Examination of Witnesses (Questions 220-239)
Mr Richard Stratton, Mrs Penelope Williams, Mr Edward
Reed and Ms Isobel d'Inverno
12 MAY 2008
Q220 Lord Powell of Bayswater: The
professional bodies come along and tell us all the time they want
greater simplification but they also come along and tell us that
because there has to be this or that provision—entrepreneurs'
relief and so on coming back in—you cannot do without extra
complication. Again it is very hard to see what the right answer
is. If I was HMRC I think I would feel a bit persecuted by some
of these comments.
Mr Stratton: That is a perfectly fair point.
The taxpayer does cause complication by asking for special provisions
which HMRC and the Treasury quite often listen to and enact, and
then you end up with a complex system as a result. There is no
easy solution.
Q221 Lord Powell of Bayswater: One
cannot have one's cake and eat it. Lastly, on the entrepreneurs'
relief, was it a mistake to base it on the retirement relief?
Was there a simpler way of doing it which preserved the benefit
without extra complication?
Mr Reed: Not being one who designs legislation,
I am not really in a position to tell you whether there was a
simpler way of doing it, but retirement relief was a relief which
had mainly critics and very few supporters, and it seems surprising
to have pulled that out of the old books and refurbished it for
the purposes of reacting to representations made by various bodies.
There are specific problems with it which have not been addressed,
or problems which have been taken from the old retirement relief
particularly as they relate to trustees doing business, but some
of the other problems such as the length of time that you had
to have held an asset before you could claim retirement relief
do seem to have been addressed. It does seem slightly peculiar
to take a relief which very few people found easy to administer
or understand and try to replicate it all these years later when
we thought it was consigned to the dustbin.
Q222 Lord Powell of Bayswater: It
is a bit of a cop out to say, "It has not been very well
done but I could not suggest how it could be done better",
I think if you are going to make criticism you ought to have a
more constructive answer.
Ms D'Inverno: One way of approaching it might
have been to retain a form of taper relief for some categories
of business assets which would not have been any more complicated
and would probably have been possible to introduce in a revenue
neutral way. The slightly objectionable thing about these changes
is that they are clearly not revenue neutral and to confuse tax-raising
with simplification seems to be trying to hoodwink the taxpayer.
Lord Powell of Bayswater: A very fair point.
Lord MacGregor of Pulham Market: Chairman,
I think we have covered most of the important points in relation
to capital gains tax, so can we move on to another topic?
Chairman: By all means.
Q223 Lord MacGregor of Pulham Market:
Both societies support the calls for legislation to determine
when someone is UK resident to replace the practice, mainly based
on case law, which underlies much of the present approach. The
Law Society of England and Wales indicate that this statutory
test should be introduced with effect from 6 April 2009 and that
in the meantime clause 22 should be held back. I wonder if you
could expand on your views on that, and I particularly take the
point Mrs Williams made that there has been a long period of consultation
on this particular tax and why therefore wider ranging legislation
was not introduced this year and how difficult it would be to
put the tests on a statutory basis?
Mrs Williams: I do not know if I can comment
about why wide ranging legislation was not introduced this year,
but HMRC have been provided with proposals by a number of professional
bodies about the form the statutory residence test should take.
Most people are agreed that a day-counting basis should be the
most appropriate. The reason why we think it is better to have
a statutory test rather than to be relying on the situation we
have at present is because there is a lot of uncertainty. There
is uncertainty in relation to the residence rules which for these
purposes should be divorced from the domicile question because
residence is relevant not only for people coming to the UK but
also relevant to people seeking to leave the UK. A number of the
recent cases which have been before the courts have considered
Brits moving away from the UK and the circumstances in which they
cease residence, and that seems to be the area of most uncertainty
at present. We would say that clause 22, by having a night count
test, really reflects the position in Gaines-Cooper but
the question about the connections the person should have when
they seek to leave and the extent to which they can retain links
is still very much up in the air.
