Examination of Witnesses (Questions 209-219)
Mr Richard Stratton, Mrs Penelope Williams, Mr Edward
Reed and Ms Isobel d'Inverno
12 MAY 2008
Q209 Chairman: Welcome to our witnesses
from both Law Societies, England and Wales and Scotland. I think
you have done this before so we do not have to tell you too much
about the preliminaries. As you know, this year our inquiry focuses
on three main aspects of the Finance Bill, that is capital gains
tax, residence and domicile and encouraging enterprise, and from
your written evidence, for which many thanks to both societies,
your main interest is going to be on the first two of those, capital
gains tax and residence and domicile. I do not know if you want
to make any initial statements, if you do by all means carry on.
If not, we will move straight into questions.
Mr Stratton: That will be fine, thank you.
Q210 Chairman: Perhaps I can start
off with consultation and ask you whether consultation on capital
gains tax and the residence and domicile proposals as announced
in the Pre-Budget Report could reasonably have taken place before
that announcement? Also, how do we manage consultation on potentially
contentious issues when there will almost certainly be winners
and losers and the losers will no doubt shout loudest, possibly
to the exclusion of a balanced debate or a means of finding a
reasonable policy objective? How do you think the consultation
should be organised in the future with that in mind?
Mr Stratton: First of all, I would like to say
this is one of the most difficult questions raised so it is a
good thing to deal with it first. My colleagues will doubtless
have something to add to this. I think in the context it is important
perhaps to differentiate between the topics that we are dealing
with here. There is residence, domicile and CGT. There was a consultation
on residence and domicile in 2003 which we, the Law Society of
England and Wales, responded to and at that stage said we thought
a statutory test for residence would be a good idea. If you consider
residence as a concept, as a basis for taxing, it is a relatively
isolated topic, it is not of itself that controversial and is
something that you would have thought could be consulted upon
on a timetable fairly straightforwardly. There would be winners
and losers but one would suggest it is not such as to produce
an outcry of itself. If you move then to domicile, that is a more
difficult topic and it shows the problems of modern consultation.
Domicile is a mixture, I would suggest, of the controversial and
the technical. As we have discovered as the domicile changes have
gone forward, all the very difficult technical issues have come
out and the Finance Bill is addressing those but it has not managed
to address them completely, so there will be further changes to
be made. It is an area where it would be nice to divide the controversial
part of the fairness of the tax base and who should be taxed from
the technical issues. We at the Law Society believe very much
in open consultation, for all parties to become involved in public
consultation processes. We feel the technical aspects of domicile
could have been consulted upon. Things like the £30,000 charge
per annum and the framing of that charge, you could perhaps isolate
and deal with separately. I was reminded of the consultation on
REITS, real estate investment trusts, where there were a huge
number of technical points. The technical points were all dealt
with through a very well organised consultation, a very sophisticated
consultation, but there was also the rather controversial issue
of how much a company had to pay to get into the REITS regime.
The Chancellor cleverly took that point off the table and said,
"I will decide about that point at the end, I will decide
whether we are going ahead and go through Parliament and I will
announce my proposed number", which he did and it was a good
way of taking a controversial element out of the technical side
of the structure. When you get on to capital gains tax, I have
to say that when you look at that, it is a simplification and
a rate change; it is two things. At a technical level we would
welcome simplification, but in terms of a rate change there are
some things which perhaps should not have been consulted upon,
and if the Government is proposing a change to the rate of tax,
that is perhaps a PBR or Budget announcement, and then it goes
through Parliament. So I think there are grades of consultation
revealed by these different circumstances.
Q211 Chairman: Thank you very much.
Is there a Scottish view on this?
Ms D'Inverno: I think we would agree broadly.
