Examination of Witnesses (Questions 100-119)
Mr Frank Haskew, Ms Francesca Lagerberg, Mr Derek
Allen, Mr Alex McDougall and Mr Chas Roy-Chowdhury
1 MAY 2008
Q100 Lord MacGregor of Pulham Market:
How much of that do you think will really deal with the problem?
Ms Lagerberg: There is a very effective disclosure
regime in the UK. I think the disclosure of tax avoidance scheme
rules have changed the way that these schemes are undertaken.
Also, there is quite a strong recognition about the way HMRC risk
assess that area. I do not think that is really the problem here,
the issue is going to be for businesses trying to use the one
relief that has been given because they are going to look at entrepreneurs'
relief that has been set up on the back of very some ancient retirement
relief rules. Retirement relief was removed for a very good reason
and now it is back, it is slightly dusted down, a little bit shinier,
but it is very much the same regime. It is very easy to go back
to the old rules of history because they are easier to get down
off the shelf, but there were a lot of problems with retirement
relief. I do not think your concern should be about clever planning
schemes, it should be about the core people that relief is aimed
at, small businesses, which is what it is trying to help, trying
to get an effective rate of 10% and will they be able to use the
relief and is it good enough for what it is intended to do. I
think that is going to be the bigger concern for the majority
of people, will that work effectively, and have we not just reintroduced
some of the problems we removed in 1998.
Q101 Lord MacGregor of Pulham Market:
But that is a different issue from the issue of people trying
to move income into capital gains for the obvious reason of the
lower tax rate. Although you have raised that point, just to confirm,
you do also agree with your colleagues that the requirement to
disclose schemes now to HMRC will effectively deal with the problem
that did exist previously?
Ms Lagerberg: To be honest, I think it will.
I think the disclosure of tax avoidance scheme rules means that
if someone is trying something very aggressive, very out there,
it would have to be disclosed and it would be shut down incredibly
quickly if the previous two years are anything to go by. The ground
rules that people operate under have changed, so they would be
far more wary about trying to implement a scheme which would have
a very short shelf life indeed.
Q102 Lord MacGregor of Pulham Market:
Could I just go back to the indexation point of April 1998. We
have already discussed it a bit, but it seems to me in a way there
is an element of what you might almost describe as retrospection
in what is coming in now. In 1998 the Government did agree to
a 1982 fixed point for devaluation to take place. Is there any
reason why they could not just have drawn the line at 1998 and
taper relief, of course, would have gone but at least the indexation
up to that period would have remained?
Ms Lagerberg: That is a very good point and
it is one that I think was not really thought through properly.
There is a lot of expectation there, particularly for certain
sectors, where indexation was a very significant item and the
reason the rule changes were brought in in the way they were in
1998 was to preserve people's expectations. It very badly affects
a number of people for whom that was their nest egg on retirement,
they thought they knew what was going to happen to them and the
rules completely changed for them. When you run some of the computations
through it is a pretty dramatic effect. Taper relief is a dramatic
change but actually it is the loss of indexation, and the hike
from an effective 10% to 18% is an 80% increase, and if you add
on indexation some people are well over 100% worse off because
of those changes.
Q103 Lord MacGregor of Pulham Market:
If they had held the asset for some considerable time.
Ms Lagerberg: If they had held the asset for
some time.
Q104 Lord MacGregor of Pulham Market:
And during a period of what was quite high inflation which indexation
dealt with.
Mr McDougall: That is right. That was particularly
true of farmland where the problem was quite acute. The indexation
allowance for an asset held on 31 March 1982 up to 1998 was a
multiple of 1.047, so it more than doubles the base value. If
it was felt that it was right that an 18% rate applied to the
gain from the market value at March 1982, in essence what is happening
is you are taxing them at 36%.
Q105 Lord MacGregor of Pulham Market:
How much?
Mr McDougall: You are really doubling the effective
rate because you are losing this 1.047 multiple purely as a result
of not necessarily land price inflation but RPI, but it is as
close as the system allowed for the real rate of inflation over
agricultural land. In essence, the rate that has been charged
is on a gain which is twice what the real gain is if you take
inflation to 1998 into account.
