Examination of Witnesses (Questions 60-78)
Mr Andrew Meeson, Mr John Cullinane, Mr John Whiting
and Mr Jacob Rigg
28 APRIL 2008
Q60 Lord Barnett: One of you referred
to personal allowances and the changes there that you reckon are
unfair. In your earlier evidence, which unfortunately I was not
here for, you spoke about "simplification can never be fair".
I am not sure whether you would classify this as simplification
anyway, but, on the issue of personal allowances, you feel this
is really unfair the way it has been done. Is that my understanding?
Mr Meeson: My Lord, it is probably I, on behalf
of the ATT, who am guilty of the comments to which you allude.
Yes, we do believe that there is an element of unfairness in this.
Like John, I can see both sides of the argument and I am not prepared
to put myself on either side of the fence in that respect, but,
the purported abuse, as it were, is that the non-domiciliaries
are in some way unfairly benefiting from sheltering their offshore
income and gains from UK taxation. In one sense the £30,000
levy addresses this, but then to say, "In addition, we will
remove the personal allowance"—which adds an extra
taxation burden to their already taxed to UK income—and
to do the same with the capital gains tax annual exemption—which
then puts an additional burden on their already taxed UK-based
gains vis-a"-vis the normal non-domiciled individual—seems
to be almost, to put it callously, putting the boot in when someone
is down. It is adding insult to injury.
Mr Whiting: I would also confess to a similar
comment, my Lord. I have a particular interest as a member of
the Low Income Tax Reform Group—so a particular interest
in the unrepresented. It is of great concern that we have here
a provision that will affect a considerable number of the vast
majority of non-domiciles who are not only unaware of the term
"non-domicile" in many cases—they are paying their
UK taxes—but, because of the situation back home—and
we could easily be talking about the half million or so foreign
students who are here paying fees to our universities, as much
as the people who are serving in our sandwich bars, waiting at
tables, bring the agricultural produce in—because of the
work they do back home, or their summer job back home, or the
rent on their flat, are suddenly losing their personal allowances.
And this is assuming they are geared to dealing with this. It
seems unfair, at best, and, actually, totally impractical, because
all the evidence we have gathered from talking to HM Revenue &
Customs is that they are simply not geared up to cope with this.
Indeed, we are still, even today, finding that they have not realised
that there are issues when, for example, here in the UK we may
try to deny a low-income person a personal allowance but under
the double tax treaty they are still entitled to it, so they,
therefore, have to deny it on the one hand and then give it back
again—all of which sounds hopelessly impractical even if
it is fair, which we would argue it is not.
Q61 Lord Barnett: Given the amount
of money you reckon—and the Treasury have given you the
figures—we benefit from non doms, are you all saying you
would prefer we did nothing to change the situation?
Mr Rigg: Certainly at STEP we are guilty of
making these comments in our submission. Whilst I agree with the
rest of the panel that the situation needed to be looked at, certainly
it could have been looked at over a much longer period of time,
with adequate consultation, without rowing back on draft legislation
that had already been launched and, indeed, then issuing clarifications,
effectively legislating by press release, where people were trying
to plan their tax payments on the basis of the latest letter that
had happened to come out of a meeting or a notice from Ernst &
Young or something like that. Certainly we would support the basic
fundamental policy principles that the Committee cites but I think
it is important to balance the sort of important abstract concept
of fairness with the important but very concrete notion of competitiveness
in all of this. Perhaps where we have ended up, although it has
its problems, is not necessarily too bad for our competitiveness,
but the way in which we have got to this position is really, really
damaging to the UK potentially.
Q62 Chairman: You are concerned mainly
about the people who are non domiciles but earning relatively
low amounts of money over here and low amounts of money of overseas
income.
