Examination of Witnesses (Questions 140-159)
Mr Michael Snyder, Mr Alex Henderson and Mr Ian Menzies-Conacher
7 MAY 2008
Q140 Chairman: Can I just put one
supplementary to the BBA? You comment on the lack of ground work
in the policy development and the confusing, conflicting messages
being given out. What do you think should be done differently?
Mr Menzies-Conacher: Fundamentally, it goes
back to the fact that we think there should have been a better,
fuller, more comprehensive consultation over this. When you refer
to the review that has taken place since 2002, I do not think
that was a particularly open review. It did not seem to involve
many people and certainly did not address the sorts of issues
that eventually emerged in what is now the Finance Bill. From
that point of view we did not have a comprehensive understanding
of the policy rationale that was driving these changes. They appear
to have come out very piecemeal. If you look at the history of
it, we have PBR statements, consultative documents, draft clauses,
amendments to the draft clauses, letters from the Director General,
end of the consultation, the Finance Bill, more promised changes.
None of that suggests a clearly thought out rationale. It is that
uncertainty that we were really getting at there. In terms of
your question on the uncertainty of the review, I would agree
with the comment before. First of all, if you put in narrowly
in the context that the old review created uncertainty, absolutely
not. There was a completely universal view that it had been kicked
into the long grass and was just going to stay there. No one was
really concerned about that. People were not worried about that.
I accept that having taken the genie out of the box there is a
problem. Having done that, you do need to get some conclusion.
I still think that on balance it would have been better to have
deferred it for a year to allow a lot of the detailed problems
that they are now seeing emerge to be resolved properly.
Q141 Lord Wakeham: The genie is out
of the bottle and you want it cleared up but also there are those
who say it should be deferred for a year or so in order to clear
up some of the uncertainties that are there. You come down in
the camp on the side of: let us get a conclusion but there ought
to be a delay for clearing up some of these things for a year
or so. Is that the view?
Mr Henderson: There are certainly some more
detailed measures where we have even yet to see the legislation,
particularly governing companies and trusts. It does seem to me
that there is a clear case for deferring the more complex measures
to be worked out in detail. There is another area which one can
argue either way which is around the practical implications of
the new measures, how they are going to work with PAYE codings
and things like that, where all the detail is still being worked
out now, but it is harder of course to delay that.
Q142 Lord Wakeham: We have to deal
with the Finance Bill and either it is in or it is not. If there
is a case for a delay which some people are saying ----?
Mr Menzies-Conacher: The concern at the moment
is that we are rapidly running out of time in the present Finance
Bill. There are some very constructive discussions taking place
with officials. Problems are being addressed but quite late on
in the process. There is a great danger in practice, if you draft
against rigid timetables, that we are almost as likely to put
in new problems as solve old ones because that is the nature of
drafting in a hurry.
Q143 Lord Sheppard of Didgemere:
Talking about the issue of residency, starting from where we are
today rather than where we would like to be, is it better to follow
the principle we have had for some years of case study and practice
or to get a proper legal definition of residency and to discuss
the thing fully and end up with an agreed formula?
Mr Snyder: It would seem to me that having a
proper formula built into the legislation would obviously be desirable
as opposed to relying on the Revenue and Customs to continue their
practice as announced. I think it is unrealistic to think we are
going to get that this side of this particular bit of legislation.
On balance, I would leave it to the practice for now and hopefully
this can be wrapped up in a future Finance Bill in terms of codifying
what it is, because I do not think there will be time now.
Mr Henderson: There are two problems with relying
on Revenue practice. One is that it is Revenue practice. It does
not give certainty for the taxpayer that legislation gives. The
other is that the Revenue practice draws heavily on the case law
but the case law is now something like 100 years old and clearly
has not adapted to modern living and working conditions with regard
to residence.
Q144 Lord Sheppard of Didgemere:
Obviously over the last X years you have discussed this issue
and sometimes it has been hidden in the long grass. More recently,
have you discussed the question of residency with the Revenue?
Mr Henderson: It was raised as recently as last
Friday at the Finance Bill open day with HMRC who referred it
back to the Treasury as a policy matter.
Q145 Lord Wakeham: They would not
give you an answer?
Mr Menzies-Conacher: No. The only thing that
emerged from the Treasury side was in their formal response to
the "paying a fairer share" consultation, published
at the end of March, which was fairly dismissive of the idea of
a statutory residence test. It was saying they thought the present
one was more flexible and preferable. Unfortunately, I think "flexible"
is code for uncertainty.