Q106 Lord MacGregor of Pulham Market:
So for long-term holders, if they come to sell the assets, they
will actually be facing a higher rate of tax now—
Mr McDougall: In essence, yes.
Q107 Lord MacGregor of Pulham Market:
—even with the 18%.
Mr McDougall: Yes.
Mr Roy-Chowdhury: In some ways that allowance
could have been taken forward like a capital gains tax exemption
as being a parcel on its own if there had been proper consultation
at the time.
Q108 Lord MacGregor of Pulham Market:
Can I ask one last question. You have recommended that there would
be some logic in aligning the index limit in line with the pension
lifetime limit. I could not quite see the logic of linking it
with the lifetime pension limit.
Mr Haskew: I think it was a question of if you
want simplification potentially they were both in the same sort
of area, both, if you like, increasing every year, so it was a
question of having one limit. Instead of having two separate limits
for two separate things, it was just having one limit that would
do both.
Q109 Lord MacGregor of Pulham Market:
They are two separate issues really, are they not?
Mr Haskew: They are, yes. It is really another
possible way of simplifying the system.
Q110 Lord MacGregor of Pulham Market:
Or raising the limit?
Mr Haskew: The point is it is not obvious that
the current limit is going to be increased whereas there is a
mechanism for the pension limit to be increased annually, if you
like, so it was really a question of shoehorning it into that.
Q111 Lord MacGregor of Pulham Market:
It is as much a question of indexing the limit.
Mr Haskew: Yes, that is it.
Q112 Lord Sheppard of Didgemere:
Can I ask one question on what has been said on avoidance. I cannot
remember whether it was three or four years ago, but it was at
least three years ago, when I remember saying to the Inland Revenue
when they came to this sub-committee why was it the legal profession
and the accounting profession had been able to out-run them for
decades. That is from my experience in business and so on. I said
do not take that badly and they said they wanted more powers and
since then they have got more powers. From what you have just
said the position on avoidance would be quite different and the
20 versus 18 will not be the same position as it was for many
years when that existed in the late 1970s and into the 1980s.
Does that mean that you think the Inland Revenue have, I had better
not insult them by saying woken up, but do you think they are
now in a much better position? Are they asking the legal and accounting
professions much sharper questions than they used to?
Mr Roy-Chowdhury: It is really a principles-based
solution where it is self-assessment and it is for the accountancy
profession and legal profession to actually disclose schemes which
are, for want of a better word, considered to be in certain categories
of tax avoidance. Therefore, the Revenue are getting a heads-up
before those potential planning opportunities are put in place
to actually issue a press release saying, "We are going to
stop this now, from today, and legislation will come in the next
Finance Bill". It is a very smart tool that they now have
which they did not have four years ago. Clearly that has given
them the opportunity of being able to stop shifting from income
to gains and stop a lot of what otherwise may have gone on with
the differential in the rates.
Q113 Chairman: I think we have given
capital gains tax quite a good run for its money, but just before
we move on to residence and domicile can I just ask, in some ways
the scope of the entrepreneurs' relief is narrower than for business
assets taper relief and may be more complex as well. Do you think
that is justified?
Mr Roy-Chowdhury: It is difficult to understand
why, if it is there to give some measure of relief in the same
way that taper relief gave relief for certain classes of assets
in a certain way and other classes in other ways, the rules should
be based on the taper relief rules for entrepreneurs. It would
have been broader, it would have been fairer and, again, going
back to what we were talking about on expectations, where certain
entrepreneurs were expecting to get relief and pay tax at 10%,
they would have been brought within that 10% rate which under
the current entrepreneurs' relief they are not. Again, it is failing
legitimate expectations that these business people had.
Ms Lagerberg: I would rather we have some relief
than none at all, so we should be grateful for small mercies.