Q224 Chairman: In your written evidence
both societies point out some compliance concerns, for example
taxpayers of modest means who are unlikely to be aware that under
the new regime they may no longer be entitled to personal allowances.
If, between you, you had to prioritise these compliance concerns,
which would you see as the most important and why? To what level
would you like to see the de minimis levels increase and
how do you see in practical terms HMRC actually administering
these new rules?
Mrs Williams: I think there are two sets of
taxpayers who are caught potentially in compliance issues. One
is the low income taxpayers and their position would be amended
by having the de minimis levels increased. We would say
that de minimis levels of, say, £10,000 of income
and perhaps a disposal consideration of four times the annual
allowance for capital gains tax might be appropriate. The other
category of people who are caught by the non-compliance concerns
are in the context of deemed remittances. The rules as presently
drafted catch people in a very wide range of circumstances. The
definition of relevant person is very widely drawn. It is very
easy to see a situation where an individual makes a gift to somebody
outside the UK, somebody defined as a relevant person, and that
person brings it back into the UK at a later stage and buys services
in the UK, how is the individual who made the gift to know that
remittance has been made, to know the funds out of which that
remittance has been made, and that calls into question how much
eg spouses understand about each other's affairs. The definition
of spouse is very broad and covers persons who are living together
as civil partners and that too, bearing in mind there is no time
limit on when the rules may be applied, would cause compliance
issues.
Ms D'Inverno: I am sure that the Revenue, in
relation to the lower paid, will have to simply ignore the issue
because I do not see how they will have the resources to police
it. That means that many taxpayers yet again will be in a non-compliant
state through no fault of their own. Unless the Citizens' Advice
Bureau or people like that are going to take this up, when it
really is not the most important thing they should be spending
their time on, I am sure it will just be left to lie until the
problems are solved by other means which is not satisfactory.
Q225 Chairman: Is that a view you
share in the England and Wales camp?
Mr Stratton: Yes. We can certainly see that
happening.
Q226 Lord MacGregor of Pulham Market:
How can you see an HMRC way round this? They would have to have
substantially increased resources and links with tax authorities
in other countries. It seems to me a huge area or is that why
you conclude that it is just not possible?
Ms D'Inverno: Perhaps that is one of the things
they should have considered carefully before the provisions were
introduced and looked into and consulted with colleagues in other
countries.
Mr Reed: If you consider the microcosm of an
individual client and how that client is hit by the residence
rules, it is pretty demanding for one client to try to determine
taxability in, say, two different countries. If you extrapolate
that to Revenue authorities generally, it is going to be pretty
difficult to keep track of.
Q227 Lord Blackwell: Can I pick up
two specific points? One is the employment costs of the denied
personal allowances, whether you think they have a significant
impact on employment costs from that change, and the second relates
to the deemed remittances point where we understand the government
is going to bring forward amendments for the banking community
to meet some of their representation. Do you think those need
to be spread to cover workers in other sectors?
Ms D'Inverno: In terms of the employment costs,
many employers feel a degree of responsibility towards their employees
and will try and take steps to acquaint themselves with what needs
to be done in order to deal with people's tax affairs properly.
There are also quite a number of individuals from overseas working
in this country where their employment contracts have tax equalisation
clauses in them or where they are paid on a net of tax basis,
so there is more for an employer to do, often with not very big
sums involved. It is a lot of messing around for very little effect
really. In terms of the deemed remittances, I am sure there are
lots of areas where the provisions will need to be made even more
complicated and the clauses will grow in order to accommodate
these things to the degree where nobody will be able to understand
them, apart from the professional advisers, which again means
they are inaccessible to the ordinary taxpayer. That seems to
be unavoidable having started from this type of approach.
