Examination of Witnesses (Questions 40-59)
Mr Andrew Meeson, Mr John Cullinane, Mr John Whiting
and Mr Jacob Rigg
28 APRIL 2008
Q40 Chairman: I wonder if you could
elaborate a bit on that. I think there are still some discussions
going on with the Chancellor about insurance bonds, are there
not? What is the current view? What are your concerns there?
Mr Whiting: Perhaps you are talking to the insurance
industry but the main fact is that by going and investing directly
into shares, you are looking now at an 18% rate; whereas investing
via an insurance-based product which derives income, you are taxed
at potentially 40% and, therefore, we now have something of a
bias against going in through the insurance industry. It may be
that is just how it is—and, of course, there are various
bits of, as it were, double tax relief coming out and it can get
quite involved—but one feels that this was not quite thought
through, as to whether this was going to be part of a package
which, overall, as we alluded to earlier, raised a little extra
money or whether it was just an accidental by-product.
Q41 Lord Powell of Bayswater: Is
it not worse than that? Is there not quite a lot of unfairness
here? There will be quite a lot of people who have built up their
businesses on a certain view of the tax system who are now going
to lose out pretty considerably because they will lose the sort
of relief that they had before. As you have said, there has been
no transitional relief, no transitional period, no grandfathering,
and there are people in the employee share schemes who are going
to suffer from this. I can see there is a good side to it too,
but the bad side is somewhat greater than you are suggesting,
is it not?
Mr Cullinane: To be honest, I think people exaggerate
that. After all, if the Government had simply not changed the
structure but increased the rates—which governments clearly
have a right to do and have to do from time to time—then
you could say all the same things. There are numerous examples
in the tax system where you get expectations and there is a different
tax result at the end. It is just that in this instance, where
there was a more overall change in structure, we think it would
have been better had they been consulted. But, in all honesty,
I do not think there are many businessmen who, if they had known
at the outset they were going to pay 18%, would have said, "I'm
not going to bother to build up my business then" or "I'm
going to a completely different country to do it." I can
see why the people in that position are aggrieved, because they
have had ten years of being told they were entitled to pay only
10%, but I doubt in all honesty whether many of them would have
acted very differently.
Q42 Lord Powell of Bayswater: There
is quite a lot more who are going to find themselves within the
£1 million ceiling.
Mr Whiting: It is this legitimate expectation:
"We were led to expect that the rate would be 10% if we built
up a business and sold it—and, indeed, if we did it again
it would be 10% again."
Q43 Lord Powell of Bayswater: But
you could get over that if you grandfathered it and started it
with anyone entering the scheme now, as it were.
Mr Whiting: There would be a strong argument
for grandfathering or at least allowing some sort of election
which could conceivably even allow you to go for the 10% rate,
and maybe pay some of the tax upfront, but at least you have fixed
that 10% rate.
Mr Meeson: My Lord, one of the issues that led
to the unfairness is the brevity with which the exercise was carried
out for most of the business community. I appreciate that those
elements of the business community who were being specifically
targeted on this were talked to, but the vast majority of small
businesses and certainly the vast majority of employee shareholders
were not consulted. Suddenly, in October 2007, they are told,
"Come 6 April 2008, the world will change and you will be
paying nearly twice as much capital gains tax on your disposals."
Speaking as a private practitioner, I have been deluged with business
clients desperately trying to do something—in some cases
something quite artificial, which is quite appalling—to
crystallise the 10% taper while they could, because of this "buy
now while stocks last" mentality which putting a short deadline
on something like this brings about. Of course, it does not have
the same effect in the other direction. Those who were looking
to pay anything between 24 and 40% on their disposals, woke up
in October and suddenly thought, "That's wonderful. All we
have to do is sit there a little longer and life gets better."
The ones who had been expecting 10% are faced with this awful
decision: "Do we do something or face life getting appreciably
worse?"
Q44 Lord McGregor of Pulham Market:
You will recall previous issues about capital gains tax being
different from income tax and the reason for the original 40%
capital gains tax rate. Do you see the prospect of a lot of people
now having an incentive to turn income into capital gains because
of the difference between the 40% and 18% rate as was argued in
the past? If so, is there sufficient protection in the legislation
to prevent this happening?
