Examination of Witnesses (Questions 180-199)
Mr John Cridland, Mr Mervyn Woods and Mr Richard
Baron
7 MAY 2008
Q180 Chairman: The other two topics
we want to deal with are residence and domicile and encouraging
enterprise and we are a little short of time. Were there other
questions anyone wanted to ask on this or anything else you specifically
wanted to say on capital gains tax?
Mr Cridland: No, my Lord, that is very helpful.
Chairman: In which case, perhaps we can move on to
residence and domicile. Lord Blackwell, would you like to start
off?
Q181 Lord Blackwell: Thank you, Lord
Chairman, and I apologise I missed some of your earlier responses.
The tax policy on residence and domicile has obviously been something
which has been under review for quite a while and has been discussed.
One of the questions we are interested in is why this particular
timing? Why did it come out in 2007? Given that it has been talked
about, is there advantage out of the fact the uncertainty has
been reduced and it has now been crystallised? How do you see
the way and how this has been handled?
Mr Baron: I think the answer to timing is quite
simple, they were bounced into it by an announcement by the Conservatives.
To what extent they had been planning this policy in advance,
I am not sure. Of course if there were a Sword of Damocles hanging
over all the non-domiciles saying, "Well, something might
happen sometime in the next year or two", then it would be
helpful to have the uncertainty removed, but given that nothing
had happened for a long time I am not sure that Sword of Damocles
was looking particularly threatening. In terms of the handling
of it, I think it was very unfortunate, as with capital gains
tax, that the Government started by saying, "This is what
we are doing", then there was a big row and then, "Maybe
we'll talk about it", rather than saying, "This is what
we are thinking about, what do you think about it? What are the
pros and cons?"
Mr Cridland: I would only add to that, and concur
with those comments, that the furore over this issue was really
in the New Year when draft clauses were available which made it
clear that the application went well beyond what most stakeholders
were expecting at the time of the Pre-Budget Report. Again, given
my comment earlier about rates and other unintended consequences,
whilst there has been some debate about the £30,000 fee,
actually the much greater concern was to do with other matters
such as the treatment of trusts which only became apparent much
later in the process. So I think from the CBI's point of view
the consultation was inadequate. Whilst there had been in earlier
years consultation, that consultation I think I am right in saying
had come to a close and it was not current, and I do not think
many people in the business community were expecting changes at
this time.
Q182 Lord Blackwell: If they look
at the impact of this policy, the justification as set out in
the consultation document was broadly that here are individuals
who are enjoying UK services and want to contribute to them. I
know you have done some numbers on the arithmetic, (a) do you
think that was a reasonable objective and (b) do you think the
arithmetic will actually work out and will raise money for the
Exchequer?
Mr Baron: Fairness is always a laudable objective
but it is a very elastic concept. Once you get beyond the point
of saying that it is fair that somebody with more money should
pay at least as much tax as somebody with less money, it can mean
many things to many people and of course you do have to juggle
that against pragmatism. There is a question, and it is a very
serious question, of whether the Government has actually scored
an own goal and that the consequences are actually damaging to
the British economy and indeed damaging to tax revenues. We do
not know. The numbers which the Government put out in December
in the document called Paying a Fairer Share were admittedly
very soft. They said, "We are not certain about these numbers
but we think it is something of this order." So it is possible
that the true number, the true impact on tax revenue, is negative.
I am sure the range of uncertainty, given behavioural effects,
is that wide, but nobody knows what will happen. Of course nobody
will ever know because by the time you look back on people's tax
returns after you have them in a few years later, other things
will have changed as well and you will not be able to separate
out the effect of this.
Q183 Lord MacGregor of Pulham Market:
We have been receiving quite a lot of criticisms, some very major,
some very detailed, about the proposals as they now stand in the
Finance Bill. I do not want to go back but looking at the Finance
Bill as it is now, which provisions would you pick out as being
the most contentious still and why? I know the CBI were arguing
in February that the proposals should be scrapped and started
again, which is probably not going to happen, so are you now more
optimistic that something will emerge that you can live with from
the negotiations and live with by the time the Finance Bill has
become an Act?