Mrs Williams: On the deemed remittances point,
the point has been raised with HMRC in a series of questions put
to them on an open day on 2 May. None of those questions was answered
at that open day because they told us that, as a result of the
correspondence with the BBA, the provisions were being amended
and we would expect to see the government amended legislation,
they said, two weeks from that day. We are hopeful that it should
be some time this week and we are hopeful that the changes will
recognise the competitive need for changing that provision.
Q228 Lord Barnett: You currently
support calls for legislation to determine when someone in the
UK is resident in a place of practice, but you are not happy with
the date of introduction. You want it delayed to 2009. Do you
think that would be helpful or would it not create even more uncertainty
while you are consulting over the next 12 months?
Mrs Williams: It would be fantastic if we were
able to have the residence test introduced with effect for the
current tax year if it was going to be acceptable for everybody.
Without that consultation process having happened, it is very
difficult to know that those rules would be in an acceptable form.
People are moving to the UK and will be living in the UK for the
current year and they need to understand the basis upon which
they will be resident in that year. That is why we say we would
expect legislation to be worked on during the course of the summer.
Maybe it could be issued with the Pre-Budget Report and then tabled
to be part of the Finance Bill for next year.
Ms D'Inverno: It surely would be possible to
get round the uncertainty by for example saying to taxpayers that
new rules will be coming in but during this year or the year after
you will not be disadvantaged. If the old rules suited you but
gave you a better result or something like that, it would be possible
to bring these things in in a more palatable way rather than springing
them onto an unsuspecting public and then having to back pedal
and sort them out afterwards. It is surely possible to introduce
new legislation in a way that does not frighten taxpayers.
Mr Reed: We have ended up, I suppose, with two
different ways of calculating again.
Q229 Lord Barnett: If it was not
for the media pressure there was at the time, do you think you
would support these new measures on non-doms?
Mr Stratton: There are a lot of the new measures
that I would not support. There is an underlying principle of
fairness in connection with a country and how much tax you pay
on the basis of the connection with that country which is a reasonable
principle. It became very rapidly apparent that, at the same time
as introducing the safe haven of the remittance basis for which
you pay £30,000 if you are extremely wealthy, the opportunity
was taken to massively tighten up the old remittance rules. What
was introduced on the short term timetable was an entry barrier
to get into a new regime for people who did not know what the
new regime was going to be when they paid the entry fee. Also,
when you look at the City of London and outside the City of London,
you have enormous sectors in the country where there are lots
of non-domiciles resident here from the lower paid to the higher
paid executive to the very wealthy. It is extremely difficult
to cater for all the circumstances. I would not have supported
all the changes, despite the principle.
Q230 Lord Paul: Has anybody gained
from this?
Mr Stratton: I do not think so. You have probably
had this said to you before. The deeply upsetting thing about
this is probably that there is not much gained by these changes.
There is just a lot of irritation for people. If you take someone
who comes here and, say, becomes resident here but under a double
tax treaty they would be resident in another country because their
centre of vital interest is there but they are resident under
the new rule, they would end up perhaps paying tax in the UK because
let us say the double tax treaty with their home country does
not cover everything. They could probably set that tax off against
the tax that they would pay on the same amount in their home country
under the double tax treaty. They would probably end up paying
exactly the same amount of money but they have to fill in two
times the forms that they would have to fill in normally. You
get a little bit of money maybe for the UK but not a lot and probably
not enough to balance the losses. You just irritate people. While
accepting the principle of fairness, the trouble is we are now
in extremely sophisticated jurisdictions, so applying the principle
of fairness is rather difficult.
Q231 Lord Paul: The Law Society of
England and Wales has concerns around retrospection and the commitments
given in the letter from the acting chairman of HMRC and the subsequent
budget documentation have not been fully followed through. How
significant are the issues that you mentioned? Have you pressed
changes on HMRC?