Mr Whiting: I think it is inevitable if you
look at the two rates, which, as you mentioned, my Lord, at least
at the starting point, were the same. You now have a rate of 40%
for income, potentially plus national insurance, if that is relevant—so
potentially even higher—versus 18% capital gains. Inevitably
people are going to look to realise capital gains. But, then again,
that is only a continuation of what we have, because, in many
ways, people would have been looking at 10%—admittedly after
two years—versus 40% upwards. Is there enough protection?
There is a great deal of protection in the tax system, not least
the disclosure regime which has been in place since 2004. Is that
sufficient protection? I guess time alone will tell, inevitably,
but there is a lot of protection within the system of specifics.
There are some general targeted anti-avoidance rules; there is
disclosure; there is a great deal of, shall we say, armour-plating
there for the Revenue's benefit.
Q45 Lord McGregor of Pulham Market:
I was thinking of particular individuals rather than businesses—you
know, the incentive to move into contrived schemes to convert
income into capital. I presume you would think that most of these
will now be caught by the new regime.
Mr Whiting: I think a lot of the contrived schemes
will be disclosable by the promoter through disclosure or under
the various and targeted anti-avoidance rules. Although, in many
ways, I suspect we may be revisiting something that came up in
a Royal Commission report back in 1955, Badges of Trade,
when something is to be categorised as a trade rather than a non-trading
transaction, I do wonder if we will be revisiting and refreshing
those principles at some stage.
Q46 Lord McGregor of Pulham Market:
So that the simplification becomes more complex again.
Mr Whiting: The simplification moves on to another
part of the forest, as it were, yes, my Lord.
Mr Cullinane: The degree of simplification is
in doing away with the taper relief which led to varying rates
between 10% and 24%, and outside those parameters in some cases.
This division between income treatment at 20% or 40%, plus maybe
national insurance, and capital treatment is not new. As John
was saying, it has been there all along. The simplification question
is whether you would go further and tax everything at the same
rate. There is a lot of logic and equity in saying that but I
acknowledge that those people who are complaining about moving
up from 10% to 18% would look even less favourably on that step
being taken further. There is also the international competitiveness
argument, as many countries have lower rates of capital gains
tax. I do not think it is as a result of the simplification that
has taken place that we have this capital/income divide. It was
there anyway and it would be there if we followed international
comparisons.
Q47 Lord McGregor of Pulham Market:
You referred to the taper relief. Do you think that the removal
of indexation up to April 1998 is justified in the context of
the overall package? That was obviously designed to deal with
a very inflationary period to some extent and was a protection
against that. Do you think that is justified?
Mr Cullinane: I think pretty much what I thought
about the other aspects of it, that in the abstract I think you
can argue that if you have a low rate, therefore do you need other
more complex compensations if you already have a low rate to start
with. The problem is, again, the expectations that people had.
When we moved from indexation to taper relief, they did not disturb
the indexation that had accumulated so far. For those people who
had lost a great deal of past indexation, it must have come as
a big shock to them.
Mr Whiting: I think it is another thing to keep
under review because if inflation stays low, arguably a low rate
of tax will do, but we do have to point to the fact that there
is now no inflation protection for what may become inflationary
gains when you have held an asset for a long period.
Mr Meeson: Equally, my Lord, I think it is worth
pointing out that those individuals who feel hardest done by from
this simplification, the 10% to 18% people, by and large have
least indexation to have lost, because the tendency will be to
have had either lower initial base costs for having incorporated
from scratch or more recent establishments. It tends to be the
land-based gains that are most burdened with indexation. In those
instances, quite frequently they have moved down from a 24 to
an 18 regime, so there is an element of quid pro quo. It
is a difficult one because you do not really know until you look
at the profile of days that have been taxed what the indexation
position is out there.
Q48 Lord McGregor of Pulham Market:
Could I ask one question of ATT. I think it was in your evidence
that you said, "Quite apart from the issue that `simplifying'
the rate of CGT leads to unfairness, it should be noted that the
proposals in the Bill do not really amount to simplification in
any significant sense—the computation of gains and losses
remains as complex as before ...". Would you like to comment
on that further in the context of simplification?
