Memorandum by the Institute of Chartered
Accountants of Scotland (ICAS)
The Institute of Chartered Accountants of Scotland
welcomes the opportunity to give evidence to the House of Lords
Committee considering aspects of the Finance Bill 2008 and related
consultation documents. In this draft response we have followed
the order of the questions issues in the March 2008 consultation
document published by HM Revenue & Customs and HM Treasury.
THE ENTERPRISE
INVESTMENT SCHEME
BEFORE INVESTMENT—THE
INVESTEE COMPANY
Q1 In October 2007 PricewaterhouseCoopers
Ltd published the survey "Enterprise in the UK: Impact of
the UY tax regime for private companies", which showed 65%
of respondents were aware of the EIS—up from 52% in 2006.
What more can be done to continue this trend of increasing awareness
of the scheme?
A1 Given the restrictions regarding connection
with the company prior to the raising of capital through EIS,
it is of extreme importance that any potential investors in a
business are aware of EIS as early in the process as possible.
We do not think, however, that any amount of publicity will ever
mean that awareness is at an acceptable level. There does not
seem to be a problem with this in the EC state aid rules.
Although this may increase compliance costs
and discourage some investee companies from proceeding (see our
comments at Q3 below), if HMRC think that avoidance is the issue
here, further debate and consideration of a GAAR restricted to
VCT/CVS/EIS might enable some of the restrictions to be removed.
Q2 Is there anything in the broader regulatory
regime that hampers investee companies seeking external investors
under the scheme? If so, how could this be addressed?
A2 The problem with EIS is that the legislation
is so complex and subject to differing interpretations. What is
needed here is a lighter regulatory touch and a set of unambiguous
rules so that the costs of setting up the scheme are not prohibitive
to the investee company. In our opinion that can only be possible
where you have acceptance by Government that there will be some
tax lost through simplification. In practice, many professionals
find the EIS intimidating and fear of making a mistake deters
many from starting the process.
Q3 How well do advance assurances serve their
purpose? Are there any ways in which the process of gaining an
advance assurance could be simplified?
A3 It remains the case that very few investee
companies could complete an application to HMRC for advance clearance
without knowing the rules; otherwise how do you know what is important
to disclose? One answer is that you disclose everything but that
could be a prohibitively long and costly process. The most usual
answer is that you engage a professional advisor to do it for
you if you can find one sufficiently skilled to feel able to take
on the work.
The answer of course, is to simplify the system
as a whole and expect to lose some tax at the margins. As suggestions,
the losses could be kept to a minimum by setting a two-tier system,
one for small companies and another for medium sized companies.
The smaller companies regime would be very light touch and simple
to follow. The other could be more regulated.
Q4 The list of excluded activities (see Box
2.1) has remained largely unchanged since the inception of the
scheme. Do respondents feel it has kept up with commercial and
technological developments? Are there any anomalies affecting
particular industries or sectors?
A4 We think that the list system is preferable
to any other. However, some sales are qualified by the number
of times the product is used and this can give the appearance
of a leasing arrangement. Any disputes or uncertainty adds to
cost, absorbs management time and detracts from making an EIS
attractive to raising finance.
Q5 How well does the current control test
achieve its objective of focusing relief on financially independent
enterprises that have most difficulty in raising capital?
A5 We do not have objections to the independence
test. We cannot think if any reason why you would disadvantage
any small businesses as a group structure is probably not appropriate
for most at the seed capital stage.
Q6 The Sainsbury Review of Science and Innovation
recommended that "The conditions of the EIS concerning the
time constraints for the start of trading and the expenditure
of money raised should be reviewed". While the Government
believes that it is necessary to preserve rules requiring the
investment to be put to good use promptly, views are welcome about
how the requirements might be refined in practice, especially
whether there are particular industries that they do not fit well
(for example, those whose ability to commence trade is dependent
on potentially long regulatory approval procedures)?
