Memorandum by the Confederation of British
Industry (CBI)
1. INTRODUCTION
As the UK's leading business organisation, the
CBI speaks for some 240,000 businesses that together employ around
a third of the private sector workforce, covering the full spectrum
of business interests both by sector and by size.
The CBI welcomes the opportunity to give evidence
to the House of Lords on aspects of the Finance Bill 2008.
2. DOCUMENTS
Attached to this paper are:
A. CBI evidence to the House of Commons Treasury
Select Committee on the Budget 2008—"CBI Analysis of
the 2008 Budget".
B. CBI post PBR 2007 written suggestions
to the Prime Minister on Capital Gains Tax.
C. CBI post PBR 2007 submission to the Treasury
on Residence and Domicile.
D. CBI press release of 28 February 2008
on Residence and Domicile.
E. CBI Tax Task Force consultative report
"UK Business Tax: a Compelling Case for Change" March
2008.
3. WRITTEN NOTES
AHEAD OF
ORAL EVIDENCE
We have been asked to focus our attention on
three main areas:
— Capital Gains Tax and the new Entrepreneurs'
Relief.
— Encouraging enterprise—taking
into account three Government Budget Day Documents.
— Enterprise: unlocking the UK's talent.
— The Enterprise Investment Scheme.
— A Study on the Impact of the Enterprise
Investment Scheme (EIS) and Venture Capital Trusts (VCTs) on Company
Performance (HMRC Research report 44).
— Residence and Domicile.
4. ENCOURAGING
ENTERPRISE
Finance Bill Clauses
The Finance Bill Clauses under consideration
are very limited in their impact. Clause 28 increases the investors
annual limit from £400,000 to £500,000. While the increase
is welcome, it is likely to have little effect as very few investors
have sufficient resources and income tax liability to invest such
a sum in EIS investments and benefit fully from the tax relief.
However, we see no reason why there should be any limit at all—the
few investors with sufficient wealth to invest over £500,000
in EIS companies should be encouraged to do so.
A better objective would be to make the EIS
more attractive to a wider number of investors, with smaller sums
to invest, through improvements to the regulatory regime concerning
EIS Approved and Unapproved Funds.
Clause 29 excludes the activities of shipbuilding
and coal and steel production from all three venture capital schemes.
This clause is also expected to have little impact. The coal,
steel and shipbuilding industries are so capital intensive that
companies in these industries are unlikely to qualify for the
EIS in any event.
Enterprise: unlocking the UK's talent
The Government's new enterprise strategy sets
a 10 year vision for the Government's objectives on enterprise.
It was published against a seriously negative backdrop given the
breakdown of trust between the entrepreneurial business community
and the Government incurred, in particular, by the changes to
the capital gains tax regime. The CBI has welcomed the strategy
as a first crucial step in re-establishing the Government's commitment
to enterprise. However, its value will depend on the implementation
of the proposals and its ability to encourage all government departments
to commit to promoting enterprise.
The strategy is built around the framework of
five enablers of increased productivity: culture, knowledge &
skills, access to finance, the regulatory framework and business
innovation. And, an initial set of proposals have been made under
each of these enablers.
The CBI was pleased by the strategy's overall
focus on encouraging growth of firms and its ambitious nature.
In addition, a number of the proposals, as well as announcements
in the Budget, reflect CBI lobbying and are in direct response
to suggestions made by the CBI. However, there is still much to
do rebuild relations with the entrepreneurial and SME community,
particularly in the tax area. The CBI recommends revisiting the
review of small business taxation undertaken by the Treasury in
2001 with more comprehensive consideration being given to the
impact of tax changes on entrepreneurial and SME businesses as
recommended in the Treasury Select Committee's Ninth Report of
session 2007-08.
Enterprise Investment Scheme (EIS)
We believe that, given the right conditions,
the EIS has a key role to play in encouraging enterprise. However,
if the EIS is to be allowed to develop its full potential, a thorough
overhaul of the legislation is needed, going beyond the scope
of the March 2008 Treasury/HMRC consultation document. The CBI
will be making a detailed response to this consultation, for which
the closing date is 20 June 2008, on the basis of current discussions
with Members.
Entrepreneurs' Relief
The introduction of an entrepreneur's relief
is too limited in its scope and application to encourage the entrepreneurial
risk-takers that the UK needs to nurture and generate. In addition,
the draft legislation was only published on 28 February 2008 and
came into force on 6 April causing further uncertainty in the
business community. It has not offset the financial damage to
the entrepreneurs, investors and small business owners who made
long-term business planning decisions on the basis of the former
CGT regime nor will it incentivise serial entrepreneurs.
