higher rate of income tax. When you talk about
the anti-avoidance side, have you in mind in particular the provision
now that accountancy firms and others have to submit schemes which
look as though they are getting around certain rules, or any schemes
of that sort which they are putting to their clients, or is there
something more specific, because I find it quite difficult at
the moment to see exactly how this will work out, whether there
will be ways of devising means of transferring income to capital
gain without having to have a scheme itself? It is that you are
really thinking of, is it, the fact that accountancy firms now
have to submit any proposals they have of that nature?
Mr Gammie: That was certainly what I was referring
to in terms of the disclosure rules, yes. That, as I say, has
so far tended to generate increased anti-avoidance legislation
in Finance Bills, as the Revenue have closed off schemes and arrangements
which have been disclosed to them. That is a process which will
continue and to the extent that there is increased avoidance activity
in relation to Capital Gains Tax because of the change of the
rate, one would expect the same process to go on there of disclosure
and specific provision to deal with it. But as I say, the Revenue,
certainly in the financial products area, have been looking at
trying to adopt a different approach to avoidance legislation
which they hope will provide a more satisfactory remedy. That
is something they are continuing to consult on and if it is successful
in one area, no doubt it is an approach they may try and adopt
elsewhere to resolve the issue.
Q12 Lord MacGregor of Pulham Market:
Exactly how does that latter point work?
Mr Gammie: The particular provisions they have
been consulting on is what they have called principles-based avoidance
legislation, so that instead of having highly detailed technical
legislation they try and express the purpose or the principle
which is embodied in the legislation in more general language,
which will then hopefully be more effective at catching particular
arrangements. That is in the financial products field they have
been looking at it, but obviously if they could develop something
successfully there they might well look elsewhere.
Q13 Lord MacGregor of Pulham Market:
I see, it is the principles-based bit that you are referring to
really?
Mr Gammie: Yes.
Lord MacGregor of Pulham Market: It will be
interesting to see.
Q14 Lord Wakeham: Just really following
on that, surely what will happen, to some degree in any case,
is that it will not be avoidance as such, it will be activities
which create a genuine capital gain which will be much more favourably
attractive to people? For instance, you might be a dealer in land,
buying and selling land. You will be an investor in land and you
will turn it over much more slowly and you will be able to argue,
with some reasonableness, that if you held it for a sufficient
length of time you get the lower rate of tax. That is not a scheme,
it is just a pattern of life based on the tax system, is it not?
Mr Gammie: Yes, you are absolutely right, my
Lord. If you introduce differential rates for either activities
or investments where you can substitute one for the other, then
inevitably the tax system has a distortion in it which will tend
to make people favour activities and investments which carry the
lower rate. That is the inevitable consequence and, as you say,
it is not all necessarily described as avoidance, and that will
happen.
Chairman: Are there any other questions on Capital
Gains Tax?
Q15 Lord Barnett: Yes. On the entrepreneurs'
relief, is there any evidence as to how the number, if any, of
companies or individuals starting up businesses has reduced or
came in late because of the changes in Capital Gains Tax?
Mr Gammie: I do not think, in relation to the
changes which have been introduced now, it would be possible to
asses what the behavioural effect of those may or may not be.
Inevitably in relation to all of the sorts of reliefs we have
had over many years for favouring entrepreneurial investment or
for raising equity, such as the venture capital relief, there
is a certain amount of evidence now as to the impact they have
had on either allowing capital to be raised or in terms of business
formation or business growth, but inevitably all of these things
are extremely difficult to assess with any degree of accuracy.
Q16 Chairman: Shall we move on to
residence and domicile? May I just kick off again and ask a general
question, and that is to ask you why you think the PBR announcement
and the subsequent detailed proposals caused so much controversy,
and should that have been anticipated and headed off in some way?
Mr Gammie: The idea of changing the rules for
non-domiciled individuals has, of course, been one which has been
around for a long time and this Government announced some years
ago that it was reviewing the position, but because it had made
no announcement I think it was getting to the point where people
were anticipating there was not going to be any change. Inevitably,
when you change rules such as these you are going to stir up a
large response from those who are liable to pay more tax under
it and I think in particular the concept of just having a sort
of £30,000 toll charge is a new concept, something we have
not previously seen in the tax system, and I think that of itself
was going to raise questions as to whether that was a fair way
of changing the rules and of dealing with a particular situation.