Mr Woods: My Lord, I think we will have to live
with it because the Government has indicated it is not going to
reverse its policy, so the best attempt we can now make is to
get closure on something with the best changes to the Bill we
can achieve. One of the big uncertainties of course, as we pointed
out in our paper, is whether the US tax authorities will see the
£30,000 charge in the same way as the UK tax authorities.
This has always been a big issue, it is still unclear and, as
of the most recent pronouncement by HMRC, we will not know the
answer to that until the Finance Bill has gone through and the
Americans are asked to comment on actual legislation as opposed
to a proposal. So we are left with a great big uncertainty as
regards the Americans. There are also other areas where there
is a great deal of uncertainty still to be resolved, some of which
are positively acknowledged as such and I think PAYE and the impact
of all these proposals on employers is one of those. We are very
pleased the Government has now committed itself to consultation
on PAYE, because it is certainly not clear from the scheme of
the thing as it currently stands whether it can be subjected to
PAYE as we understand it, and it certainly could not, prior to
the announcement it was going to be deferred, have been applied
from the beginning of this financial year. That was simply an
impossibility which we put to the Treasury and happily they acceded
to that point. Whether we get movement on things like the £2,000
threshold remains to be seen. I would have thought the Government
might be willing to move on that if for no other reason than it
is very difficult to see how HMRC will actually police that in
practice. Is there, as John Cridland referred to earlier, any
cost benefit to be had from trying to run round checking up on
£2,000 earned abroad by somebody who is picking strawberries
in Worcestershire? I very much doubt it. I doubt whether HMRC
have actually got the manpower to do that sort of checking up
even if they wanted to. So it might well be that they would want
to revisit that and consider it should be made into something
more realistic. Those are some of the areas that need to be looked
at, but PAYE from an employer's point of view was a complete no-go
area and so I am grateful we have got time to think about that
and discuss it.
Q184 Chairman: There were a number
of calls, including from both of yourselves, for all or part of
the proposals to be deferred from April 2008. What do you make
of the counter argument that it was right to proceed to eliminate
continuing uncertainty? You have already talked about prior consultation
but do you have any other comments about the overall handling
of the initiative? Are there any major concerns apart from consultation?
Mr Cridland: I think the damage which has been
done is now done and it will be very difficult to unravel that
damage. It has damaged sentiment I think more than anything, my
Lord Chairman. It is only a year ago, or less, that we prided
ourselves that the City of London had through its own good efforts
established a significant competitive advantage over a number
of other world financial capitals and we have managed to knock
ourselves down a pitch. Many of the international visitors whom
the CBI meets and discusses with are just surprised that the Government
has given a signal, as they see it, that that capital and those
people are no longer necessarily as welcome in the United Kingdom.
I fear that damage is done. What I would say in contrast to the
capital gains tax story is that I do think the Government belatedly,
to be fair to them, listened to the concerns being expressed and
whilst, as Mervyn has said, we need to look at the detail of these
proposals as the Finance Bill progresses in principle some of
the most major concerns, both for employers and for individuals,
have been addressed. This was never a debate about the £30,000
fee but it cannot be sensible for the tax affairs of individuals
who play such a critical role to the UK economy in the City—but
not just in the City, some of our major manufacturing companies
across the land—to be publishing draft proposals in January
which affect their tax affairs as soon as April. We know, and
I am sure you have heard, that professional firms between Christmas
and the end of March, were unable to take on more work in this
area because of the advice they were needing to give individuals,
and that is just not a commonsense way of addressing matters of
this kind.
Q185 Lord Wakeham: There is one aspect
of it which we have had some evidence about and that is the question
whether, having gone down this road, the Government would not
have been wiser to have brought in legislation to determine whether
someone is a UK resident to replace the practice of case law which
underlines the present approach. Have you a view on which would
have been the better process?
Mr Baron: I think that would have been a good
thing. In general it is better to legislate where you can straightforwardly,
rather than rely on inherited practice or case law. I think this
is a case where you could lay down very straightforward, precise
tests in legislation.
Mr Cridland: I would concur with that view.
Q186 Lord Wakeham: What about the
uncertainly about the new day counting rules? Whether you approve
of it or not, is it pretty clear what is now intended?
