Memorandum by the British Bankers' Association
(BBA)
The BBA is the leading association for the UK
banking and financial services sector, speaking for 223 banking
members from 60 countries on the full range of UK or international
banking issues and engaging with 37 associated professional firms.
Collectively providing the full range of services, our member
banks make up the world's largest international banking centre,
operating some 150 million accounts and contributing £50
billion annually to the UK economy. Financial services companies
pay £12 billion directly in tax and their employees a further
£15 billion in income tax. The sector contributes annually
over £100 billion to UK economic growth and a trade surplus
of £25 billion to the balance of payments.
We are pleased to submit the following written evidence
to the House of Lords Sub-Committee on the Finance Bill 2008.
In response to the invitation to contribute to the Sub-Committee's
inquiry this year, the BBA has focussed its comments on the issues
of residence and domicile, after some general initial comments
on process. The matter of HM Revenue & Customs' (HMRC) powers,
a further significant issue for the banking industry and not specifically
listed as one of the topics of the Sub-Committee's inquiry but
which falls within the Sub-Committee's remit of tax administrative
matters, has additionally been flagged at the end of this submission.
GENERAL COMMENTS
We believe that there is much that HM Treasury
(HMT) and HMRC have done to review and improve the impact of the
tax system on financial and insurance services.
Since the early 1980s a macroeconomic climate
has been created within the country that has fostered UK financial
services and has attracted firms of all types from around the
world. In contrast to New York and Tokyo, which both have large
financial services activities underpinned by demand from the domestic
economy, London is predominantly internationally driven. The external
perception of the UK has been that all governments through the
last 25 years have sought to ensure both proportionate regulatory
and tax regimes apply to this international industry. Over the
last six months, however, this has been questioned on the back
of major and unexpected changes to the tax regime, notably in
respect of the residence and domicile rules. We are concerned
that the individuals and businesses which are critical to the
success of the UK's financial services sector may not perceive
the UK as being as an attractive location as it was once considered
to be and our detailed comments on the Finance Bill proposals
are set in this context.
POLICY DEVELOPMENT
AND CONSULTATION
Whilst there have been welcome cases of successful
consultation, the Government's recent tax policy development has
not inspired the full confidence of the financial services industry.
A principal concern is that the full implications of some proposed
tax policies were not envisaged or taken into account. Even when
external political pressure for change is acute, governments should
not be propelled into precipitous action without careful and detailed
consideration of the potential outcomes of the proposed changes.
This requires full and timely external consultation. Consultation
must be both on the policy and the detail of implementation, as
it is meaningless to consult on measures to iron out the defects
of a policy that has been developed without reference to stakeholders.
The lack of groundwork in the policy development
of the residence and domicile rule changes was evident in the
confusing and conflicting messages being given out. The inability
of Government to articulate its intentions was unsettling, given
the highly mobile nature of capital and talent, and particularly
given the fact that the changes were due to come into effect imminently.
While subsequent discussions with HMT and HMRC
have been helpful to clear up some pressing concerns, notably
regarding the drafting of clauses in the Finance Bill in relation
to deemed remittances, it is regrettable that these discussions
could not have taken place before the Pre-Budget Report announcement,
and it is also regrettable that we were not granted our request
for a deferral of the residence and domicile proposals until a
detailed and careful consultation could be concluded, to deliver
a solution that would not result in damage to the UK's standing
as an outward looking economy.
The BBA welcomes the announcement that the Government
is to establish a taskforce, comprising private sector experts,
recognising the need to ensure that competitiveness remains at
the heart of any future reforms to the tax system. It is to be
hoped that such a taskforce, in combination with more general
and broad based consultation, will in future ensure that the fiscal
environment supports the growth of the financial services industry.
COMPLEXITY OF
UK TAX LAW
AND SIZE
OF THE
FINANCE BILL
The BBA has for a number of years expressed
concern about the compounding complexities of UK tax law and the
size of annual Finance Bills. This year marks no exception, with
the Finance Bill running to 160 clauses and 46 schedules and the
explanatory notes running to 1,148 pages.
There is a fundamental lack of certainty in
UK legislation, which is concerning for business given the growth
and complexity of UK tax law. This is compounded when, as in two
cases in this year's Finance Bill, the existing law is amended
retrospectively—in the case of Clause 55 by some 21 years.
We also consider that there is an over reliance on guidance as
a crutch for poorly drafted legislation. Lack of clarity in legislation
and tax by guidance not only create unpredictability as to the
ultimate legislation but give rise to an additional compliance
and administrative cost for business.