The removal of the personal allowances and the Capital Gains Tax
exemption effectively across the board I think was something which
had not necessarily been anticipated, and because that affected
a much broader population of individuals again it was going to
raise questions both as to fairness and as to the practical way
in which it could be administered. I think one of the problems,
of course, in this particular area is that particularly high net
worth individuals who are in this position will put in place arrangements
which are built around the existing rules and which are not necessarily
easy to restructure in terms of trusts and offshore investments
and the way in which they have structured their investment into
the United Kingdom. Of course, the Revenue are not necessarily
conversant with all the ways in which these things are structured
because they are structured in a way which does not require any
report necessarily to the Inland Revenue of what has been done.
Therefore, on the highly technical aspects of these particular
rules I think the Revenue probably had some difficulty in formulating
exactly what changes they wanted to make, and of course when they
published draft legislation that apparently went very much further
and had a very much greater impact than had generally been anticipated,
even from the announcement in the Pre-Budget Report, especially
as to whether or not some of the changes are going to operate
retrospectively in the sense that income and gains could be taxed
in the current year which had effectively accrued before any of
these changes had been made. I think that really the general uncertainty
it generated as to what precisely the rules were going to be,
how wide-ranging they were going to be, really led to the degree
of outcry that there was and the publicity it obtained.
Chairman: Thank you very much. I am going to
have to leave you at this point, but I am handing over to the
capable hands of Lord Wakeham. Thank you very much indeed.
In the absence of the Chairman, Lord Wakeham
took the Chair
Q17 Lord Barnett: The £30,000
a year annual charge would not be made if the unremitted foreign
income and gains are less than £2,000 a year. How on earth
would the Revenue ever know the size, whether it is more or less
than the £2,000?
Mr Gammie: Maybe I did not make it absolutely
clear. I should explain that the £30,000 charge and the £2,000
de minimis are entirely separate aspects of these proposals. The
£30,000 charge only comes in for long-term residents, individuals
who have been resident in the United Kingdom for seven years out
of ten. The £2,000 charge is related to whether individuals
want to claim the benefit of the remittance basis, even when they
are not long-term residents, so it has a much broader effect than
the £30,000 charge. As to how easily the Revenue will be
able to monitor whether individuals are filing their self-assessments
correctly when they have got foreign income and gains of more
or less than £2,000 I think is a major question and it is
left entirely to the individual to file his self-assessment, as
I say, as he thinks fit. He obviously has to file it according
to the rules, but how you actually check what their foreign income
and gains are I think is extremely difficult to fathom.
Q18 Lord Barnett: Yes. The long-term
residence of course is a point you have made, seven out of ten
years before the annual tax charge of £30,000 takes effect,
but there are some rather complex rules about residence. They
are going to charge a person who spends from midnight at the end
of a day. Are they going to have something on a tax return saying,
"Did you leave at midnight or 11.55?" How on earth are
they going to be able to administer such a residence rule?
Mr Gammie: Of course, for the vast majority
of individuals there is no doubt as to where they are resident.
The change in the rules of residence and counting the days by
reference to whether you are here at midnight will normally be
for those people who want to claim they are not resident in the
United Kingdom because they are not spending enough time in the
United Kingdom to make them resident here and the complexity which
surrounds that is not significantly different from the complexity
which is already in the system because at the moment we still
have to count days to work out whether somebody is resident or
not, it is just that we ignore days of entry and days of leaving.
So you just exclude them from the calculation. Now we will still
have to count days but it is just that we will use a different
basis for doing so. So it has changed, but it is not more complicated.
The Committee suspended from 5.05 pm to 5.12
pm for a division in the House
Q19 Lord Paul: Mr Gammie, as you said, this
has been going on for almost 50 years, this discussion about being
non-domiciled or domiciled. The press have raised a lot of questions
for the last ten years almost and governments did not come to
any decision, neither of the governments in the last few years.
All of a sudden, once the Government announced it, the press went
exactly opposite to what they were saying before this announcement.
It started with a reaction from one party, whether it was a teaser
or whether it was thought of or anything, I do not know, £25,000,
and then the Chancellor jumped it to £30,000. Can you tell
us what tempted him to amend it later?
Mr Gammie: I think in relation to the press
comment, obviously the press tends to react to the sort of information
it is fed, I think, and whilst the press prior to the announcement
of any changes had obviously been very hostile to the idea that
there should be individuals here who are paying far less tax because
of their domicile status, then of course when the proposals come
out I suppose the press starts picking up the reactions from individuals,
from the City and from others and it reflects that. It may not
say very much about the way in which the press analyses the information
which comes through to it.
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