It is very targeted, it is only aimed at small businesses, it
is capped, a person with a large gain gets some benefit from it
but it will be a drop in the ocean for some people's gains. It
will not help employee shareholders who do not have a sufficient
shareholding, so it will not help the Tesco cashier who has got
shares in the business, so that is not good to encourage people
in their ownership of the business that they are in. It is quite
limiting. Also, in some ways it is a shame that it has not been
linked to competitiveness for the UK because the serial entrepreneur
will be through that million pound cap and wondering whether the
UK is a place for them to take their gains. They are internationally
mobile, why would they stay in the UK to make the gain for their
next venture. I think it has missed some opportunities, but the
policy around it was meant to be quite restrictive and it has
probably done what it said on the tin. I think we would have liked
it to have done more but that is a policy decision.
Lord Sheppard of Didgemere: There has been concern
that insurance bonds may be put at a disadvantage by these changes.
I am not certain that I am qualified to understand your answer
on that but perhaps you would like to give it to me and I will
tell you if I understand it.
Q114 Chairman: The question is on
insurance bonds, that they may be put to some disadvantage by
these measures. Do you share those concerns?
Mr McDougall: I think it is because they come
under a totally different regime, the effect of which is that
it is not on a level playing field with the investments which
are subject to capital gains tax, largely because in the hands
of many policyholders where you are looking at the gains they
are not capital gains, albeit that quite a lot of the growth has
arisen from capital gains in the life fund. It is because tax
has been paid at the level of the fund that there is no basic
rate tax on policyholder gains, but the effect is that if you
have got a higher rate taxpayer who makes a policyholder gain
he or she will pay tax at 20% on the gain because there is an
inbuilt basic rate credit, whereas if it were capital gains it
would be taxed at 18. That is my understanding of it. I used to
do a lot of life company tax but that was a long time ago and
the regime has changed somewhat. That is how I would see it.
Q115 Chairman: Thank you very much.
Let us move on to residence and domicile and perhaps I can start
by asking one or two general questions. It is an area that has
been under review for many years, indeed I think the present review
was started in 2002. Why do you think concrete proposals then
emerged in PBR 2007? Do you welcome the fact that at least the
uncertainty of the review is no longer hanging over people? Do
you have a view on the correctness of the policy reasons for the
proposal? I think for the ICAEW you thought that the changes might
result in a net loss of revenue because of the behavioural changes
and the reactions to it, which means you are casting doubt on
the figures that went into the Budget arithmetic. Perhaps you
would like to expand a bit on that.
Ms Lagerberg: If I could pick up on the first
point on whether concrete proposals emerged and why they emerged
in the PBR in the way that they did. Politics is a funny old game,
is it not, and we are not really the right people to judge on
politics. Obviously the political climate had changed and it was
time for the Government to put forward some proposals on this.
What is really disappointing about this is there has been a consultation.
If you go back to 1988 we were talking about reviewing residence
and domicile and there was actually a very strong belief that
the rules needed to be changed. The residence rules are based
on the age of steamships and on cases that involved lunar months
as the grounding on which they were based. There is no doubt that
change was needed. The domicile rules have been looked at many,
many times and consistently put on the too difficult pile, but
there is a need for change. There was a huge amount of response
to the consultation that began in 2002. The ICAEW put in at least
two responses, if not three from memory, and many other people
did too. What we got in the PBR was not bad. It was not a response
to that consultation, it was a much more short, snappy comment
based around having a £30,000 annual charge with more details
to follow. The details that came out in January were not based
on the back of a detailed consultation, they were a raft of measures
that had been thought about but were not part of the consultation
process that we recognise. Of course, the January changes have
been significantly altered thereafter. Do we feel it has got rid
of the uncertainty? Well, if I knew what the rules were I would
probably be able to tell you. I am still not sure what they are
doing because we have not seen the proposals yet. I am looking
forward to seeing the Finance Bill proposals because they are
not there yet. Do we think they have got the policy right? Again,
policy is difficult for us to comment on, but if you are looking
to improve the residence and domicile rules in a way that gives
people certainty we are not there yet. Fairness, I am not convinced
they have quite got that right but it is an awful lot better in
the Finance Bill than it was in the January proposals. I am very
concerned about the competitive elements of it. Again, the January
proposals were far worse than the proposals we have got in the
Finance Bill so there has been some sensible discussion there
but there are a lot of issues around this. This is a really complex
area. It is a law of unintended consequence area where you make
one minor change here and you unravel a whole host of complex
legislation somewhere else. This should not have happened this
way, this was a very poor consultative process.