Mr Baron: I think it is pretty clear now. The
only uncertainty was what to do about transit passengers, people
who maybe land at Heathrow and leave from Gatwick and maybe answer
an email on the bus in between, or something like that. We seem
to have got sensible practice on that. Obviously the Government
did move from saying, "We are going to count both the dates
of arrival and departure" to saying, "We are just going
to count the date of arrival" and it is very good they made
that change, but of course that was never a matter of uncertainty,
it was perfectly clear what was meant by that, it was just a policy
we wanted changed.
Q187 Lord Sheppard of Didgemere:
Would you like to comment on the whole question of compliance
costs and how that fits in with the personal tax allowances and
how it affects both the employer and the individuals concerned?
Will it be sorted out in time? What would you do to get it simplified
and quickly?
Mr Baron: The main thing to look at there is
the increase to £2,000. The original proposal was of course
£1,000 so putting it up to £2,000 is a significant improvement.
I am not sure what data the Revenue have on how many people would
drop out of their tax net if they put it up to £3,000 or
£4,000, the idea is to get it to a point where most people
can say, "I know my income from letting out my flat in Warsaw,
or whatever it is, is definitely below that, so I am in the clear."
As has already been said, it is pretty unlikely that the Revenue
are actually going to collect the money which might be due from
people who have a foreign income of marginally over £2,000.
Q188 Lord Sheppard of Didgemere:
Would you see a change in the £2k to £3k, or even £5k,
being adequate? Our previous speakers were talking about a factor
of 15 as the change which is necessary.
Mr Woods: Unfortunately, my Lord, we have not
got a Revenue cost benefit analysis which shows us where the break-even
point would come. I would have thought the point at which you
should set the exemption threshold would be the one beyond which
the Revenue would see themselves in a positive position as opposed
to one where there is nothing in it for them anyway. What is the
point in setting a threshold which will not produce any revenue?
Q189 Lord Wakeham: Do you think they
have got that figure?
Mr Woods: I hesitate to say. I suspect not otherwise
I would have thought they would have put it into the public domain
but that is pure speculation. The point is, given we have got
the KPMG Report on reducing admin burdens, et cetera, why on earth
would one want to introduce a whole new raft of admin burdens
which rise in the opposite direction to no net benefit to the
Exchequer? I really cannot see any gain to be had from that.
Q190 Lord Barnett: In paragraph 14
of Document C you expressed those concerns about it not going
to raise any revenue, so do I understand from what you are writing
and saying that you would be happier with tax levels which did
raise more money?
Mr Woods: No, I think what we were saying was
that before coming forward with what actually amounts to a very
great complication of the tax system, as opposed to the Chancellor's
announcement of the simplification agenda, there should be a jolly
good case made out to justify that complication. We do not think
from the figures which we have seen and the evidence which has
been produced by the Government to date that there are those arguments
and they have been made out.
Mr Cridland: We were looking, my Lord, at the
net tax take, trying to make the point that a number of these
non-doms actually pay a significant tax of other sorts in the
United Kingdom and if, looking at the pessimistic side, a lot
of these people choose not to be here in the future, then the
Government could find itself out of pocket.
Q191 Lord Barnett: So the strawberry
pickers would have other revenue as well?
Mr Cridland: Quite possibly.
Q192 Lord Barnett: So why would a
strawberry picker want to bother with claiming non-dom status?
Mr Cridland: Clearly the people we are concerned
about are likely to be high value individuals in the City whose
contribution through their spending power in the UK—
Q193 Lord Barnett: So you are not
really talking about strawberry pickers?
Mr Cridland: In this particular case we were
not.
Q194 Lord MacGregor of Pulham Market:
Could I come back to the point you raised about the HMRC delaying
for one year the PAYE issues and so on? There are obviously a
lot of complications. Looking ahead, would there still not be
increasing employment costs as a consequence of denying personal
allowances from day one on an employee's tour of duty in the UK?
Mr Woods: Yes, there would.
Q195 Lord MacGregor of Pulham Market:
Would you like to quantify that and say how you deal with it?