Mr Whiting: That is a particular area of concern
of mine. All of us would recognise different categories of people
here. Within this, all of us would agree, I suspect, going back
to Lord Barnett's question, that there is definitely scope and
sense in reforming the residence and domicile rules. If we go
back to the consultation that started in 2002, we were to have
a reform, and I think many of us subscribed to the ideas and the
principles that were in there. To take one particular example,
it would be very welcome if we could have a good reform to the
definition of residence. Certainly the CIOT is strongly in favour
of a statutory residence test that can be applied mechanistically
rather than by HMRC judgement. That would be a very welcome way
forward, as undoubtedly there is some tightening up that is sensible
on the definitions of domicile and remittance basis, but to see
that we have 50 pages of legislation on the remittance basis is
too much.
Q63 Lord Barnett: You have mentioned
that your concern is about the less well off being hit. If they
have little or no unremitted income, they can claim not to be
any more non dom, can they not?
Mr Cullinane: Somebody who comes here on a seasonal
basis, as a potato picker or something from Romania or somewhere
like that, if they have more than £2,000 of income in Romania
but they are here long enough to be resident in the UK as a year-by-year
matter, then, if you follow the strict letter of the law as it
is coming in, either they have to disclaim personal allowances—so
they are going to have to get their PAYE code changed to effect
that or they are in default—or they have to report the Romanian
income they get—which may only be £2,001 by the way:
it may be very small—and then they and the Revenue, if you
are to follow the law properly, are going to have to work through
the Romanian tax implications, the double tax implications, and
so on. It is quite evident that this problem was not even thought
about and that HMRC have no plans to try to enforce this. It is
a way of making millions of people non compliant and putting a
tax cloud over their head. As John said, we are concerned about
the tax system in general as a result of the way this has been
handled. The very wealthy have to some degree got what they wanted
in terms of achieving reversal to the policy, whereas the problems
affecting these people have only just come out. The poor and wealthy
alike would have been better served by a more open, consultative
approach. By all means say, "These are anomalies that need
to be tackled," but allow that to be debated and get people
acclimatised to the idea.
Lord Paul: I still am not convinced that the
Treasury has really gained from this or lost, if you look at the
next five years. I am non domicile—I am too late to change—but
there are lots of people who are seriously considering that they
will change their residence. Governments could not make up their
minds. For the last 40 years they have been looking at it. Now,
all of a sudden, as more of a political decision that makes no
sense whatsoever.
Chairman: You have the question. We will have
your answer when we come back.
The Committee suspended from 3.46 pm to3.54
pm for a division in the House of Lords.
Q64 Chairman: Lord Paul has been
for a good long walk, having been to vote, and would like the
answer to his question.
Mr Whiting: Lord Paul's question, if I might
paraphrase it, was: Do we think the measures will raise any extra
money in the long term? That is a very powerful question. The
concern is that they will overall damage the UK's tax revenues.
My personal view is that it is hard to see how they will raise
significant amounts of money. Certainly, from my own firm's experience,
we are seeing a number of clients considering moving—not
the flood that was at one time predicted but there is the feeling
that some will move, and, more subtly, some will not come here
in the first place.
Mr Rigg: Certainly that is the experience of
STEP and our membership. A significant number of people who were
considering coming here are not now coming here. It is difficult
to say how it will end up with the tax revenue position, but I
think it is likely that only small amounts of revenue will be
involved now.
Q65 Lord Powell of Bayswater: I think
under the present practice you can arrive on day one and that
does not count, be there on day two and that does count, and leave
on three and that does not count; so that, in effect, you have
got three days for the price of one. Now that has been reduced
to two days for the price of one. Will that be a bigger disincentive,
even than the idea of paying £30,000 a year tax?
Mr Cullinane: In terms of short-term residency,
to the extent you are clarifying rules then it does allow people
to plan, even though there is an element of tightening up in it.
Our main concern about that area is that we are tightening up
in the way of doing a day count but the day count is by no means
the end of the story as to whether you are resident or not. You
are tightening up the detail but the rest of the iceberg is still
there. The Revenue rules are firm on this matter but do not exactly
reflect case law and the case law is somewhat more unpredictable,
as evidenced by the fact that there are still cases going through
the courts. It is not so much a problem with what is being finally
enacted; it is more a missed opportunity to say, "Couldn't
we put this all on a statutory footing so that everybody knows
where they stand?" and then I think people will know exactly
how much they can come here before they become a UK taxpayer.