Q116 Chairman: Do you still think
there will be a net loss to Revenue even after the changes have
been made?
Mr Haskew: If I can pick up on that point. I
think we said "might", we did not say "would".
Our main concern is that in previous consultations on this we
have said if you are going to make changes you need to do a proper
economic analysis of what the result of it is going to be to see
whether there is a net benefit to the UK. To be perfectly honest,
we do not feel we have had that at all. There has been no real
attempt to justify the figures and the amounts of revenue being
raised from this. Our concern is that we have no idea where the
figures have come from to support this and certainly our evidence
is that a lot of people would just leave the UK. I think it would
be true to say that the changes that we have seen in the draft
legislation on areas like remittances, have potentially dampened
down the worries considerably for a lot of people, so perhaps
the initial concerns we had back in October are less than they
were, but the fact is we have not had any figures to justify what
is a fundamental change in policy.
Q117 Lord Sheppard of Didgemere:
Against the background of it being a complex topic of conversation
or fear, if you want, certainly in the City for six or seven years,
if not longer, was it rather surprising that it became so controversial
when it did actually happen? Was it because it became highly political
with both parties trying to pinch each other's ideas, or was it
because we still do not know exactly what the results of this
will be and we probably will not know for ten years whether people
do come here and whether we do lose inward investment and so on?
Why do you think it has been so controversial?
Ms Lagerberg: I think the January proposals
which were far more extreme than what is actually in the Finance
Bill did raise a lot of concerns in the City because certainly
the UK looked very unattractive with the potential to be taxed
on your income in different parts of the globe in a way that had
never happened before. It was such a dramatic change with such
little time for people to reorganise their affairs. There was
a huge amount of concern and a lot of that has been reined back
and all credit to the people who have done something about it.
I think that was why it blew up in the way that it did. From the
PBR proposal, which was quite short, to the detail that came out
in January, those were really quite sweeping ideas and thoughts
that had a very, very negative effect on the UK. If you are internationally
mobile the UK did not look very attractive in January. I work
for a large accounting firm, Grant Thornton, and we have a lot
of high net worth individuals and you always wonder about whether
people are genuinely going to leave the UK, but we had clients
who were very, very concerned about whether they should remain
based in the UK in a way that I have never seen before.
Mr Roy-Chowdhury: I fully agree with Francesca
and Frank but, like capital gains tax, it was the abruptness with
which the announcement happened. The 2002 consultation which we
were very much a part of, ACCA participated in, was nothing like
what has come out. What seems to be totally lacking is if there
is a need to rein back the tax regime for non-doms to create a
fairer tax regime for them, as the announcement says, then where
is the research. Is it actually beneficial for the UK to not have
this regime at all? Is it going to mean more job creation, more
wealth creation, more tax revenues for the UK? In terms of cost
benefit, is it better for the UK not to have this at all or to
have it? If it is better for the UK to have it then let us not
fetter the regime with a levy, let us not fetter the regime with
other consequences for those who are staying here. If it is best
that the UK does not have it then let us sweep it aside and have
the same regime for everyone, which is what most of the rest of
the world does. The research has not been done but the measures
were announced and the proposals had to still be formulated in
a concrete fashion for legislation. That is where we are coming
from, that there should have been a more formed judgment made
before the announcement happened which created the fuss, created
the concerns, and then the original proposals tried to have the
best of both worlds, the rising bases and the remittance bases
at the same time, which is not the way to attract talent and keep
talent in the UK.
Q118 Chairman: There is a Scottish
view coming.