A6 We think what needs to happen here is
that there is some "wriggle room" is built into the
rules whereby companies can obtain an extension to the limit in
certain circumstances such as factors beyond their control eg
difficulty in obtaining loan finance makes it hard to complete
the funding package in time. In addition, there should be no time
limit on say 20% of the funds. It is known that certain trading
activities are frustrated by the time constraints especially where
planning approval is required. By "wriggle room" we
suggest an amendment to Section 175 ITA 2007 to add at the end
of (3) the words (c) or such later time as the Board may by notice
allow.
It is commercially unrealistic to expect companies
raising funds to know exactly when and how much funds are needed
and a relaxation on the 20% would allow companies to err on the
side of caution. Raising too little equity is a serious mistake.
Section 179 ITA 2007 defines a qualifying business
activity to be a qualifying trade carried on wholly or mainly
in the UK. This can cause difficulties for high tech companies
wishing to export and needing to set up a foreign sales force.
BEFORE INVESTMENT—THE
INVESTOR
Q7 Is there an adequate level of awareness
among potential investors of the existence of the EIS? If not,
do you have specific proposals regarding how investor awareness
could be increased?
A7 There is not an adequate awareness. HMRC
should consider TV advertising or simplify the rules to make advertising
the scheme unnecessary. It might be worth considering whether
information held on HMRC's database might be used to identify
taxpayers who should consider EIS investment and targeting better
a campaign of awareness.
Q8 Is there anything in the broader regulatory
regime that hampers external investors seeking potential investee
companies under the scheme? How could this be addressed?
A8 We think the main thing hampering investors
seeking individual companies is the fact that EIS funds exist.
If we were investing through EIS we would always go to a fund
to take away the risk that procedures had not been followed correctly
leading to the loss of relief. This will be exacerbated through
the new penalties regime which puts the emphasis on the individual
taking reasonable care. Presumably HMRC will consider anyone with
an EIS investor to be a relatively experienced investor who should
know the rules of the scheme. EIS investment is notoriously complex
and many external investors are deterred from further consideration
because of the fear of getting it wrong.
Q9 Could any added value be gained from adapting
the carry back provisions to all carry back or carry forward for
one year either side of investment?
A9 That would be welcome but it does not
help with the fundamental difficulty of EIS—complexity.
There is a fear that the complexity can have unforeseen and unpredictable
consequences. For example a loss claim made under Section 381
ICTA 1988 (Sections 23, 24 and 72 ITA 2007) could eliminate taxable
income for earlier years.
Q10 Are there examples where the rules surrounding
connected parties work in a way that seems anomalous to, or at
odds with, the purpose of the scheme?
A10 At is most fundamental level the scheme
is there to provide growing companies with seed capital because
loan capital funding is inappropriate due to the riskiness of
the business. As most businesses start as family affairs to some
extent at least with mother/father/grandparents funding the start-up,
it seems anomalous to us that these are the very persons excluded
by the connected persons rules. By removing those rules you would
allow the business to start, concentrate on producing a product
the then attract further EIS funding from funds or individuals.
We would also point out that the founder directors/employees
behind setting up the business should always be allowed to own
EIS shares and that they should be able to own more than 30% and
that it need not be ordinary share capital. The EC state aid rules
talk about quasi share capital (eg asset backed loan stock) and
do not talk about connection being an issue. It is recommended
that some revision of the rules on connected parties might encourage
better corporate governance by encouraging non executive directors.
A compromise might allow a cap on pay for the right non executive
directors to be recruited and encouraged to invest.
BEFORE INVESTMENT—HMRC
Q11 Are HMRC or other Government departments
missing any opportunities to raise awareness of the scheme among
potential investors and/or companies? Is there anything that HMRC
or other Government departments are doing that impedes the links
between potential investors and companies?
A11 See previous comments.
MAKING THE
INVESTMENT
Q12 Are there any ways in which the process
of obtaining EIS relief (or the forms themselves) could be simplified?