Q146 Lord Barnett: Have you spoken
to The Daily Mail and any other parts of the media who,
having brought this on you might say from what you have said,
now probably do not like what they have brought on?
Mr Snyder: I would guess they love what they
have brought on because it means there is more frenzy to feed.
On the other hand, what is very interesting is that when the original
proposal was announced there was this enormous heat built up over
it and you saw it in every newspaper, but since the various clarification
and modification measures were announced—I do not know if
you have noticed—I have not seen a great deal of comment
about it. There is some but not a great deal. From my point of
view and from the point of view of the competitors of the City,
that is really important because we are not just talking about
reality; we are talking about perception of reality. Perceptions
are what influence businesses' investment decisions. For me, while
one can talk to the media—and we have talked to them; there
have been plenty of articles quoting me—the reality is that
it is much better to say it is unfair not to tax those who are
over here, living in our houses and taking our facilities and
so on. It is quite a difficult one.
Q147 Lord Barnett: On this question
of uncertainty, if you have been involved as I know you have for
a long time in these matters, any major new tax introduction will
inevitably mean that future Finance Bills would be amending it
regularly. That has been my experience for five years as chief
secretary a long time ago, so you cannot be too surprised. A delay
would surely add even more uncertainty as you recognise yourself.
I am not sure about the other two of you.
Mr Menzies-Conacher: We are where we are now.
As we said in our written representations, we would much prefer
to have a deferral up front and sort it out. We are now in a position
where we have to just try and get as many corrections of things
in the Finance Bill as we can and some, like statutory residence,
I agree, we would certainly advocate but that can be next year.
Q148 Lord Sheppard of Didgemere:
To avoid getting into party politics, especially as I would be
on the wrong side of the discussion but was the fact that this
suddenly came on to the agenda a complete surprise to the City?
Mr Snyder: It was really. I did get a phone
call from the person who was announcing it at the party conference
on the Monday. I received the phone call on the Sunday, warning
me that this was about to happen. That was the only advance notice
that came and then of course the reaction from the government
in terms of its announcement was perhaps not altogether surprising
but nevertheless unhelpful. That is why I say it is across the
party spectrum, as it were, that it has been unhelpful. Vince
Cable has also been saying some unhelpful things. I had conversations
with all three gentlemen and, with the benefit of hindsight, perhaps
there would have been a different approach. However, as I think
we have all acknowledged, we are where we are and therefore we
just have to make the best of what we have in the time frame that
is available. What I would make a plea for is that your Committee
in conversations with the government, on the few things that could
be done to try and help, ensures that they are done to make it
better in its process through to enactment.
Q149 Lord Paul: Talking to various
people all over the world, the reaction has been terribly bad
to the extent that the Conservative Government and the last Labour
Government have worked very hard to make Britain a very attractive
country for investment. Those sorts of announcements by both parties
have ruined all the good work that has been done. Do you hear
the same?
Mr Snyder: Frankly, yes. We do hear the same.
I think we have to be reasonably balanced about it however. In
one of your draft questions later on it says, "Where is the
balance?" There is always a balance in these things in terms
of the people who are being taxed. For me personally, I think
it has been a big blow but what is important is that we get certainty,
we put it behind us and mitigate it to the best extent that is
possible. The government obviously listened to quite a bit of
those representations in doing so. We just need closure because
otherwise this is going to rumble on in the press and media and,
as you say, that fuels the perception or misperceptions I think
in a lot of cases, because the difference that it will make to
the very wealthy is irrelevant and the middle people, which is
what we are really concerned about frankly, the middle earners
that are over here on secondments, not normally for two or three
years these days as you will know, but who could be here for ten
years or longer. They may not call it their international headquarters
but it is de facto their international headquarters in
the City. This is really important, so I think we have to just
try and resolve a few of the issues that will affect those middle
income earners.
Q150 Lord Paul: This uncertainty
is only removed for a period of seven years. Beyond that, it is
still uncertain.
Mr Henderson: Yes. I think that is a fair point.
Looking further ahead, there is still uncertainty around the regime.
I can probably highlight two points. As Michael was saying, what
we have now a lot of people feel they are willing to try and make
work. There remains a concern though that we still do not have
the legislation or the practical details and there is yet to come
the HMRC reaction to that and the normal submission of tax return
and inquiry process. As you probably know, there are severe concerns
around confidentiality and what that will mean going forward.
