Memorandum by the Chartered Institute
of Taxation (CIOT)
INTRODUCTION
The Chartered Institute of Taxation (CIOT) is
pleased to have the opportunity of submitting comments to the
House of Lords Finance Bill Sub-Committee in relation to the Finance
Bill 2008. We note the three areas of focus for the sub-committee,
on which we comment below. We have also drawn attention at the
end of this note to two other areas which fall into the sub-committee's
remit of tax administrative matters, of which we feel the sub-committee
should be aware.
As an introductory comment, we think that one
general lesson to be drawn from this Budget/Finance Bill is, once
again, the importance of consultation—consultation that
is timely, properly managed and includes working with the right
people and organisations, and having regard to what they say.
A number of measures of considerable significance (for example
Income Shifting, Residence and Domicile and Principles-based drafting)
show welcome evidence of listening and an ability to make some
changes in consequence. However, the process in all these and
other areas would have been so much more effective for the development
of the UK's tax system had consultation taken place in the right
sequence—before the announcement of how changes would be
made, not afterwards and against a background of decisions already
largely made. Hasty and ill-considered announcements do not just
lead to bad law: a hostile reaction will in turn lead to the possibility
of real, coherent reform being precluded—as has happened
with residence and domicile.
CAPITAL GAINS
TAX AND
THE ENTREPRENEURS'
RELIEF—CLAUSES
6 AND 7, SCHEDULES
2 AND 3
The introduction of a new 18% flat rate of tax
is welcome as a simplification, although we did not endorse the
way in which it was suddenly announced without consultation. It
inevitably creates winners and losers, the latter including people
on low incomes who would probably also be involved with long-held
assets.
The proposed "entrepreneurs' relief",
on gains up to £1 million, appears to be based upon the old
retirement relief rules, which brings with it significant complications.
Our key concerns are that the entrepreneurs' relief does not appear
to be available for:
— certain assets used in a business,
such as a property owned outside a trading or farming company
and rented to that company—even where the company stops
paying rent from April 2008; and
— most employee shareholdings—where
the employee is not an owner manager. Whilst approved share schemes
still offer tax advantages, employees have lost their 5%/10% CGT
rate.
There will be an additional burden in retaining
details of records over many years. We question how practical
or effective this will be.
In the context of another of the topics for
the sub-committee, we note that the relief is a one-off £1
million; although a significant benefit, it does not send the
same signal to the serial entrepreneur that the 10% CGT rate did.
RESIDENCE AND
NON-DOMICILE
ISSUES INCLUDING
REFERENCE TO
NON-COMPLIANCE—REMOVAL
OF PERSONAL
ALLOWANCES—CLAUSES
22 AND 23 AND
SCHEDULE 7
HM Revenue & Customs (HMRC) are to be congratulated
on listening to the (strongly expressed) concerns with the original
proposals on Residence and Domicile and moving to alleviate a
good number of them. The result is an improved package that is
less likely to act as a deterrent to investment in the UK; its
element of retrospectivity has also been mitigated. However, its
impact on the UK is still potentially adverse, and one change
we would strongly recommend is that the "seven-year test"
should only start after an individual has finished full time education.
Otherwise, an individual who studies in the UK for A levels and
a degree is almost immediately into the £30,000 charge—and
so much less likely to stay here to work.[1]
We think four areas still need attention:
(i) Personal allowances—the doubling
of the de minimis amount of foreign income to £2,000 does
not solve the unfairness or impracticality of the denial, from
day one, of personal allowances for anyone who claims the remittance
basis. This will catch two groups in particular:
— The UK employer (often a foreign
bank) of non-domiciles who are on a tour of duty to the UK. For
all that the remittance basis claim will be down to the employee,
the employer will have to take an interest in the issue, explain,
monitor and modify the payroll accordingly and, in most cases,
compensate affected employees through a tax equalisation payment
or face a demand for higher pay. Whatever HM Treasury (HMT) says
about employees having a choice, the result will be that many
non-domiciled employees will face additional UK tax and look to
their employers for compensation, thus increasing employment costs.
— The low paid, who will, in great
numbers, unwittingly breach the new rules and so risk a future
penalty. The de minimis amount is unlikely to cover everyday situations
such as the rent on the let-out flat back home, or earnings from
helping with the family farm in the summer, or a student's summer
vacation job at home or simply the vagaries of currency fluctuations.
HMRC are simply not in a position to cope with the practicalities
of educating and coping with this community and we do not believe
the practical implications for this community have been thought
through.
The only fair and practical solution to this
issue is to harmonise this loss of personal allowances with the
£30,000 charge, to come in after seven years rather than
immediately. In any event, there should be no loss of the CGT
annual exemption when the non-domiciled person is likely to be
exposed to gains through currency fluctuations.
(ii) Residence test—the modification
to count only days where the individual is in the UK overnight
is welcome and sensible, but has to be set against the lack of
a UK statutory residence test. We are still largely dependent
on case law and on HMRC practice. This also orientates towards
a 91-day test, out of line with other countries. The UK needs
a statutory test of residence that is clear and easy to work with;
there needs to be a commitment to develop such a test.