It seems to us there is absolutely no reason at all why the domicile
changes had to be brought in so quickly, with the result that
the Finance Bill is only half finished in relation to these provisions
and they are being developed on the hoof. We really cannot see
why it could not have been rolled out over a longer period. It
is an enormously complicated area. Also we are quite concerned
about the lower paid non-domiciled individuals, to whom this will
come as an enormous shock and there will not be any time to prepare
them for this change or their employers. Clearly it would be inappropriate
with a change such as a change to the rate of CGT for professional
bodies to be consulted about that, but in terms of looking at
transitional reliefs or whatever, I am sure we could do better
than deal with it in this on-off way as it has been and also involving
a number of meetings of a select few behind closed doors; consultation
we feel should be open. In Scotland, because we are geographically
remote, we are used to being forgotten about, but when the broad
range of professional bodies are also being forgotten about, that
seems a sorry state of affairs.
Q212 Lord Blackwell: Can I move on
to some specific questions on CGT and enterpreneurs' relief and
start with a fairly broad question which is, to what extent the
changes have met the Government's objectives. They said back in
2007 that they wanted to ensure the UK had an internationally
competitive capital gains tax system which responded to the changing
needs of investors and promoted flexibility and competition. How
well do you think in the round the changes they made, the simplification
and other changes, have met that and where did they fall down?
Mr Reed: If I may attempt to answer that question,
I think nobody has any quarrel at all obviously with the objective
that the Government was aiming for, and indeed simplification
is something which a number of people were calling for in the
run up to the publication of this Finance Bill. I think I did
hear a number of people requesting there be no further dramatic
changes to UK tax law for a year or two to allow us all to get
used to the idea. In the round there is, on the face of it, a
much simpler system ahead of us, but the fact of having introduced
an entrepreneurs' relief at the last minute in reaction to representations
made by a number of bodies does mean we have a system which pretty
much is as complicated as the system it is attempting to replace.
The huge benefit of taper relief as I saw it was going to be that
it was a relatively straightforward system in the way it eventually
evolved. The main criticism of it was it did not entirely replace
the old system, so we had two systems running at the same time
and you had to remember what happened before 1998, then what happened
after 1998 and we are pretty much still in the situation where
we need to remember a number of different systems at the same
time. I think in the round I am not sure we have advanced very
far.
Q213 Lord Barnett: Could I just revert
briefly to the answer on consultation to the Chairman? Is it not
a fact that even if you had months or even years of consultation,
the net result would still be that every year there would be major
amendments to Finance Bills and particular new taxes introduced,
and that is why Finance Bills get bigger and bigger every year?
Mr Stratton: Yes, that is true. Hopefully consultation
helps with ironing out technical details and unforeseen problems.
I think the main benefit of consultation is so you can see, or
the Government can seen, unforeseen results of what it is proposing
to do, and then may change the direction of the ship slightly
to cope with that, but we are in a world where tax does change
on a regular basis. It may not need to change as much as it does
but it does change quite dramatically every year.
Q214 Lord Barnett: Then if I could
go to the answer which has just been given on taper relief, do
I take it from that you quite liked taper relief or is it the
case that you just do not like change?
Mr Reed: I think the point I was trying to make
was if you felt there was a flaw in the indexation system which
applied beforehand, taper relief in the form in which it eventually
ended up did have an advantage of simplicity and people knew where
they were heading tax year by tax year. Compared to a reintroduction
in effect of retirement relief, I think the answer to your question
is yes.
Ms D'Inverno: Also, if I might add, the rate
of tax that people generally paid on business assets was sufficiently
low for no one to really bother trying to avoid it and everyone
paid it quite happily, whereas if you raise it to 18% that immediately
raises the spectre of people trying to navigate round it because
18% is a much higher rate for business assets. If you think back
to the pre-taper relief days, people thought capital gains tax
was too high and made efforts to avoid it.
Q215 Lord Barnett: But whatever the
rate, there will always be professionals who are looking to seek
to avoid it, will there not?
Mr Reed: I think it is the job of the professionals
to deal with the law as it is in front of them, and looking at
it from my perspective, when taper relief was brought in there
was a significant dropping off of unusual planning, including
people unnecessarily turning over their lives to go non-resident
for example, and there was a significant dropping off in that
and I suspect there may be an increase in that again now because
the rate is significantly different.
Q216 Lord Barnett: Would you argue
that simplicity in taxation, whether in this field or any other,
is simply not possible?