The issue will not go away for a period of time.
Q151 Lord MacGregor of Pulham Market:
Can I come on to middle earners? Indeed, not just middle earners
depending on how you define middle earners—if you define
them in the City, it is rather different from defining them elsewhere—but
also lower earners and also the point about how it operates in
practice. You drew attention in your paper to the fact that you
thought the number was likely to be significantly higher than
the government estimate of 4,000. You drew attention to the STEPS
estimate of up to 150,000. I take it that most of that comes into
middle earners and lower earners. Perhaps you can confirm that
and say whether you think the figure is right. The £2,000
de minimis limit that others have put to us seems extraordinarily
low. It is very difficult to get over to people, particularly
since as I understand it from your note HMRC are not going to
work through PAYE in the first year. How do you see this operating
below the high network individuals? How can HMRC monitor compliance
over what assets are being brought into the country? How can you
avoid increasing employer costs? I would be grateful to hear you
elaborate.
Mr Snyder: The issue is that we estimate that
sort of number. A lot of it is anecdotal because of course none
of us has the definitive information. HMRC do not even know exactly
what they have in terms of the people who are not making the returns
or whatever. It is quite difficult and I sympathise with the difficulty
over figures but anecdotally I can give you one example of the
level of interest in this and the numbers. In one very large,
international investment bank in the City, they have a series
of seminars. Normally, they struggle to get 30 people to these
seminars. They put one on on non-doms and had 700 people apply.
They had to run the course obviously many, many times. It just
gives you a flavour. The reality is that the 2,000 limit is ridiculous.
The only thing I can think of is that, because they put £1,000
out and we all said this had to be higher, they thought doubling
it would do the trick. If I can give you one practical example
of that, if somebody is coming in—let us just take a middle
earner in City terms in terms of these investment banks—let
us say someone between £75,000 and £125,000, which would
not be unreasonable and they would be leaving their country. They
probably owned a house in their country which they are not going
to be using so they would let it out. Unless it is very small
and in a low income earning country, the chances are that the
rent that they would receive on that would be vastly greater than
2,000. It just seems to me therefore that the limit is not even
allowing ordinary people who would go on to these secondments
in City terms to be able to let out their house without fairly
serious implications, having lost their personal allowance and
so on. Arguably, that is nothing really to do with their lifestyle
or their utilisation of resources in the UK. I think it needs
to be considerably higher than the £2,000.
Q152 Lord Barnett: What figure would
you put on it?
Mr Snyder: Probably about 30,000 a year. I cannot
really see that it should be bigger than that because it is not
relevant to the UK economy and activities and their utilisation
of resources and therefore arguably is not really relevant to
the UK tax system.
Q153 Lord MacGregor of Pulham Market:
Others have argued for raising the personal allowance level, a
lot of people who at the moment are not filling in self-assessment
forms and so on. Perhaps you could answer that in relation to
the other questions on practicalities.
Mr Menzies-Conacher: There is one thing that
is overlooked in relation to the £2,000. That is income or
gains. You can get gains in the UK calculated in sterling. You
can run some numbers and people with relatively small assets denominated
in euro which are held for a few years and sell now, even if they
are making a euro loss with the appreciation of the euro, they
will make a gain that is taking them over the £2,000. They
will not even know that. They will not realise it. They will not
think about it. It is a minor example of what I believe is likely
to be the case. There will be substantial non-compliance with
this. In certain regions the Revenue attitude almost seems to
have been, "We do not care about that" which I think
is depressing. That is not the right approach to this. There is
a real problem that people will not appreciate. There are an awful
lot of people who are non-doms who are not at the wealthy end.
The very wealthy will have advice and everything else. The middle
is the problem for employers because either they are an assignee
from overseas in which case you will have to do a lot more paperwork
for them. You are likely to end up giving some form of tax equalisation
to pay for the loss of the allowances they were going to receive,
maybe not the £30,000 depending on how long they are here.