(iii) Technical points—There remain
concerns with the definition of the remittance basis (eg fees
paid to fund managers) and aspects of the £30,000 charge
(eg creditability against other countries' tax). These will need
continued discussion and modification, and show that these complex
reforms are being brought in too quickly and without proper advance
consultation. Some of the changes have wider impact than seems
fair—the "source ceasing" rules are very retroactive
and the offshore mortgage grandfathering is rather capricious.
(iv) Confidence rebuilding—many in
the non-domiciled community have, rightly or wrongly, gained the
impression that the UK no longer welcomes them as much as it used
to. There is work to be done to ensure that the UK is still perceived
as an attractive location for work and investment, especially
in relation to the financial sector. We need to have a commitment
from HMT/HMRC to continue to listen to practical issues that arise
over these changes.
ENCOURAGING ENTERPRISE—CLAUSES
28 AND 29 AND
SCHEDULE 11, PLUS
CONSULTATIONS
The Finance Bill contains a number of changes
to the rules relating to various targeted reliefs already in the
tax code: for example, the changes to R&D tax credits, vaccine
research relief and enterprise management incentives. We have
to point out that such targeted reliefs do in many ways run counter
to the Government's overall aims of simplifying the tax system,
increasing the compliance burden and cost for both taxpayers and
HMRC. (We do appreciate that some of the changes proposed this
year are a result of EU measures.) But there is some evidence
that many taxpayers would prefer a lower overall tax rate without
these reliefs.
A key consideration is surely whether the reliefs
change taxpayer behaviour at all or whether they simply reward
actions that would have been taken anyway. Again, the evidence
is mixed at best[2]
and, in this context, we note with interest Clause 27 with its
introduction of a requirement for the taxpayer to make a declaration
that (in effect) the availability of the relief has changed their
behaviour (though the lack of a defined baseline will make compliance
tricky).
Considering the three documents relating to
Enterprise, a general comment is that they are less about taxation,
our area of expertise, than finance and other areas. Some points
we would make are:
1. EIS consultative document—the steady
restriction of the size of company to which the EIS applies raises
the question of how effective a relief this is for encouraging
growing businesses. Is there too much focus on establishing new
businesses? We would also question whether the list of excluded
businesses is outmoded with the current gross assets test and,
as a practical measure, whether HMRC could give advance clearances
for EIS availability to make things easier for claimants. We assume
the consultation will take into account the behavioural issues
associated with the relief.
2. Study on EIS/VCT—this has some interesting
findings (eg on survival rates for assisted businesses, perhaps
showing that the reliefs are going to riskier businesses that
would otherwise have greater difficulty raising finance). It would,
though, have been useful to test whether behaviours had really
changed with the availability of this financing, as well as whether
the results of any changed behaviour are, overall, a real enhancement.
3. Enterprise: unlocking the UK's talent—this
is a wider ranging document that raises a lot of issues. Tax is
only mentioned briefly. In many ways this is correct, in our view,
despite the importance which we naturally attach to taxation.
Our point is that we prefer a system of reduced complexity and
light regulation. To this end, we would expect to see the document
record such axioms as the objectives of any reform; and that Government
action would be limited to removing barriers or addressing shortcomings,
not trying to create additional incentives that serve mainly to
confuse. Some of the comments in the Regulatory framework chapter
do point in that direction. We would have expected Chapter 6 to
critically review the success of the R&D tax credit rather
than simply refer to it in passing (paragraphs 6.5 and 6.6).
RETROSPECTIVE LEGISLATION—CLAUSE
55
While we appreciate the need for the Government
to clamp down on what is perceived as abusive tax avoidance, we
can see no justification for the introduction of such legislation
with such extreme retrospective effect. The proposal to backdate
this legislation to the 1987 legislation is excessive and, whatever
the concerns about avoidance, unjustified.
This sort of move gives rise to significant
concerns about not only the proportionality of the measure but
whether the UK tax system has any certainty and whether the UK
is a stable place in which to invest.
HMRC POWERS—PART
7—CLAUSE 108 ONWARDS
Many of the provisions have been reviewed over
the last year by way of a thorough consultation. However, we have
a number of concerns about the breadth of some of the new proposed
powers and would like to record that a number of the issues raised
during the consultation have not been addressed. The consultation
finished only days before the Budget and we consider that this
has not provided adequate time for the issues to be properly considered—especially
given their importance to the whole tax system. It does give the
unfortunate impression that the consultation was not a true one
and that decisions had already been taken.
We give two examples of areas of concern
— Clause 108 and Schedule 36, paragraph
10—deep concerns are expressed regarding the breadth of
the power to visit virtually any business anywhere, anytime, with
minimal safeguards. This was raised during the consultation on
several occasions and it is disappointing to see little change
to the original proposals.
— Schedule 36, paragraphs 21-24—this
is enacting HMRC's view of legal professional privilege (LPP),
with which the profession does not agree.
We would be pleased to amplify our concerns
or comment on other areas if that would be of assistance to the
sub-committee.
21 April 2008
1 It is worth noting that the LSE's analysis of
their undergraduates shows a breakdown by domicile of: UK: 47.6%;
Asia 28.4%; Rest of Europe 13.3%; N America 7.7%; Africa 2.2%;
Other 0.8%. Back
2
See, for example a PricewaterhouseCoopers survey on "Enterprise
in the UK: Impact of the UK tax regime for private companies"
at http://www.pwc.co.uk/eng/publications. Back
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