I think we would then find more people would readily come and
there would be more tax revenues. Even though some people who
are coming will not be resident.
Mr Whiting: As to the result of adjusting the
amount of days here, it is probably sensible.
Q66 Lord McGregor of Pulham Market:
Could I come back to the £2,000 de minimis limit.
I think you referred to the educational aspect of this. Do you
mean by that that the self-employed and those not in employment
will all be impossible to get at, to be made aware of the new
changes, and that, therefore, it is going to be a burden on employers
to do that? Is that what you mean by that? The second question
is on what I might call the unintentional evasion of the tax.
It seems to me that it is extremely difficult for HMRC to be able
to follow through tiny sums of money. The illustrations you have
given really are very, very small. Whereas there are means of
checking these things in the UK, I do not see how it is going
to be possible for them to do this, except at extraordinary cost
in administration and so on, to ensure compliance. The last question
is: Does that lead you, therefore, to the view that it is better
to confine the removal of personal allowances for capital gains
tax for those who have to pay the £30,000 charge?
Mr Whiting: The education aspect is exactly
as you have stated. Let us leave to one side those wealthy entrepreneurs
who have advisers. Let us even leave the high-earning executive
who has advisers. We are talking here about the large bulk of
non doms who either are going to be in ignorance or look to other
people for explanations. The Low Incomes Tax Reform Group already
know that we are going to get customers looking for explanations,
because we have already started to have them, but the great majority,
if they look anywhere, will probably look to their employers.
We just do not think the Revenue & Customs are geared up to
assist, but that even assumes that these people have heard about
this issue in the first place, and there we do not think the Revenue
& Customs have really thought that they need to do an awareness
campaign—to get Adam Hart-Davis to do another sort of jumping
out of aeroplanes campaign or something on a non-dom basis perhaps
The first stage is that there is a great problem about educating
on the residence issue. Your question on evasion: from the low
incomes tax point of view we have termed it inadvertent non-compliance.
Q67 Lord McGregor of Pulham Market:
I did say unintentional.
Mr Whiting: People will just inadvertently not
comply. If we go back to Lord Powell's point about low income
remittances, let us bear in mind that somebody from Poland or
wherever who is paying for things in the UK with his Polish credit
card, is remitting funds which might or might not mess up the
whole of this arrangement, so there is going to be a great deal
of unwitting non-compliance. Frankly, we are assuming that the
Revenue have just said, "We don't really want to bother with
that. We are only interested in the £30,000," but if
these people are perhaps slightly higher up the income scale,
perhaps employed by the archetypal city bank, it is the bank/the
employer who is going to pick up the cost. What is the answer
to this? Undoubtedly the best answer is that this loss of personal
allowances only trips in, along with the £30,000, after seven
years. Just to bring it right back to your first point, to education,
one cadre we have continually highlighted is the student population.
We here in the UK try to attract overseas students to take A-levels,
degrees, et cetera, probably in the hope that they will continue
to work here, but you might just note that by the time they have
done A-levels, degrees and had a gap year or whatever, they are
virtually into seven years' residence, so that this new system
is probably an incentive to go home at the end of it.
Q68 Chairman: The ATT memorandum
accepts that the reason for computing the £30,000 charge
in the way that the legislation does is a desire to ensure that
the payment qualifies for credit against foreign taxes, particularly
US tax. You state, however, that the chosen mechanism is neither
simple nor clear. Do you accept that the objective is a good one?
Do you have any thoughts on an alternative better mechanism?