We do not know how the circle is going to be squared between the
fact that you have PAYE ongoing obligations in relation to the
current year which is impacted by an election that you are going
to make after the year. At the moment we have a temporary fix
in that that will be ignored for the first year and we will just
have to sit down and have some discussions about how to deal with
the practicalities going forward. A simple answer from an employer
point of view is that you would get the Revenue to issue a notice
of coding and you stick to it. That is what you do. You apply
it, but whether that is going to produce the right answer or give
the Revenue more trouble in due course because they are going
to have to then go and produce self-assessment for individuals—what
happens after they have left the country? There is a raft of unknown
issues with this, all of which at that level are likely to come
back to the employer. At the moment, we do not know. One of the
big problems, coming back to the question of how many there are,
when this was first mooted at a corporate level we tried to find
out how many relevant people we had. Our HR systems do not tell
us because we have never needed to know. You have very high paid
assignees coming in. You know about heavy hitters but an awful
lot of people you do not. I had a woman working for me and I did
not know she was a non-dom. I never needed to know. That is partly
why I think there is no answer to how many are out there. There
are an awful lot more than people think about. There may not be
that many who are going to pay the 30,000 but that is a very different
question.
Mr Henderson: In answer to your question on
the personal allowance point, as Michael said, ideally it would
be as high as possible. The personal allowance was put forward
as a workable number to try and take as many as possible out of
the system while meeting some of the policy objectives that we
understood lay behind these measures, and also not complicating
the tax system still further with rates, thresholds and numerous
different numbers.
Q154 Chairman: In both of your written
submissions you helpfully brought out the effect on those who
have been in full time education in the UK. You suggest that the
proposals should not be targeted at this group. I wondered if
you might expand on that. What changes would you wish to see?
Secondly, specifically to the BBA, you bring out the mandatory
extension of share schemes to those not ordinarily resident in
the UK and the incentive to use overseas financial services providers,
where some government action is promised, and the grandfathering
arrangements for offshore mortgages. These are new points for
this Committee so could you expand on them for our benefit and
say how significant you think those issues are?
Mr Menzies-Conacher: On full time education,
the question is what change would we like to see. The simple thing
is we would like to see time spent in full time education simply
disregarded in terms of calculating the seven years. Our problem
is that we would like to recruit non-residents—Chinese,
Indians—for obvious reasons. If they have been educated
in the UK, that is absolutely ideal but by the time they have
been educated in a UK university with an MBA they are starting
to approach the end of the seven years before we have even got
them on board.
Q155 Chairman: If you have a student
visa, it does not count?
Mr Menzies-Conacher: Yes. Disregard it and carry
on from there. On the mandatory extension of the share scheme,
the UK has this rather odd concept of resident but not ordinarily
resident, which seemingly is one of our many historic hangovers.
In this particular case what we think has happened again is probably
just an inadvertent drafting point. The amendment changed it for
another area which had a consequential knock-on here. The problem
is that if at the moment we have to state the normal SAYE schemes
that we and most large corporates run, they are all employee schemes.
At the moment we do not have to make them available to resident
but not ordinarily resident. It is optional. If you have to bring
them in mandatorily, the problem will be that these people tend
to come and they will go again certainly within the three, five
or seven years of an SAYE contract. You are bringing them in to
a scheme which is probably wholly inappropriate to them. They
may well be taxed in their foreign domicile. Certainly they are
not going to get the benefits of it. There is a lot of to-ing
and fro-ing. How do you track it? How do you know if they have
arrived? Administration. The other thing that is particularly
odd about it is if you bring them in for accounting purposes.
We now have to account for the cost of share based payments and
the value of the options granted to them under these particular
schemes. Even if the chap goes again six months later, the accounting
rules require you to continue to write off the cost of the option.
There are a lot of serious problems with it. We think it is inadvertent.
Hopefully it can be resolved. All we would like is to see that
go back to the status quo—i.e., it is an option—but
in most cases you would offer people like that an international
share plan which is more appropriate to international staff, not
UK domestic schemes which are probably not appropriate at all.
Q156 Lord Sheppard of Didgemere:
Can I just go back to the point you were making about full time
education? Have Universities UK or any university authority picked
up and joined in the debate about the issue?
Mr Menzies-Conacher: I have seen a number of
comments. One came from LSE which I do not have with me. They
were quoting the percentage of their students who are now non-resident
or non-dom in this case. It is a very large proportion. Those
are the people we are trying to recruit from. They certainly raise
concerns about their own academic staff. I have seen some about
this but I do not think I have seen it majored on.
Lord Sheppard of Didgemere: Probably in this group
you are addressing a lot of university chancellors and we all
recognise the significance of these issues.
Q157 Chairman: Overseas students
finance the tertiary sector.
Mr Menzies-Conacher: Absolutely. It is a bad
idea to discourage them. The incentive to use overseas financial
providers was a reference to investment management basically.
