Examination of Witnesses (Questions 120-136)
Mr Frank Haskew, Ms Francesca Lagerberg, Mr Derek
Allen, Mr Alex McDougall and Mr Chas Roy-Chowdhury
1 MAY 2008
Q120 Lord Powell of Bayswater: Could
we come on to the question of residence. I read in your memoranda
that most of you agree there ought to be legislation to determine
when someone is UK resident rather than just relying on the case
law in current practice. Have you put this point to the Treasury
and the Revenue?
Mr Haskew: Yes, we have.
Q121 Lord Powell of Bayswater: What
have they said?
Ms Lagerberg: We have had discussions with HMRC
and Treasury on this point and we have raised the issue with ministers.
I think it has been looked at. One of the difficulties of the
lack of thorough consultation on these proposals means that we
have got a Finance Bill already there and bringing in something
at this stage is a political decision, is there the time to draft
it, to think it through. From the ICAEW's perspective we think
it is a very helpful thing to have a statutory residency test.
Ireland has one, the US has one, many other developed countries
have one and they have worked very effectively for a long period
of time. If you had the opportunity to look at this particular
consultation and where you would start from, you would have put
that in the original proposals and we think it would have been
a very worthwhile addition.
Q122 Lord Powell of Bayswater: You
think it is just a question of parliamentary timing and difficulty
of changing things after the Bill is published?
Ms Lagerberg: It remains to be seen whether
they find an opportunity to do it and whether there is the political
will to support it. I do not know where that is going to go.
Q123 Lord Powell of Bayswater: They
have not put any counter-argument of substance.
Ms Lagerberg: I think there are a lot of things
you have to think through with any of those tests because you
have such a complex matrix of laws. It is not a case of drafting
it in an afternoon and being able to put it forward. You have
to think through the ramifications from it. The timetable is tight
to enable them to do it but we think it should be part of the
proposals.
Mr Roy-Chowdhury: Certainly in 2002-03 we did
go the route where we came pretty close to drafting or having
statutory rules for residence, so that work is within the Inland
Revenue, as it was then. We have actually prepared the ground
work already, so there is much material available which a number
of us here worked on at that time.
Q124 Lord Powell of Bayswater: Can
I just ask a supplementary? Do you think there will be uncertainty
as to whether the new day-counting rules will apply to the extra
statutory guidelines still surrounding the residence status of
individuals?
Mr McDougall: Yes, I am afraid I think there
will be, in particular on the in-transit people, because the legislation
has a particular phrase, which is not defined. The definition
is then by statement. There are a number of examples in the explanatory
notes explaining complex travel arrangements from outside the
UK to different bits of the UK, going on elsewhere, having dinner
or going to the theatre just before an overnight stay, and depending
on who you happen to dine with and whether it was prearranged
or not prearranged can affect whether that day counts or not.
There will always be uncertainty about whether or not issues were
predetermined or not predetermined. When do you make that determination?
Do you find, for example, that if you were flying into Heathrow
and out again, but your inbound flight was running late and, as
a result of that, you were going to have to overnight in London,
then sitting in the airport somewhere else you say, "Well,
in that case, I might as well make it productive rather than just
an extra chore," is that preordained because it has been
arranged, or I think it will be preordained because it was fixed
before you arrived in the UK. So if you fixed it sitting in the
terminal in JFK rather than waiting until you arrived at T5, and
hopefully you did not leave your phone in your luggage, that could
make a whole difference, and if that happened often enough because
of bad weather—and as someone who flies to London a great
deal from the North, we know how often your plans can be thwarted
by a change in the weather down here or other issues. There are
so many potential aspects which are not within the control of
the taxpayer and if someone tries to make sense of the time that
you are going to have to spend, that could well have an adverse
impact, and that is only one example.
Q125 Lord Powell of Bayswater: So
in fact the uncertainty is worse than it was before?
Mr McDougall: You knew to some extent an element
before, because we did not have that particular measure; we did
not have that definition of a day in the UK, but this is a different
kind of uncertainty, and I think it is because we are relying
also on case law and cases from a different era, as we are with
domicile, where the cases go back to a lifestyle which is not
the way in which life is lived nowadays, for all sorts of reasons.
There are sometimes things to be said for what happened then but
it is not what happens now. I do think, absent a definitive statutory
test, we are going to have ongoing uncertainty and we are going
to have uncertainty that does not tend to arise in a number of
other countries.
Q126 Lord MacGregor of Pulham Market:
It sounds like another opportunity for high-level seminars and
high-level tax advice.