5. RESIDENCE
AND DOMICILE
Unlike the response on Capital Gains Tax, on
Residence and Domicile the Government have responded or is still
in the process of responding to the large number of issues that
the CBI has raised, as mentioned in Attachments C and D and subsequently.
We are not in this note examining detailed wording as the process
is still in progress.
Employers' concerns about possible PAYE implications
of the new regime and City worries about the taxation of deemed
remittances in relation to financial and other services provided
in the UK are two areas where there is now better understanding
between the Government and business than existed for a long period
after the PBR. However a number of points raised by the private
sector still remain to be resolved.
Unfortunately until a revised Finance Bill draft
text is produced it will not be possible to gauge how well the
draftsman has reflected understandings reached in discussions
with the Government and Ministerial assurances on particular topics.
All of this adds to the complexity and uncertainty of the UK tax
regime and the full extent of the reactions of affected taxpayers
will not be known until all the detailed issues are resolved.
Any change from the existing rules will produce negative effects
on taxpayers and some sectors such as maritime and financial services
seem particularly vulnerable to emigration from the UK. The final
figures reflecting the overall negative impact of the proposals
are not known at this stage.
Consultation Process
Common threads between the Capital Gains Tax
and Residence and Domicile proposals have been the lack of adequate
prior consultation and the need to fit a great deal of comment
and observation into the very compressed timeframe between the
PBR and the Budget.
In both cases the "rabbits out of a hat"
announcements in PBR 2007 of changes to come into effect with
Finance Bill 2008 came as a shock to those affected. In the case
of Capital Gains there was a complete reversal of established
Government policy with no prior warning of imminent change. In
the case of Residence and Domicile the CBI had no inkling of the
changes announced.
The CBI has long argued that the tax policy
making and legislative processes (including Parliamentary scrutiny)
would be greatly enhanced by improved consultation before Government
decisions are made. The CBI believes that such consultation would
greatly improve the range and quality of the evidence on which
Ministerial, Parliamentary and other decisions have to be taken
and on how best to implement those decisions. It would also help
the UK's international tax competitiveness by avoiding the damaging
perceptions of uncertainty and instability created by surprise
announcements as well as heading off unintended consequences.
Following the 2007 PBR, the high profile negative
public comments and the lack of understanding of both policy aims
and details of implementation mechanisms have been damaging to
the UK's international reputation. Moreover for both Capital Gains
Tax and Residence and Domicile the problem of uncertainty has
been exacerbated by evolving changes of policy stance. This has
been particularly acute in relation to Residence and Domicile
where there has been and continues to be a stream of official
material, some of which has been contradictory. This is set out
in more detail in Attachment C.
Furthermore, in the case of Residence and Domicile
there are still issues which remain to be resolved either by way
of response to questions already raised or by way of revised draft
Finance Bill clauses to give effect to policy decisions now taken
following post-PBR discussions between the Government and business.
These would, in a prior consultation process, normally have been
identified and worked through before legislation was presented
to Parliament.
The CBI's recent Tax Task Force Report (Attachment
E) reiterates the case for improved consultation in tax matters
as one of its key recommendations for enhancing the international
tax competitiveness of the UK.
It is self-evidently better to have an effective
consultation process than to be forced into the sort of fire-fighting
role in which business has found itself since the PBR. The CBI
strongly believes that such consultation would be beneficial to
both Government and business and that steps towards it should
be taken immediately.
6. OVERALL OUTCOME
In Attachment C we set out a number of principles
or yardsticks by which we assessed the Residence and Domicile
proposals. The Government has moved towards meeting our concerns
in a number of areas, for instance in relation to trying to reframe
the proposals so as to prevent double taxation in respect of US
taxpayers. Other improvements are referred to above and in Attachment
A. However it remains a priority objective to ensure that Residence
& Domicile reform does not penalise talent which has already
come to the UK from abroad nor deters future arrivals. Given the
influx of investment and skills from the US to the UK it is particularly
important to ensure that problems arising from mismatches between
UK and US rules are satisfactorily resolved, a process which may
take longer than is available before the completion of the passage
of the Finance Bill through Parliament.
In broad terms adding to the complexity of the
UK tax system is not the direction in which the CBI wants the
Government to go as it is a negative factor in international competitiveness.
The Capital Gains proposals have created the
perception of a sudden abandonment of a clear, longstanding, policy
objective of encouraging business, with no adequate replacement.
Unfortunately it cannot be said that the overall
outcome of either the Capital Gains Tax or the Residence and Domicile
changes is an enhancement of UK international tax competitiveness.
The welcome announcement by the Chancellor of
the Exchequer of the new business/government forum on tax to look
at the long-term challenges facing the UK tax regime and ensure
competitiveness endorses the calls the CBI has long made for competitiveness
to be at the forefront of thinking in relation to tax reforms.
April 2008
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