RESIDENCE AND
DOMICILE: CLAUSE
22, CLAUSE 23 AND
SCHEDULE 7
In its response to HMT's "Paying a fairer
share: a consultation on residence and domicile", the BBA
recommended that: the Government defer its proposals until a detailed
and careful consideration of its objectives could be concluded,
to deliver a solution that would not result in unintentional and
irrecoverable collateral damage to the financial services sector.;
that the Government conduct a full regulatory impact assessment
on the proposals, setting out the purpose and intended effect
of the measures, the risks, the benefits, consultation processes,
the compliance costs for individuals and businesses, and any other
costs and effects, including the effect of any projected loss
in tax revenues (not only personal tax) as a result of individuals
leaving the UK; and that an operational impact assessment is conducted
to ensure that HM Revenue and Customs (HMRC) is sufficiently geared
to cope with the additional burdens created by any changes.
The BBA considered that such a deferral would
be necessary to give both the Government and stakeholders the
time to fully explore the range of potential outcomes that could
result from such significant changes. It is still our belief that
the deferral of these proposals for full consideration would result
in a more coherent and optimal outcome. As the Government has
not granted this request and following on from the Budget announcement
on 12 March 2008, and publication of the Finance Bill on 27 March
2008, we accept that the best way forward is to flag a number
of key issues that require attention and resolution during the
passage of the Bill. We nevertheless anticipate that further issues
and consequences may materialise in future.
Clause 22—Periods of residence
The move away from the Government's initial
proposal to include days of arrival and departure when day-counting,
to counting only days where an individual is in the UK overnight
was a welcome improvement on the original proposals, which would
have severely compromised the competitiveness of the UK. However,
the non-statutory 91 day average test remains out of line with
the UK's global competitors, and we consider that it would be
preferable to introduce a statutory test for residence.
Clause 23 and Schedule 7—Remittance basis
Unresolved issues related to changes to the
remittance basis are significant for the BBA's membership as employers.
Non-UK workers constitute a large proportion of employees in our
sector, reflecting the industry's considerable success in attracting
talent from around the globe, at all levels from graduate trainees
up to top management. The primary concerns of the BBA's membership
in this regard are:
— That years spent in full time education
should be excluded from the seven-year qualifying test—the
financial services sector is concerned to ensure that these measures
do not significantly impact upon graduate and post-graduate recruitment.
In an increasingly global marketplace, financial institutions
are keen to attract the most able and talented individuals onto
their graduate programmes. Of particular benefit are those who
possess an understanding of particular cultures and/or speak the
language of perceived key growth areas, such as China and South
East Asia. Many such graduates will have been educated in the
UK and therefore breach the seven year rule immediately or shortly
after commencing employment. At an early stage of their career
they will not be higher rate taxpayers. In contrast to their UK
domicile peers, they will be forced to file UK tax returns and
claim treaty relief for overseas tax suffered on investment income.
This administrative burden is wholly disproportionate to the additional
tax raised, if any, and we do not believe that the proposals should
be targeted at this group.
— The mandatory extension of UK approved
share plans to Resident but Not-Ordinarily Resident ("RNOR")
persons—The Finance Bill proposes changes to the class of
persons who must be invited to participate in offerings under
the all-employee UK approved share plans ie Save As You Earn (changes
to Para 6 Sch 3 ITEPA 2003 as proposed by Para 38 Sch 7 Finance
Bill 2008—page 176 line 45) and Share Incentive Plan (changes
to Para 8 Sch 2 ITEPA 2003 as proposed by Para 37 Sch 7 Finance
Bill 2008—page 176 line 40). We cannot see a justification
for RNORs to be included on a mandatory basis, nor does it appear
that this is a planned policy change adopted by Government. The
changes have arisen due to other legislative changes relating
to RNORs and unapproved option plans. These changes in respect
of unapproved plans are welcome as they provide RNORs with parity
of treatment for persons ordinarily resident in the UK, but the
mandatory inclusion of RNORs in the share plans are not welcome
for the reasons below.
Whether or not a person is RNOR is often dependent
upon their intentions and there is no mechanism for the employer
to know how or when these intentions have changed. An RNOR is,
by definition, a person who does not expect to be in the UK for
three years or more and who has no long term commitment to the
UK. In contrast, the all-employee approved UK plans are for persons
who will be participating for at least three years—in the
case of SAYE for three, five or seven years (option vesting periods)
and for SIP for at least five years (earlier withdrawal results
in loss of tax relief). With respect to its inbound international
assignees, many employers have a category of "short term
assignments" whose contract is expected to last for two years
or less. These employers do not want to be forced to offer participation
in the UK all-employee approved share plans to this population.
The RNOR will not benefit from participation and in many cases
will be adversely impacted compared to continuing participation
in home country arrangements.