Mr McDougall: It is wonderful. I do a lot of
lecturing. It is good for that, but it is not actually a sensible
system.
Q127 Lord MacGregor of Pulham Market:
Can I just come back to this question of statute against case
law? I am not clear in my own mind exactly what the real benefits
of shifting from one to the other are. Perhaps you could just
say a bit more about why you are advocating that. Secondly, in
the light of the experience you have had in consultation in 2002,
how complicated would it actually be to introduce legislation?
Finally, perhaps in a note rather than now: you have referred
to the US and Irish systems. It would be helpful to have a note,
briefly, about how these work and how they could be applicable
to the UK.
Ms Lagerberg: Picking up your point about the
statutory test and why we think it is a good idea and why we think
it could be better, the main problem is we do not have much statute
on residence. There is just the 183 day rule. Most of the residence
rules that have been applied over the last many years sit in an
HMRC leaflet, IR20. That is not statutory. It is not even regulatory.
It is tertiary legislation. It has become very outdated anyway,
and the idea was that it would be updated, and that was before
these changes took place. It does give rise to uncertainty for
people who just want to know "When am I resident and when
am I not?" A lot of those issues are to do with people if
they want to know when they have left the UK and if they have
come into the UK within our residency system. It is a certainty
point. Looking at the Irish and American experiences, it is much
easier to say with absolute certainty where someone sits. You
might not like the answer but you know what the answer is, and
I think that is where we are at. We think that certainty would
actually provide a very useful bedrock to a review of residency.
We are happy to provide some information that we have on the Irish
experience and on the US experience. I suspect the UK needs a
hybrid of both to get to the point where it is workable, but both
of them are very interesting in their own ways. The difficulty
with the US test is that it is based on a very different regime.
The UK regime does not necessarily read across.
Q128 Lord MacGregor of Pulham Market:
One other subject, completely different, which is the de minimis
rule, the £2000 de minimis rule. We have been receiving
quite a lot of evidence that it is going to be very difficult
to get this across to people, particularly to a lot of people
who are earning very little in the UK, and how that is going to
be done. Is it going to be done through employers or what? It
would not catch the self-employed of course. That is one point.
The other point is that it sounds as though it is going to be
extremely complex for the HMRC to run, if they are going to take
it seriously. It sounds as though it will involve quite a considerable
increase in resources in the HMRC to make it work.
Ms Lagerberg: I absolutely agree with both of
those points. I think with de minimis it is very hard to
see how that message is going to get across. English might not
be the first language, but also, it is not a topic of conversation
that people tend to enter into. It is going to be a difficult
message to put out and, yes, from a resource perspective, HMRC
are going to police whether that £2,000 de minimis
is being properly operated, and that is a big ask. There are a
lot of people potentially around that particular figure—do
they have the resources to do that, the training to do it, and
the understanding of the issues around it? It is a massive undertaking.
We were very concerned about the compliance, the admin work placed
upon HMRC and upon the taxpayer that that particular de minimis
will bring.
Q129 Lord MacGregor of Pulham Market:
Would you just raise the limit?
Ms Lagerberg: We suggested raising the limit
to round about the Personal Allowance. It is not a perfect fix
but it does take away some of the issue. It does not resolve everything
though. We would agree it is not a perfect fix at all.
Mr Roy-Chowdhury: We certainly welcome a de
minimis and it should be higher but, in terms of the audit
of people who say they are within the de minimis, where
are the information powers for HMRC to go and audit whether people
have actually submitted a correct return? OK, there is the Mutual
Assistance Directive, there could be other double tax agreement
ways they could get the information, but there is just a lack
of ability for HMRC to be able to audit the return effectively
under this de minimis. I think there is a concern how it
will happen is really an open question.
Mr McDougall: On that one, in his open letter
about what the proposal as originally drafted was supposed to
mean, Mr Hartnett said that it was not the intention to require
significant information from all the non-domiciled individuals.
However, whatever the de minimis limit is, if it is to
be properly policed, that will require all these to be potentially
liable to inquiry and that has a resource as well as a principal
matter, and the reason we suggested £5,000 instead of the
original £1,000 was really, as with ICAEW, to try and equate
it broadly to the level of the Personal Allowance because, in
a way, that is a measure of income which should not be taxed.
We also thought it would actually make it easier to police those
around the margin, because those around the margin of £5,000
would be far fewer than those around the margin of £1,000
or in fact even £2,000.