Mr McDougall: I have a couple of comments to
add to that if I may. The first one is what we got in October
and subsequently was not really the result of a review of residence
and domicile. Whilst there was a little bit of adjustment to the
meaning of resident, particularly in terms of how you count days,
actually what it is really about is how the UK tax applies to
resident but not domiciled individuals, which is a very different
matter. We are still somewhat out of step with many other countries
on how we look particularly at this issue of domicile where we
have a number of significant anomalies because of what the word
means. That was the first thing. The second thing was, in support
of what Chas has just said, when the first consultation document
came out after the PBR most of what it was saying was that we
really did not have very much in the way of concrete information
because the only statistical information which was available was
the number of people who submitted non-resident pages to their
self-assessment tax return claiming to be not domiciled, but you
only had to submit these pages where that status had an impact
on UK tax, so we do not actually know how many non-domiciled individuals
there are. Because it only applied to people who remitted income
to the UK we do not know the extent of the potential wealth which
is arising to people who are not domiciled but had not previously
been remitted. There was a huge amount of information not there.
There was a huge perception among those who are not domiciled
in the UK that, in fact, this was a political attack on them and
somehow they were not welcome. There have been elements of an
attack raised over the years. I say it is a perception, I do not
think that is the reality, but, nonetheless, in these things perception
is what matters more because that is what people take as the basis
for some of their behaviour.
Q119 Lord Paul: If there is any case
where consultation had been long enough, it is the non-domicile
case. As has been discussed, it has been going on for the last
30 years and very much hyped up over the last ten years. The press
criticised it and there have been attacks on a few non-domiciles,
including me. I declare that I am a non-domicile because it suited
me because I belong to one party. Why is it that the profession
did not speak up during those years and give some facts and figures?
It was announced, I am sure it was a reaction to a very half-hearted
type of policy which was announced by one party and the other
party jumped on the bandwagon with absolutely no thought, and
even at that time the press went on until they realised that the
truth was very different. There is no doubt that a lot of people
who want to come in certainly have no intention to come in and
stay here to invest. They might invest, but you do not have to
be here to invest. The damage has been done which is very significant.
There has been 30 years of work by both parties to make Britain
an attractive place and the damage has been done, I do not think
there is any doubt about it, people are talking. I know a lot
of people, and I am sure you do, who are looking at it and asking
whether they want to stay. There are people like me who may not
want to stay. I will not go but younger people are thinking of
it. Was it not possible for the profession to speak up more for
30 years instead of discovering all of a sudden in January when
all hell broke loose?
Mr Roy-Chowdhury: In terms of the consultation
process, we considered it had actually finished in 2002-03 when
no more was heard, no more meetings were held, so as far as we
were concerned that was the end of the issue. As you said, very
rightly, there was a decision made when it was a right and opportune
moment to re-announce this but what came out, as we said, was
not anything to do with consultation. I have been preparing a
presentation which I am giving in a couple of weeks' time and
looking at The Sunday Times Rich List published last Sunday,
27 April, if you look at the top ten more than 50% are non-doms,
and that is anecdotal evidence as to how powerful the non-dom
regime is in the UK in attracting those kind of people. Below
that, there is a whole raft of others who are operating in much
more ordinary jobs. I think the research needs to be done, or
should have been done before the announcement was made and before
legislation happens. That is what it is about, is it good for
UK plc to maintain this regime or not. Let us do the research
before passing judgment and passing legislation.
Ms Lagerberg: From an ICAEW perspective, over
many, many consultations that have taken place over, you are right,
30 years, that has been going on for quite a while, the point
that has always been made is do not bring in something quickly
without really thinking it through and looking at the consequences.
As with any change you are going to get winners and losers, and
we all know that there will be winners and losers from any change
of this nature. Take your time, do it properly, look at the research,
think it through. That is not what has happened. To stand up for
the profession, I think that point has been made over and over
again. Looking back to the 2002-03 review, one of the things we
asked for was a commitment that there would be a proper consultation
process if this was ever decided and I am afraid to say that simply
has not happened.
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