A12 The forms are not the problem, it is
getting to the point of completing the forms that is the problem
ie is it qualifying and does the investor qualify?
THE THREE-YEAR
QUALIFYING PERIOD
Q13 Is three years a sensible time period
for the company to have to continue meeting the qualifying conditions
to ensure that the funds raised under the EIS are being used according
to the policy objectives of the scheme?
A13 We think it is probably not necessary
because there will be a limited secondary market for the shares
anyway unless someone creates one. In that circumstance you could
have avoidance and early withdrawal of capital but we do not see
that as a realistic possibility when there is already a GAAR for
financial products that could be extended to cover here.
Q14 What more could be done to ensure that
companies meet their obligations and avoid accidental breaches?
A14 Simplify the system and accept some
limited tax leakage.
Q15 Are there alternative ways of treating
breaches of the requirements that still support the scheme's objectives
and deter misuse, but apply more proportionately?
A15 Rather than have an "all or nothing"
approach why not use a sliding scale that distinguishes between
deliberate and non-deliberate breaches. Proportionality seems
sensible.
EIS FUNDS
Q16 Are there any procedural or administrative
aspects of the processes concerning EIS funds that you feel could
be simplified. If so, how?
A16 Not that we can think of.
OTHER
Q17 Do you have any other suggestions on how
the administration of the EIS could be simplified and/or improved?
A17 See above.
RESIDENCE AND
DOMICILE: CLAUSE
22, 23 AND SCHEDULE
7
Introduction
Since the announcement in the Pre-Budget Report
(PBR) on 9 October 2007, that major changes to UK tax law and
practice in this area were to be made there has been significant
uncertainty as the proposals have changed on many occasions. The
draft legislation and full details of the changes had been promised
for publication before Christmas 2007 (itself some 2½ months
after the PBR. However, it was not until 18 January 2008 that
these were published.
Whilst there has been consultation by HM Revenue
& Customs (HMRC) (who are to be congratulated for taking account
of the concerns raised by this Institute and the other Professional
Bodies), the frequency of change in the run up to commencement
on 6 April 2008 when affected individuals, companies and trustees
were seeking to understand the impact of the changes and determine
what action to take made it extremely difficult for them to do
so.
The problem is compounded by the fact that the
Finance Bill provisions are not final as stated in the Explanatory
Notes by HM Treasury. The HMRC website has sought, with some success
but also with some problems, to set out the updated version of
what is proposed. It cannot be sensible for the proposed legislation
as published in the Finance Bill to require so much revision.
Indeed, before the Bill was available to the public, the detail
was already out of date in many aspects. Some of the proposed
revisions are as a result of representations made in the consultation
and others as an apparent result of threats from many non-domiciled
individuals to leave the UK taking wealth and business interests
(many providing UK jobs) with them.
In our view, all of this demonstrates the need
for effective consultation to take place with sufficient time
being given for proper discussion of the concepts as well as draft
legislation so that the conclusions of that process are then presented
in the Budget with the Finance Bill containing the final legislation
(subject to any amendment made in the Parliamentary process) but
without it requiring significant amendment from the consultation
process.
Whilst it is for Ministers to determine policy,
the outcome has to be capable of being operated by both taxpayers
(and their advisers) and HMRC with sufficient certainty that once
the legislation is seen in the Finance Bill that will be the final
form subject only to minor change rather than wholesale surgery.
We now deal with some of our specific concerns.
Test of "Residence in the UK"
Despite the change to count any day in which
an individual is in the UK at midnight, we take the view that
there will still be substantial uncertainty as the test will still
be heavily dependent on existing case law and HMRC practice. We
would prefer a clear statutory test as is the case in many other
countries and which is consistent with the approach taken elsewhere.
We welcome the exception to the "in the
UK at midnight" test for transit passengers. There will inevitably
be potential for litigation as to when the new Section 831 (1B)
ITA 2007 will apply.