At the moment under these proposals, if fees are paid to a London
investment manager or other resident non-doms global portfolio,
those fees when they are paid are treated as a remittance or would
be treated as a remittance and hence would become liable for tax,
depending what election you have made. The consequence of that
would be that as in most cases such expertise is easily available
and certainly would be made available—Geneva for example—if
you could have your same portfolio run offshore without the tax
consequences, you would do so. That was raised with the Treasury.
We got a response from the Minister, Jane Kennedy, saying that
this would be addressed. We have not yet seen the revised clauses
to address it but we hope it will be. Even though it gets resolved,
it is another issue of not having the stuff fully thought out
in the first place. We are tripping up against quite serious business
consequences which did not have the time to be thought through
properly. Grandfathering arrangements for offshore mortgages is
in one sense a relatively narrow point referring to the change
in definition of remittances. Until 6 April, the position was
that if you took out a mortgage albeit on a UK property but from
an offshore provider, to the extent that interest was paid on
that, that was not treated as a remittance to the UK because it
was paid offshore. That was in the PBR and the Budget notes thereafter
announced as a loophole that had to be closed. Going forward,
that is fine. That is what it is. The concern is that in the Budget
note it was described differently to the Bill. The word "grandfathering"
is a bit of jargon, but simply where a loan was in existence as
at 6 April it continued to be treated for tax purposes in the
same way, unless it was repaid or varied or whatever. The detailed
wording in the original Budget note referred to that loan being
secured on property. The Finance Bill wording is different and
refers to the loan being used to purchase property, the obvious
consequence being that anyone who has re-mortgaged which is relatively
common these days in between the original purchase and 6 April
lost that grandfathering. Everyone had been working on the assumption
of the Budget note, that that was what we understood it was going
to be, because that was what was in the drafted clauses in January
as well. The Finance Bill comes out and all of a sudden it appears
that a whole raft of people who thought they were safe are not.
That again was raised at the Finance Bill discussion meeting last
Friday. I think that is acknowledged probably to be an error in
the Finance Bill drafting and hopefully will be corrected.
Q158 Lord Wakeham: Can I ask a more
general question about consultation? This Committee has over the
years always taken a considerable interest in the degree of consultation,
whether it is adequate and, as you know, there are arguments both
ways. If there is too much consultation too soon, the winners
and losers get cracking and all sorts of things happen. There
is criticism about the degree of consultation. Have you a view
as to how we could organise these things in this country better
to keep the balance between the Revenue and the taxpayer but to
be better able to deal with it for the future?
Mr Snyder: It is a very difficult one because,
as you say, if you have too long a consultation period it becomes
unwieldy and if you have too short a one you do not get the right
information. Personally, I do not think it is necessarily to do
with the length of the consultation. It is about the preparedness
and really hearing as opposed to going through elaborate listening
mechanisms and being able to get the correct information to ministers,
frankly. I had a meeting with Jane Kennedy and Andrew Maugham,
the chairman of the Council of Economic Advisers on this matter.
When they understood what was being said, despite the attitude
of the Revenue and Customs, which is a major problem in this country
at the moment and it is perceived to be a major problem because
of the attitude that they adopt, fortunately in this particular
meeting it was adopted in such a way that it was obvious to Jane
Kennedy and Andrew Maugham that it was ridiculous and therefore
they did make some changes. You have to have the ability to be
able to have access to ministers in a way that can actually influence
them. It is really the mechanism of finding out how ministers
can hear the true picture. They have to form a balance. There
is a balance in all these things. I am not suggesting there is
a right or wrong, but they need to understand the implications
sometimes of some of the proposals. A lot of what is wrong is
in terms of the anti-avoidance provisions and assuming that everyone
is bound to be a crook unless they are proved otherwise, which
is wholly wrong in my judgment both as a practising accountant—I
should declare that interest—but also from my position in
the City, seeing how people react to it. My feeling is it needs
to be a real preparedness and openness to hear the proper arguments,
not ones that are exaggerated or put in for sectional interest,
but ones that are trying to get the real implications known on
particular aspects. There are some very important ones in terms
of anti-avoidance. Alex, if he gets an opportunity, might mention
one or two in a minute because they are really fundamental but
have not really got over.
Q159 Lord Wakeham: Many of us sitting
round here have been Treasury ministers.
Mr Snyder: Exactly.
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