The adverse changes discussed above in respect
of RNORs and all-employee approved arrangements could be avoided
through the simple mechanism of changing each of the relevant
sub-paragraphs, such that they do not refer to Section 15 ITEPA
2003 but, instead, merely referred to the requirement for inclusion
in invitations of persons "resident and ordinarily resident
in the UK". We understand that HMRC are focussing on whether
or not it is possible to administer the plans in accordance with
the proposed revised legislation. Whist it is possible to administer
on this basis, it will clearly not be desirable for many international
organisations to operate this way. International employers would
like to continue to have flexibility in this regard.
— Uncertainty regarding the PAYE position
from 2009/10—HMRC has produced a temporary solution to address
the immediate term concerns of UK employers of non-domiciles,
confirming via their "Frequently Asked Questions" page
on their website that employers will not be expected to identify
which employees are claiming the remittance basis and remove their
personal allowance through PAYE for 2008-09. However, the HMRC
FAQ page also states that "HM Revenue & Customs (HMRC)
will be discussing with employers and representative bodies whether
for 2009-10 and later years it would be advantageous to deal with
some remittance basis claims through the PAYE system." Until
such time, UK employers of non-domiciles will have unresolved
concerns about the future interaction of the new residence and
domicile rules with the PAYE system, and the potential liability
for penalties.
The industry has also been unsettled about the
impact of the remittance changes on its products and services.
The BBA wrote to the Financial Secretary to the Treasury on 20
March 2008 to highlight concerns that the extended definition
of remittance under the proposed new section 809H of Income Tax
Act 2007 could give rise to significant difficulties for the banking
and fund management sectors because customers on the remittance
basis of taxation would face incremental tax liabilities from
using UK financial service providers. Such customers would thus
have an incentive to use overseas financial service providers
instead of UK providers. During discussions, the BBA learned that
one large private banking member, as a consequence of this change,
was assessing whether to move one third of its UK banking operations
offshore. The Financial Secretary to the Treasury was persuaded
of the absolute necessity to amend the Finance Bill, and provided
reassurance that it was not the Government's intention for the
legislation to have the effect described. The BBA was reassured
to have the Minister restate the Government's commitment to UK
competitiveness, and we eagerly await the amendments.
Uncertainty remains about the treatment of particular
products, such as the grandfathering arrangements for offshore
mortgages. The provisions in Clause 86 of Schedule 37 appear potentially
to be narrower than those indicated in Budget Note 104, which
stated that the Finance Bill 2008 would include grandfathering
provisions such that untaxed relevant foreign income used to fund
interest repayments on existing mortgages secured on a residential
property in the UK, would not be treated as a remittance on or
after 6 April 2008. The Finance Bill in fact appears to mean that
the grandfathered loan itself must have been used to acquire the
interest in residential property (and not simply be secured on
it) and thus seems to exclude the relatively common case where
the pre 12th March loan is the result of a re-mortgage of the
initial loan. If the expectations of the industry and clients
are to be frustrated, the impact for the industry could be significant.
The uncertainty, at any rate, is destabilising and could contribute
to a deterioration in business activity for the UK.
HMRC POWERS
Though not one of the specific topics on which
your enquiries are focused, we feel that this issue is of such
significance that we had to include a reference to it in our concerns.
We recognise the advantages of harmonising and
modernising some of HMRC's powers, to ensure that the tax system
encourages compliance, operates with minimum disruption to taxpayers
and allows HMRC to take firm action against taxpayers that deliberately
do not comply with the law. However, we are not convinced that
there is merit in a relentless accrual of new powers, without
evidence that HMRC is stocktaking and allowing previously introduced
measures to bed in. This is particularly concerning when we consider
that additional systems and powers may only serve to divert attention
and resources away from existing unresolved issues.
The measures introduced in the Finance Bill
2008 are significant and wide ranging, and the specific measures
included in the Finance Bill were not adequately consulted upon.
For instance, Clause 10, Schedule 36 refers to an officer being
able to enter any business premise to inspect business documents
that are on the premises if reasonably required for the purposes
of checking the tax position of any person. The BBA has enquired
of HMRC whether it is their intention that this provision should
enable HMRC to enter a bank branch to inspect business documents
related to a customer. Such a power would be entirely at odds
with our members' duty, under law, to keep their customers' affairs
confidential. We consider that such a measure should be widely
consulted upon, to establish whether such a power is proportionate
or within the public interest.
Additionally, we consider that increased HMRC
powers must be matched by adequate taxpayer safeguards, and we
are dismayed to note an intention to place key taxpayer safeguards
within HMRC's guidance rather than within legislation. We do not
consider this approach to offer a suitably robust protection of
taxpayer rights.
CONCLUSION
It is essential that UK competitiveness is again
prioritised by the Government and Parliament. We consider that
the mobility of capital and talent and the efforts of our international
competitors to seize the competitive advantage have been underestimated.
The UK economy and exchequer require the financial services sector
to remain strong, and the UK's fiscal environment, international
reputation, and flexible and skilled workforce need enhancement
to do so.
30 April 2008
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