Mr Woods: In the course of the discussions we
have had, we will be challenging HMRC (and the Treasury to the
extent it is a policy issue rather than a compliance issue) to
justify imposing on employers yet another raft of burdens relating
to the PAYE burden as a whole and to what benefit. As John Cridland
and Richard Baron have already said, the whole question of this
exercise needs to be examined carefully and coolly in the light
of the evidence available. I have to say I am pleased to date
the Treasury has recognised that PAYE is not the straightforward
thing they originally suggested in response to questions and are
now going to revisit it, and I think over the course of the consultation
period they are going to engage in we will have the opportunity
to put before them all of the instances where there could be difficulties
and try and work out optimal solutions.
Q196 Lord MacGregor of Pulham Market:
Do you think there is another way of dealing with it apart from
raising the threshold quite substantially?
Mr Woods: You can always take everything out
of PAYE and leave it to self-assessment.
Q197 Chairman: I think we should
now move on to the third of our topics which is encouraging enterprise.
Perhaps I will ask the first question on this and then pass on.
Clause 28 increases the EIS investment limit from £400,000
to £500,000. Do you think that was a necessary change, given
that the limit was increased to £200,000 in April 2004 and
£400,000 in 2006? Given that the Treasury issued a consultative
document on the EIS on Budget day and there were various other
documents published on that day, do you not find it surprising
that the change to the EIS limit was made in advance of wider
consideration of these publications? Would it not have been more
sensible to stand back and assess where all this might be taking
us and then introduce a broader package if it seemed desirable?
Mr Baron: I do not think the increase to £500,000
was necessary. Obviously it is nice for people who are already
planning to invest rather more than £400,000 in qualifying
investments. There is a general question, as I mentioned in the
written evidence, of should you be increasing special reliefs
or should you be saying, "No, we will keep them where they
are and when we have got scope we will cut tax rates across the
board." That is the important policy question about the direction
of the tax system and obviously a very broad one. You ask about
the relationship between the increase to £500,000 and the
consultation document, I see them as pretty well independent because
the consultation document was concerned with a lot of administrative
issues—are there particular obstacles? Obviously the limit
is only an obstacle to someone who has got that kind of money,
and the consultation document was clearly focusing on different
types of obstacles. So I am not at all worried that they chose
to change the limit at the same time as issuing that consultation
document.
Q198 Chairman: Does the CBI take
the same view?
Mr Cridland: Broadly. For CBI members there
is rather more excitement about the consultation document than
there is about the 500,000 limit. The reason that the EIS has
not been the success we would have hoped, albeit it is an important
part of the Government's enterprise agenda, is because of the
complexity of the scheme rather than the levels of relief; the
complexity and the regular changes to the scheme. So the consultative
document is the best hope to get the EIS where it needs to be
by tackling a range of issues such as connected parties and others
which make the scheme very difficult for many individuals to make
it work.
Q199 Lord Paul: The IOD suggest there
might be a case for abolishing the venture capital schemes to
reduce tax rates across the board. The CBI thinks that a thorough
overhaul of the EIS legislation is necessary. How widely spread
is the dissatisfaction with the EIS scheme as presently constituted?
The CBI wants to see the regulatory regime improved. This ties
in with another Government publication on Budget Day, Enterprise:
Unlocking the UK's Talent. Do you have specific changes in
mind?
Mr Cridland: If I may comment on the enterprise
strategy: there were many elements of the enterprise strategy
which the business community will welcome, the notion for example
of regulatory budgets in government departments I think is a novel,
imaginative approach. There were some very important areas to
do with innovation, the use of innovation vouchers for small businesses,
which is something we very strongly support. So we do not have
a problem with what is in the enterprise strategy, we have a problem
with what was not in the enterprise strategy. For our membership
it is a bit like a doughnut, it is hollow in the middle, what
was not in the enterprise strategy was an enterprise tax strategy
and until and unless the Government is able to reassure small
businesses it is with them on enterprise taxation, given it has
increased small firms' corporation tax and then made changes to
capital gains tax, both of which were unwelcome, I think the enterprise
strategy is going to have to work very hard to convince the business
community that it is valuable. Whilst in principle we are supportive
of the EIS, as you rightly say from our evidence, at the moment
there are complexities in the scheme which need addressing but
it is not the most important thing for entrepreneurs. Entrepreneurs
have had ten years when the Government had put in place a range
of measures which are very welcome and supported. In the last
year, the Government appears to be reversing its strategy and
small businesses are scratching their heads and wondering where
the Government is on this issue, notwithstanding the enterprise
strategy.
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