Mr Meeson: I would, indeed, my Lord. That I
think is another lost opportunity because every simplification
of capital gains tax we have had over the last 20-odd years has
tended to be playing around with the rates rather than tackling
the underlying complexity of the system whereby establishing what
the consideration for a gain is can be horrendously complex in
many cases. Establishing what is the allowable expenditure for
a gain is seldom simple. The various postponements, holdovers
and adjustments that go into it mean that by the time you get
to establishing the rate of tax, you have already done 99.9% of
the hard work, which is why we felt that simply saying "Rather
than pay at your marginal rate of tax, pay at this rate"
is simple but it is not a huge simplification.
Q49 Lord Powell of Bayswater: Would
it not have been simplest of all to have a single short-term capital
gains tax which simply tapered over ten years to zero?
Mr Meeson: There was a large constituency for
that back in 1997 when we had the last major change and it is
difficult not to have sympathy with it. The problem is I am not
entirely sure that that would end up being simple either.
Mr Cullinane: You have seen that in other countries
from time to time. The most obvious thing people would then do
is set up investment vehicles so they could churn their investments
in the vehicle, and then they are holding on to the shares of
the vehicle for longer. They would find ways of converting short-term
gains into longer-term gains and then you would need anti-avoidance
around that. Fundamentally, wherever you have borderlines in the
tax system between different rates and different treatments, you
are going to have complexity. The only real simple answer would
be to tax everything, income, capital gains, long-term or short-term,
all at the same rate or rates.
Q50 Lord Powell of Bayswater: Any
simplification, finally, is going to end up with clever guys like
you finding a way around it for your clients.
Mr Cullinane: If you do not want to go to that
level—which there are equity arguments for in the abstract—and
you go on to retain some borderlines, at least you can have fewer
than you have had before.
Q51 Chairman: One other aspect of
this is the entrepreneurial relief. How far has this relief met
with criticisms of the original proposals without compromising
their simplicity?
Mr Whiting: I think it has compromised the simplicity
because, of course, it has gone away from the simple, flat 18%.
I am not sure it is something that has been properly thought through
as to whether this is a good additional thing. It is, to my way
of thinking, a compromise—and in many ways a necessary one—to
recognise, going back to our previous discussions, that the entrepreneurs
had a certain amount of expectation that they would have a 10%
rate, so here they are, this is the mechanism where they are given
that 10% rate, but it has undoubtedly pulled away from the simplicity.
Q52 Chairman: Do you think they have
set about it the right way? If they had had a bit more time to
think about it, would they have chosen modelling it, as I understand
it, on the retirement relief. Is that necessarily the best way
of doing it?
Mr Whiting: If they had had more time, they
would have perhaps thought through a different way. One argument
is: if you wanted this lower rate, maybe you would base it on
the principles of the taper relief, because that is a slightly
more modern definition of what one might term "good"
assets and picked up a few more things, rather than the retirement
relief, which had a slightly different model as to what qualified.
A couple of our particular issues, of assets held outside and
employee shareholdings, would have been better treated, would
have fallen into this putative entrepreneurs' relief, using the
sort of taper relief system rather than the old retirement relief.
Q53 Chairman: I think this is quite
an important area. Does anybody want to comment on that?
Mr Cullinane: I think there are pros and cons
but the underlying point is, given more time and proper consultation,
more people would have bought into the final result.
Q54 Chairman: You think there might
have been arguments about using a taper relief.
Mr Cullinane: Yes, or coming up with a different
thing altogether.
Mr Meeson: I thoroughly endorse what both Johns
have said. I suppose one thing is that to have carried on using
a variant of the taper relief would have given an element of continuity
and comfort to the taxpayer. Having had ten years to learn one
set of rules, they are suddenly being told, "Relearn those
we abolished ten years previously." The reason those retirement
relief definitions were abolished in 19097 was because they were
seen at that time to be too complex—which is somewhat ironic
now.
Q55 Lord Paul: Mr Cullinane and Mr
Whiting, your organisation has some concerns about the entrepreneurs'
relief. How far do you think they have been met without compromising
any further simplicity?
Mr Whiting: Our concerns are that two or three
areas do not qualify, as I have alluded to: the assets held outside
the business and employee shareholdings. As we have just been
discussing, had we gone down the taper relief model, if I could
term it that, rather than the retirement relief model, that would
have met our concerns. Clearly, if you now cater for these two
with perhaps some adjustments, you are adding to the complexity,
and we are back to the perennial issue of simplicity-and-fairness
pulling against each other. We would argue that it would be fair
to cater for these, but it adds to the complexity.
