Memorandum by the Law Society of Scotland
The Law Society of Scotland is delighted to
have the opportunity to present evidence to the Finance Bill Sub-committee
on the topics under consideration.
CAPITAL GAINS
TAX AND
THE ENTREPRENEURS
RELIEF: CLAUSES
6 AND 7, SCHEDULES
2 AND 3
The rate of capital gains tax is policy issue
on which the Society would wish to comment.
The Society supports the simplification of the
tax system, and accepts that the introduction of a single rate
of capital gains tax could have resulted in simplification, however
the inclusion of the new Entrepreneur's relief reintroduces the
very complexity which the reform was intended to solve.
The Society also has serious concerns about
the way in which the changes were introduced. In particular the
Society would make the following points:
— The removal of indexation relief
with no rebasing of assets means that inflationary gains will
be taxed. Although the well advised may have been able to take
steps to mitigate this, for example by the transfer of assets
between spouses, other taxpayers will suffer an unexpected and
essentially retrospective tax charge on inflationary gains.
— The abrupt removal of taper relief
without any transitional period confounds the legitimate expectations
of many taxpayers, including owners of businesses and employee
shareholders.
— There was an unacceptable degree
of uncertainty about the changes in the period since the Pre Budget
Report, with announcements promised and then postponed, limited
consultation with a very few bodies and the prospect of a relief
of some kind but with details becoming available very late in
the day.
— Many taxpayers took steps to dispose
of shares and other assets before the end of the tax year, and
the time scale for many company disposals was accelerated considerably.
Figures recently released suggest that applications for tax clearances
in the last quarter of the 2007/8 tax year were 50% higher than
in the previous year. It is regrettable that a major change in
the tax regime introduced with undue haste has resulted in the
tax tail wagging the commercial dog.
— There is likely to be confusion in
the minds of taxpayers who expect the Entrepreneur's relief to
be a replacement for taper relief whereas in fact the requirements
are different in many respects.
— It is unfortunate that the Entrepreneur's
relief does not extend to employees with small percentage shareholdings
such as those participating in share ownership schemes in larger
companies. The Society believes the relief should be extended
to all cases of employee share ownership.
— Property let to a company or business
will not qualify for Entrepreneur's relief to the extent that
rent has been paid, whether before or after 6 April 2008, whereas
the payment of rent did not affect the availability of taper relief.
The Society believes that rent paid in periods prior to 6 April
2008 should be ignored in determining whether Entrepreneur's Relief
is available.
— The Enterpreneur's Relief is based
on the Retirement Relief code which is understood to have been
withdrawn because of undue complexity. The restriction of Retirement
Relief to cases where there has been the disposal of the whole
or part of a business gave rise to particular difficulties. There
are a number of tax cases from which guidance can be drawn, however
the Society does not believe it is appropriate for taxpayers to
be required to read tax cases in order to complete their self
assessment tax returns.
— It needs to be clarified that a part
disposal of a partnership can qualify for Entrepreneurs Relief;
and it might be thought that this restricted certain sole traders
also. In general terms the disposal of part of a business should
clearly qualify and the definition of part of a business should
be wide. As a matter of principle, should the relief not simply
be available for the disposal of assets used in a business, rather
than of a business, because it is the business assets which give
rise to capital gains tax rather than the business itself.
— The Society believes that the availability
of Enterpreneur's relief should be extended to all cases of trustee
ownership. There is no reason why discretionary trusts owning
trading business assets should be excluded from the relief.
— On defining a trading company, the
test introduced by the insertion of section 165A is too onerous.
Section 169L already excluded investment assets.
— A claim is required in relation to
the year in which the disposal is made, but it may not be known,
especially with a disposal of business assets before the cessation
of a business under section 169I(2)(b), whether a claim is possible
or desirable. There may be other such circumstances—and
in general the possibility of a claim should be allowed "within
such longer period as an officer of the Board may allow".
RESIDENCE AND
DOMICILE: CLAUSE
22, 23 AND SCHEDULE
7
Residence
The Society welcomes the clarification to calculation
of the number of days an individual spends in the UK, but believes
that this clarification should be extended to the introduction
of a statutory residence test. The question of whether an individual
is resident here is cloaked in too much mystery, and requires
consideration of extra statutory concessions and HMRC guidance.
Domicile
Whether or not the UK should continue to operate
the remittance basis of taxation for non domiciled individuals
is a matter of policy on which the Society would not wish to comment.
The Society has serious concerns about the way
in which the changes were introduced.
— Consultation took place about residence
and domicile a number of years ago, and it is unfortunate that
the current changes were introduced without any reference to those
professional bodies and others who invested considerable time
and effort in the previous consultation.
— The provisions included in the Finance
Bill are complex, tortuous and in many cases incomplete, due to
the very short timescale in which they have been drafted. It is
understood that parts of the legislation will have to be introduced
by way of amendment during the passage of the Bill. It is hard
to see why this legislation needed to be introduced so quickly.
— The legislation is so complex that
it will be impossible for most taxpayers to understand what the
provisions mean. Although this may not be a problem for the well
advised, those of lesser means will not be in a position to complete
self assessment tax returns because of the complexities of the
legislation.
— Non-domiciled taxpayers of modest
means are unlikely to be aware that under the new regime they
may no longer be entitled to personal allowances. Changes need
to be made to ensure that these taxpayers are not inadvertently
in breach of the law.
— The potential loss of personal allowances
will also result in increased compliance burdens for employers.
— The new rules may also affect students
coming to the UK to study, and the Society believes that the seven
year period should only start to run when full time education
has ceased.
— There appears to be a degree of unfairness
in the new regime in that the £30,000 payment is unlikely
to be of concern to wealthy taxpayers, whilst the loss of personal
allowances will be of considerable concern to the less well off.
— Given the amount of money likely
to be raised from these changes, it is hard to see why they have
been introduced. There appears to be a perception that the changes
amount to a political attack on non-domiciled individuals.
— The complexity of the legislation
seems to be out of all proportion to the tax it is intended to
raise, and given the detailed record keeping requirements there
will be a disproportionate compliance burden for taxpayers affected
by the new regime.
ENCOURAGING ENTERPRISE
Some aspects of the consultation and research
papers are outside the areas of expertise of members of the Society.
The Society would like to make the following
points about the Enterprise Investment Scheme (EIS).
— The general perception is that the
EIS is so complicated and includes so many restrictions that many
small companies and investors decide that it is not worth making
use of the reliefs.
— The complex anti-avoidance rules
mean that there are a great many traps for the unwary. Actions
taken by the company which seem to have no bearing on EIS can
cause the relief to be withdrawn.
— Even for very small investments,
professional advice is required, and the costs can be prohibitive.
The costs of professional advice eat into the funds available
from the investment.
— The legislation and guidance is not
very accessible to the uninitiated. Without the extremely helpful
advice and assistance provided by the Small Company Enterprise
Centre, it would be extremely difficult for EIS investments to
be made at all.
— The legislation also changes frequently
and this makes it difficult for those involved in this field to
keep up to date with all the requirements.
— It is not clear that the availability
of the EIS changes behaviour in relation to direct investment
in small companies. In general the experience of our members is
that investors will take advantage of full EIS relief where it
is available, but rarely make it an absolute requirement of an
investment.
May 2008
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