Personal Allowances and the Remittance Basis
There are significant numbers of migrant workers
in Scotland and other parts of the UK—with large numbers
from Eastern Europe and the Indian Sub-Continent. The vast majority
of these workers will retain their domicile outside the UK and
will, therefore, be "non-domiciled" within the terms
of the proposed new legislation despite having been in the UK
for many years. These workers are likely to have income arising
in their home country especially where they spend part of the
year in the UK and part in their home country. Whilst the amount
of this income may well be within the £2,000 de minimis
amount (the doubling of which from the original proposal is
welcomed) in some cases, the effect of the new legislation will
be that such individuals will have to file UK Self Assessment
Tax Returns to disclose that income and to deal with any potential
double taxation. Failure to do so will mean that such individuals
will be non-compliant in respect of their UK tax obligations despite
their UK income being dealt with, commonly, under PAYE. It is
unreasonable, and arguably contrary to Human Rights legislation,
that new UK tax rules should be introduced with this effect without
adequate time having been given to allow such individuals to be
made aware of these new obligations. In general, such individuals
will not have Tax Advisers and many do not have adequate skills
in English to be able to ascertain the full extent of their UK
tax obligations. Time will also be required for HMRC staff (in
Contact Centres) to be trained in the new rules as applicable
to this group in the population. The necessary language skills
for HMRC staff will also need to be adequately resourced.
We would have preferred the de minimis limit
for unremitted overseas income to have been set at a more reasonable
figure to take these individuals out of UK tax in respect of the
overseas income (where it will normally be subjected to tax in
the source country)—especially where, in terms of the new
rules, such individuals may lose their right to the UK personal
allowance for income tax purposes and the CGT annual exemption
(although this is likely to be of much less concern in such cases).
We recommended, and still do, that a level of £5,000 (approximating
to the personal allowance) would be fairer in such circumstances.
In addition, we do not think that it is reasonable to require
that individuals with small levels of unremitted overseas income
should lose their UK personal allowance as this will impact on
low paid migrant workers against whom the policy does not appear
to be directed.
It cannot be the Government's intention to create
a system which inherently puts a large number of low-paid migrant
workers (who are essential to the UK economy) in a state of non-compliance
with their UK tax obligations.
Meaning of "Remittance"
The new Section 809K defines a "remittance"
to the UK (of overseas income and gains) to include "property"
being brought into the UK.
In the case of migrant workers, as described
above, we are concerned that, for example, the bringing to the
UK of a vehicle or the tools of the trade for, say, a Polish plumber
where these items had been purchased out of non-UK funds—perhaps
several years before there was any intention of coming to the
UK, will amount to a remittance of a sum equal to the original
cost of such items.
Relevant Persons
The new legislation defines "relevant persons"
for the purposes of Sections 809K to 809N. Section 809L (3)(a)
provides that a man and woman (who are not married to each other)
living together as husband and wife are treated as if they were
husband and wife. This is in essence a "common law spouse"
(or civil partner as there is a similar provision for same sex
couples). This is inappropriate as such a concept is no longer
found in Scots Law having been abolished by the Family Law (Scotland)
Act 2006 as we understand it. We also believe that such a status
is not available elsewhere in the UK. It seems to fly in the face
of Human Rights legislation that such status might be introduced
for certain individuals from overseas but is not applied for taxation
purposes to the UK population at large.
CONCLUSIONS
We are of the view that there are many lessons
which ought to be learned from what has happened since the PBR
in relation to these changes. Among these are the need to consult
at an early stage with the Professional Bodies and others to ensure
that a policy decision can be implemented fairly and effectively.
There can be little doubt that the early version of the proposals
gave an impression that non-domiciled individuals were not welcome
in the UK.
We consider that too much concern was expressed
about how to tax wealthy non-domiciled individuals without adequate
recognition of the impact that the proposals would have on much
less wealthy individuals to whom the provisions would also be
applicable (as discussed above).
28 April 2008
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