Q56 Chairman: We can now to move
on to residence and domicile. If you have not come here burning
to say something which you have not had a chance to say, let us
move on. Tax policy on residence and domicile has been under review
to a greater or lesser extent for many years. The present review
was commenced in 2002. Why do you think concrete proposals emerged
in the Pre-Budget Report of 2007? Do you welcome the fact that
at least uncertainty of the review was no longer hanging over
people? Do you have a view on the correctness of the policy reasons
for the proposals?
Mr Cullinane: It is probably a fair guess that
the proposals came out as a result of the party political situation
at the time. Not much else prompted them appearing at that time.
Yes and no on the uncertainty point, because I do not think many
people who were affected or might have been affected thought their
position was that uncertain at all. The general perception was
that the prior consultation which had been announced seven years
ago and did not ever seem to get any concrete form, was just there
in the long grass, so I do not think anybody really felt themselves
affected by the uncertainty. The proposals that were made, and
even more than the proposals that were made, the way they came
out of a clear blue sky, caused people a great deal of angst.
There are a lot of people who will probably live with what has
finally come about who were thrown into a lot of disquiet and
who considered their position in the UK much more seriously than
they would have done as a result of the process, or lack of it.
I think the net effect is to create a kind of climate of uncertainty
around policymaking which it will take a bit of rowing back to
get away from. I think that was acknowledged, in effect, by the
Chancellor when he kind of ruled out any further changes in this
Parliament and the next. It shows that he was aware that uncertainty
had been created. In terms of the underlying policy reasons—which
is, essentially, that if you have been here longer and have an
increasing association with the UK you ought to be able to shoulder
more of the tax burden—as a broad principle, I do not think
many people would quarrel with that, but one of the unfortunate
things is the way in which these proposals came in unannounced,
caused brouhaha, and then were subject to a lot of compromises
and have generally gone off at half cock. The result of all that
is that any kind of genuine, rational, consultative look at the
whole thing, to see how we can best give effect to this principle,
that the greater your connection with the UK the more of a burden
you should bear, has just been ruled out and we have a very complicated
regime with as many anomalies as before.
Q57 Chairman: And you say brought
in because of the political scene and for political reasons rather
than necessarily—
Mr Cullinane: Without being a fly on the wall,
that is the best guess you can make.
Chairman: That is the most likely explanation.
Q58 Lord Powell of Bayswater: I think
it is an open secret that the Treasury have been longing to do
this for a couple of decades at least. I remember it coming up
once or I think twice in Lady Thatcher's time as Prime Minister
and once in John Major's, and they always jumped on it and stopped
it on the grounds that it would have precisely the effect that
it has had. Do you think they were absolutely right to have opposed
it then?
Mr Cullinane: There are certainly question marks
over the domicile regime. There are probably several million non-domicile
people in the country—and, by the way, not all of them by
any means mega-wealthy: there are some quite poor people in this
category—and, hopefully, we will have a chance to come on
to that. Those numbers will grow because the world is getting
more mobile. There are some very serious questions as to whether,
at the very wealthy end, some people should have, if you like,
an almost semi-hereditary lottery ticket of favourable fiscal
status. Equally, there are competitiveness issues. It is not simply
a question of treating them all the same as everybody else, because
they are not the same as everybody else: they have different international
connections. I think we have a very complicated problem here and
a growing problem. Just to spring the problem on people and then
make some hasty compromises and then say, "We won't look
at it again," is not ideal—though I think you had to
say, "We won't look at it again," because you had unsettled
everybody and you wanted to un-unsettle them. That is not to say
everything was perfect before. I can see both sides, to go back
to your original question.
Q59 Lord Powell of Bayswater: I suppose
if one looks at yesterday's Sunday Times Rich List one
can conclude there is probably quite a lot of leeway before one
country suffers terribly.
Mr Whiting: Of course, as John has alluded to,
we are not just talking about the Sunday Times Rich List,
we are talking about five million, there or thereabouts.
Lord Powell of Bayswater: Yes. I think we will
come on to that.
| 