Q130 Chairman: That takes us to the
end of our second topic, which was the residence and domicile.
Perhaps we can move on now to our last topic, encouraging enterprise.
Looking at the clock, I would encourage questions and answers
to be reasonably crisp. May I just kick off? Clause 28 increases
the EIS investment limit from £400,000 to £500,000.
Do you think that is a necessary change given that the limit was
increased to £200,000 in April 2004 and £400,000 in
2006? Specifically, given that the Treasury issued a consultative
document on the EIS on Budget day, might it not have been a better
thing just to wait and see what the reaction to that consultancy
document was going to be before changing the limits?
Mr Roy-Chowdhury: ACCA is in favour of the EIS
scheme. We welcome the increase but we agree that a closer look
needs to be had at the tax breaks for this scheme. The reason
why we support it is because, with the current credit crunch,
there is clearly an issue of small businesses being able to get
finance, and so, while we fully appreciate that there are studies
showing that this does not necessarily help in terms of the longevity
of a business, it is quite critical at the moment—this is
our feedback—to businesses as a means of being able to obtain
finance to keep going. So we are supportive of the increase and
we are supportive of the scheme as it currently stands but consultation
could be handled better.
Mr Haskew: Our experience so far is that, following
the changes two years ago to the gross assets test, where effectively
the limits were halved, which we understand was the result of
problems with state aid, there is very little interest now in
EIS schemes, and that the actual volume of investment going into
them is quite small. The reduction in the limits effectively has
made it much less cost-effective to go down the route of raising
money in this way, particularly when they are surrounded with
a whole host of rules. It is probably one of the most complicated
areas of legislation in many ways. Our concern is that the pressures
from state aid rules, for instance, are making it very difficult
for these schemes. We are not sure ultimately of the viability
of them if we carry on down this route. If you look at the legislation,
or the explanatory notes, it is all subject to state aid approval.
We are very concerned that state aid is probably putting a stake
through the heart of a lot of these enterprise schemes, and that
perhaps there is a need for a complete review of the whole area
in the light of issues like that.
Q131 Lord Sheppard of Didgemere:
I am trying to join together two different conclusions it appears
to me you have reached. ICAEW suggests there is even a case for
abolishing venture capital schemes, whilst improving the general
climate for business investment. By contrast, ACCA suggests that
the scheme should be continued. Would you like to elaborate?
Mr Roy-Chowdhury: I have probably touched to
some extent on the ACCA view as to why we came to this conclusion.
Essentially, for small businesses, with rising house prices and
low interest rates, they were able to self-finance. That is not
the case any more, so we are very anxious that they are able to
raise adequate finance, hence we want to ensure that the scheme
continues, at least for the foreseeable future.
Mr Haskew: Our suggestion was that there should
be a wider-ranging review of the whole enterprise culture. We
were not necessarily saying that the scheme should be abolished
but we do have a concern that tax is just one part of the wider
raft of issues that small businesses in particular need to consider,
and that tax is potentially quite a small element of that. For
instance, the ICAEW produce an enterprise survey report every
year, but the biggest problems that small businesses face seem
to be more in the areas of health and safety, employment law,
VAT and PAYE problems and these sorts of issues. We feel that
there probably is a need for more work to be done on the whole
broader area of regulation of the small business sector. I recognize
that in one of the consultation documents the Government touch
on that but I think there is probably real scope to actually look
at the broader picture of how we encourage business, looking at
all the factors.
Mr Allen: If I could just add a point, the ICAS
position—and I understand you have a copy of our written
draft response to the consultative document—is that we support
and wish to encourage the availability of such venture capital
to support small business, but our concern is that the actual
regimes are so complicated that people are actually denied access
to them, either because of the professional costs that are required
to advise on this, or they are simply frightened off, and secondly,
as Chas said, the diminution in the size of business that can
benefit from the likes of Enterprise Investment has also acted
to make the thing less attractive. In principle, we would want
to see the incentives retained, because we do think there is a
mechanism that has the potential to help small businesses get
the capital they need to expand.
Q132 Chairman: Do you think that
your view of the complexity and the intimidating nature of the
scheme is consistent with the statistics set out in the consultative
document for the take-up of EIS investment?
Mr Allen: Yes. In the UK we have two systems:
a system for the informed and a system for the uninformed. None
of the uninformed are ever going to venture any place near this.