Mr Meeson: My Lord Chairman, if one is going
to do this £30,000 levy in some way, it is probably adding
to the fairness (or reducing from the unfairness, whichever you
chose to look at) by making it as creditable as possible against
overseas taxes, but then, of course, it starts raising the question
as to whether you are in fact penalising these people at all if
they are getting a direct pound for pound offset somewhere else
for what they are paying here, which raises our concern that effectively
the levy itself is an administrative tax, rather than a financial
tax, as much as anything else. That ties in also with our thoughts
on the de minimis: that if you have this £2,000 de
minimis, the Treasury is effectively saying, "We don't
care about a certain number of people," and they are the
ones for whom the tax take is £400 per annum, but that leaves
a huge gap in the difference between people about whom £400
is acceptable and people about whom £30,000 is a price worth
paying. It is an enormous scale and there are rather too many
innocent (or more innocent) categories of people, as John has
suggested, that fall within that.
Q69 Chairman: You reckon a lot of
the people who are going to be paying the £30,000 are going
to get tax relief against their foreign taxes anyway.
Mr Meeson: Some of them inevitably will. Some
of them will not. It is certainly not going to be beyond the wit
of man to arrange that one would do so, given that one has the
choice of deciding which income and gains are subject to the £30,000
tax.
Q70 Chairman: Resident and domicile:
are there any things you have not said that you wanted to say
on that subject? You seem to have given some very comprehensive
answers, but they came out in ways rather different from the way
we originally thought.
Mr Whiting: We would just add one plea. Whatever
the changes that have been made—and many of them have been
very constructive—we do not have a complete package and
one of the pleas we would strongly make is that HMRC and the Treasury,
needs to commit to keeping this under review and making further
changes.
Q71 Lord Barnett: Not surprisingly,
every year the Finance Bill will change it, for donkey's years
ahead.
Mr Rigg: If it is kept under review, having
changes every single year, where things are tightened up or loosened
inadvertently or what-have-you in a sort of hotchpotch manner,
would not be good for the UK competitiveness. It would be incredibly
damaging for us all.
Mr Whiting: All I would be looking for is sorting
out the anomalies.
Q72 Chairman: Let us go on to the
third section: encouraging enterprise. Clause 28 increases the
EIS investment limit from £400,000 to £500,000. Do you
think this is a necessary change, given that the limit has been
increased, as you know, from £200,000 to £400,000? Are
you aware of any evidence suggesting that potential investors
are wanting to make investments larger than £400,000?
Mr Cullinane: Not specific evidence. I can imagine
there may have been. A lot of these questions revolve around the
same point, which is when it comes to these special reliefs, given
they complicate the tax system, and they treat some people differently
from others, it seems to me you need an awful lot of evidence
as to whether it is achieving something worthwhile. The general
impression you get is that while a lot of good work is being done
to quantify that, it does not hit you that it is making a great
deal of difference.
Mr Whiting: It seems a bit odd to start a general
review of this and then say, "Here is part of the answer,"
just as you are starting a review.
Chairman: I think the way we asked the question
indicates that we probably feel a bit like that ourselves.
Q73 Lord Barnett: I was wondering
how effective all these reliefs are. Do you have any indication
of how effective it is, set at the previous level or the current
proposed level?
Mr Cullinane: In fairness, our members are largely
tax practitioners. We are not economists or econometricians and
so on, so the evidence is anecdotal. Probably, to some degree,
it would hit us this way as tax practitioners: the client is already
doing something or considering doing something and says, "Please
do your best to get us the best tax treatment you can." We
would tend to see situations where people are going to do something
or they are considering doing something and the tax relief is
extra. It may be that it is doing a great deal of good and it
is not quite clear to us, but, again, it is not clear why the
tax system should subsidise this good that is being stimulated
in this way versus all the other good that might be done if it
were put into generally lower tax rates. Generally we are rather
sceptical of the value of these reliefs, while being open to the
fact that we would not see all the evidence and we have not undertaken
the scientific evidence, if I may put it that way.
Mr Whiting: My own firm did a survey on exactly
those areas on EIS. Of potentially eligible companies, we found
that two-thirds had heard of the relief, and of those which had
used it, precisely half said it had influenced the decision. In
other words, half "Would have done it anyway and thank you
very much for the relief" and half, "Yes, it had influenced
it."
Q74 Lord Barnett: You would probably
prefer, therefore, to drop it altogether.