Mr Stratton: I think I am getting to the point
where I personally prefer simplicity and if that means fewer special
cases and fewer reliefs, then so be it. The difficulty over the
years has been that when you look at these regimes, partly because
of the taxpayers' lobbying, you end up with all sorts of special
cases, which does not produce simplicity. It is a question of
whether you decide that is the appropriate regime.
Q217 Lord Paul: The Law Society for
England and Wales sets out three detailed areas—the consequences
of the repeal of sections 77-79 of the Chargeable Gains Act 1992,
the vulnerable person's election and the abolition of the "kink
test" and of "halving relief". These are new to
the Committee, could you explain these points for us and tell
us in each case how important it is that a change is made? Have
you raised these points with HM Treasury and or HMRC and, if so,
with what response?
Mrs Williams: These points have been raised
with HMRC and we are waiting for a response on them at the moment.
I have to say in the context of the other issues we are talking
about today, they probably are of minor significance. We raised
them in our submissions to the Committee to highlight certain
deficiencies in the drafting of the legislation which we thought
came about as a result of the legislation being drafted in haste.
Briefly, in relation to section 77-79 the proposal is that these
sections are repealed and our objection to the manner in which
the repeal is set out in the legislation is that the change is
set out as "Rate: consequential", and the Explanatory
Notes say that the sections would serve no useful purpose in the
future because with the alignment or the simplification of the
capital gains tax rate to 18% for individuals and trustees there
would be no point in having gains attributed to trustees. We would
say there are consequences which flow from that change and they
are set out in our submissions. The vulnerable person's election,
the Explanatory Notes set out clearly what was intended by the
change in legislation, which again is required as a result of
the repeal of sections 77-79. It is our view that the legislation
as drafted is deficient. We have made a proposed amendment to
HMRC and we wait to see whether that is going to be adopted. Finally,
the abolition of the "kink test" and of "halving
relief", relates to assets held prior to 1982. The "kink
test" being abolished means that all assets held prior to
1982 will now be re-based to their 1982 value and it is our view
that, with halving relief being abolished, it would be appropriate
for assets which would have qualified for halving relief to have
an acquisition cost as at 1982 values. Halving relief was relevant
if there had been a disposal of an asset which was held prior
to 1982, if, when it was disposed of, there was roll-over or hold-over
relief or no gain, no loss treatment. On the subsequent disposal
the acquisition cost for the purposes of calculating the tax on
that subsequent disposal would not have qualified for re-basing
treatment because the asset would not have been held at 1982.
So we say the provisions for halving relief should be amended
so that that anomaly is corrected. I do not think those points
will be controversial but we will wait to see whether they are
adopted.
Q218 Lord Powell of Bayswater: My
Lord Chairman, perhaps three points and the first comes back to
the question of consultation. Was there ever a golden age in consultation
when it was very good? Has it in recent years declined in quantity
or quality? Or is this an annual gripe?
Mr Stratton: There is more consultation now
than there has been. That as a general matter is a good thing.
Some of the consultation is more opaque than other consultation
in terms of, "Can you understand what the policy is behind
it and the changes which are being proposed?" I do not think
there has ever been a golden period which I can recall. You just
find as a practitioner there is an enormous amount of it which
has to be responded to all the time which is part of open government.
The good news is that from a practitioner's perspective there
is an openness and willingness to consult. I appeared before the
Committee last year responding on the anti-avoidance sections
on managed serviced companies in relation to which there had been
consultation. That would not have happened in earlier years, which
was a welcome development.
Q219 Lord Powell of Bayswater: It
sounds as if there is not really ever going to be a state with
which we are all satisfied; it is simply not achievable?
Mr Stratton: I do not think there is a perfect
answer.
Ms D'Inverno: There are some consultations which
seem to work much better than others. For example, the recent
consultation on the gift aid scheme seems to have been extremely
helpful and perhaps the difference there is that it was taking
place over a long time and a lot of people who use the system
on a day-to-day basis were involved. So there are good consultations
which happen but on some of the changes just recently there has
not been sufficient time for us all to take time away from our
practices in order to input into them.
Mrs Williams: What is frustrating too is that
there was a consultation process in relation to the residence
and domicile changes and the professional bodies did feed in and
make comments and representations but those were not progressed.
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