Those that are very expert look at this as a very viable system,
and our members are involved in that and they make strong representations
that the tax incentives that have been gathered have helped to
promote businesses that are now making a positive contribution
to the economy, but in fact, that was on the basis of expert advice
at the point of investment to identify those businesses that were
viable, and the tax incentive is a bonus. The real problem is
that for those who are not informed, it is too complicated to
gain access, even through the first step.
Q133 Lord Powell of Bayswater: This
is a follow-on to that question. You are no doubt all familiar
with this University of Sussex study which suggests that the impact
on companies is very restricted, and indeed, it may even make
them under-perform, lower aggregate profitability and lower survival
rates. Is this scheme really worthwhile?
Mr Allen: I have made the comment that we received
representations from our members who believe it is worthwhile
and, on the basis of angels funds on which they are involved,
the skill is in identifying the right company in which to invest.
The bottom line is that the tax tail should never wag the commercial
dog, and therefore for those who are good at spotting the investment
opportunity and the business model, this is a very good sweetener,
and the feedback that they give us is that when you look at the
future employment and VAT and payroll tax through Pay As You Earn,
it is actually a good method but, of course, they would say that
they are not advising those who fail, and that perhaps those who
fail do so for different reasons.
Q134 Lord MacGregor of Pulham Market:
My impression is that VCTs are more successful and there has been
a much bigger take-up than EIS, and I notice in your paper to
us you say that the problem is, as the Chairman was saying, that
the legislation is so complex and subject to differing interpretations.
You actually go on to say that in practice many professionals
find the EIS intimidating. Is that the main reason why EIS is
so unsuccessful?
Mr McDougall: I think it is one of the reasons,
but if you are contrasting VCT and EIS, one must remember that
VCTs are able to invest part of their funds other than in unquoted
trading companies, so from a prospective investor's point of view,
looking simply at income tax relief on the investment and the
quality of the investment, you are more likely to retain your
money or grow it in a VCT than in an EIS company, simply because
an EIS company is that kind of company; a VCT is investing in
a range of unquoted trading companies, but also to a limited extent
elsewhere, and the general result seems to be that you are more
likely to get an income reward more quickly from a VCT than you
are from an EIS company, and such research as I have read tends
to suggest that you are also much more likely to get your money
back, but of course, there are some spectacular EIS companies
where you do very well. One also has to remember that income tax
relief on the investment is not the only reason for a business
being structured as an EIS company. There are restrictions on
getting that income tax relief for the people who are actually
running the business and taking their main reward from it, but
they can get the other tax benefit of an EIS company, which is
the capital gains tax deferral. In lecturing about business structures,
I encourage people to think about the EIS as a potential solution
both for those who are involved and for the possibility of getting
outside finance. Generally, on an unscientific questionnaire of
those listening, the take-up is very low, I think partly because
of the complexity and also because of the costs in trying to do
it for a fairly small business. It is a specialist market.
Q135 Lord MacGregor of Pulham Market:
It seems to me that the only attraction of EIS is the postponement
of capital gains tax. Is that right?
Mr McDougall: In the right individual's hands,
it is a big attraction.
Mr Roy-Chowdhury: That probably explains why
there are less profits, because they are trying to grow the company
and generates gains.
Q136 Chairman: Can we come to the
study by the Institute of Employment at the University of Sussex,
which looked at the impact of EIS and VCT investment on the recipient
company. You will no doubt remember that its key findings were
that overall the EIS and VCT investments have a positive effect
on capacity building in recipient companies. However, in material
terms, the effects remain at present very small. Second, that
companies with EIS and/or VCT investment had lower aggregate profitability
and survival rates over the period covered by the study. In the
light of those conclusions, is it really appropriate for the Exchequer
to subsidise investments by sharing the higher risk involved in
young growth-orientated small companies?
Mr Haskew: Ultimately, I think this is a policy
question for government. I think what it probably does show is
that there probably needs to be further work done on it, and there
needs to be probably more studies in relation to what I have loosely
called the risk element and the reward. Effectively, taxpayers
are putting money into this; what is coming back out and how does
one evaluate what is coming out as to what is going in? It is
almost like a business proposal really, and I think the studies
are probably showing that there needs to be further work done
on that. The jury is out, I suspect.
Chairman: Are there any further questions that Members
would like to ask on this topic? In which case, may I thank you
again for both your written evidence and for your very open discussion
this afternoon, and remind you that you did say that you would
give us two further papers. If there is any possibility that you
will get particularly the paper on consultation to us by 14th
May, that will be very helpful, as we have as a witness a few
days later the Treasury, and it would help inform our discussion
with them. Thank you very much indeed.
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