Mr Whiting: The general evidence of the survey
we did, which looked not just at this but at nine reliefs, was
that the message coming back from business—and this is SMEs,
the smaller businesses—was that they would prefer a lower
rate of tax, a simpler system, and less reliefs.
Q75 Lord Barnett: Simple systems
do not seem to be possible anyway, do they, in the tax system?
Mr Whiting: If you could get rid of some of
the reliefs, many would prefer abolishing the reliefs and simplifying
it that way and having a straight lower rate of tax.
Mr Meeson: The survey that John alluded to looks
at the relief from the viewpoint of the company into which the
investment is being made. Anecdotal evidence, looking at it from
the other direction, from the point of view of the individuals
making the investment into these companies, is particularly coloured
by the fact that the independent financial advisory world has
largely turned enterprise investment schemes, particularly venture
capital trusts, into marketed commodities and the anecdotal evidence
suggests here that the enterprise investment relief itself is
not the driving factor. Most of the investments into the EIS and
VCT are mainly ordered to retain the capital gains tax roll-over
relief, and the income tax relief is, as John says, a bonus.
Q76 Lord McGregor of Pulham Market:
There is a distinction between the two, is there not? I can see
that the EIS is a capital gains tax roll-over relief element but
the VCT is somewhat different. Mr Cullinane, I thought you were
commenting from the investors' point of view—your own clients,
as it were. Has not the VCT system as a whole—and in some
cases it has raised quite a substantial amount of money—attracted
higher rate taxpayers into using that relief in a way that they
would not otherwise have done, and provided equity for companies
themselves in a way they could not otherwise have got?
Mr Cullinane: I cannot claim that we as a body
are getting scientific research into this. My general perception
would be there are certain investors who are predisposed to a
lot of ways of saving a lot of tax. Because there are so many
of these types of things on the market at any one time, they will
say, "Have you looked at VCT" and so on, so there is
a certain amount of money that follows those opportunities around.
Whether those companies could never have raised funds any other
way, I frankly, if it is decent investment, rather doubt. I also
have a suspicion that a great deal of the tax saving from the
investors' point of view disappears to the organisers of these
schemes and the tax saving effect appeals to certain investors'
psychology as much as to cold assessment of their financial interest.
In short, I am very, very sceptical of all of them. I do not say
you could never justify any special treatment or any intervention;
I am just very sceptical as to whether it either has the impact
it does, or, if it does have an impact, whether it really makes
sense to target those things and that other things that are therefore
missing out as a result would not be equally beneficial.
Q77 Chairman: We have to face the
fact that three of us here were Treasury ministers and probably
at some time or other were responsible for producing some of these
sorts of schemes. I do not think we are going to analyse the past,
but would I be right in deducing from the tones of your replies
that, if we were looking forward, whilst we would not look to
you for guidance that this is likely to be a very important part
of the fiscal system going forward, that is the message I am getting.
I do not know if I am right. Others might but you do not.
Mr Whiting: Looking at it from a tax point of
view, we acknowledge that it is there, it is a relief that we
will make sure it is possible our clients, be they corporates
or individuals, can claim. The acid test is: Is this raising extra
money and is it getting that money for businesses that would otherwise
be unable to get the funds? That is perhaps the key question,
and whether the Government should subsidise that process. Maybe
the people to ask are more the financiers than ourselves. Harking
back to Lord MacGregor's question, there has been a lot of money
generated, particularly through VCTs, that has sought and largely
found investment. As the study by the University showed, it went
to riskier businesses generally—and maybe that is a good
thing. Whether the overall payback for the tax relief given was
worthwhile is a very interesting question.
Q78 Lord Barnett: We could simplify
the tax system a bit by dropping the whole damn thing.
Mr Whiting: You could indeed, my Lord.
Chairman: That really puts that particular issue
to bed—for us, anyway. I am very grateful to you for coming
along and, as usual, answering our questions and making comments
which are highly relevant to what we are think of doing. We are
very grateful to you. Thank you very much.
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