Mrs Williams: The issues that we have mentioned
in our written evidence are significant. We have pressed changes
with HMRC. The issues particularly, as we have set out in our
submissions, are in no particular order. Taking offshore income
gains held through foreign trusts. The acting chairman said that
accrued gains would not be taxed. The way that the rules are drafted
to apply in relation to offshore income gains means that there
will be tax charged by reference to gains accrued prior to 6 April
2008 if the gains when realised are not distributed in the year
in which they are recognised. We think that is unfair. Also, we
think it is unfair that personal companies are not covered by
the rules. If the companies were in an offshore trust, accrued
gains are taken out of charge. There is a point raised on alienation
on which we have been constantly seeking clarification from HMRC.
This will be a big point if HMRC are not able to clarify the position
when assets have been settled in trust historically: whether the
gains stick with the assets within the trust, or whether they
were recognised but not taxable in the UK, the HMRC will clarify
that prior to 6 April 2008. In the context of retroactive effect
in relation to the ceased source rules, a lot of people are caught.
This comes back to the non-compliance point. People set up their
accounts safe in the knowledge that they were doing it in accordance
with the rules that applied at that time. The rules changed and
the rug was pulled from under their feet. Suddenly, they have
no records to ensure that they will be compliant going forward.
Q232 Lord Powell of Bayswater: Do
you have a view of how much extra revenue is likely to be raised
by the amendments being introduced? Presumably an awful lot less
than would have been the case if the government had stuck to its
original proposals?
Mr Stratton: I do not know the answer. Obviously
there was a lot of media coverage about people leaving the country
under the original proposals and we have stories along the lines
of somebody who was looking to repair their yacht and who was
a non-domicile. That was a contract with an English shipyard.
Since these rules came in, the contract was pulled because it
was a provision of services in the UK, so it was a remittance.
Q233 Lord Powell of Bayswater: Your
instinct would be it is probably an awful lot less than was originally
estimated by HMRC?
Mr Stratton: Yes, I would be confident of that.
Ms D'Inverno: It is also necessary to bear in
mind the effect on people perhaps deciding not to come to the
UK and the lost revenue that results from these people not coming
at all or leaving, as has been happening already.
Mr Reed: I would echo that. The rules are so
widely discussed that they are being discussed inevitably in the
offshore centres. They are being discussed in continental Europe
and the United States. There are clearly people who are taking
decisions on the basis of, firstly, the rules as they appear to
be at the moment and, secondly, the sheer uncertainty of it all.
Q234 Lord Powell of Bayswater: A
lot of damage and little gain?
Mr Stratton: Yes.
Mr Reed: Even if people do not necessarily depart
in quite the flood that is predicted by the newspapers, there
are people leaving in smaller numbers and worse there will be
people who just will not come.
Q235 Chairman: Is there a view that
the proposal should not have been brought in at all?
Ms D'Inverno: Certainly not in this timescale.
Mr Reed: Not so fast.
Ms D'Inverno: Perhaps not at all. I think it
should be said that the Revenue are working enormously hard to
try and bring in all the changes that have been suggested to them
but it is a mammoth task and it is not one which should have been
undertaken on the hoof in this way.
Mr Reed: Part of the problem I suspect is that
because of the way the system used to work there is an awful lot
that is not on the Revenue's radar screens. There is an awful
lot that has been happening in relation to offshore trusts and
people's assets which they simply would not know about. I have
heard it said—and this is pure hearsay—that, when
they were introducing the subject of offshore mortgages and how
those would be treated, they made the comment that they believed
it was not much of an issue. Those of us in practice know that
offshore mortgages are big and reasonably common. You only have
to ask HSBC.
Q236 Lord MacGregor of Pulham Market:
In the context of representations and so on you raise in your
paragraph 3.2.4 four particular issues that you think need to
be addressed. Have you raised them with the Revenue? Have you
had any response and are there any which you would particularly
like to highlight for us?
Mr Stratton: Yes, we have raised these with
the Revenue. As a representative body, we have not had a direct
response but we understand that the Revenue are taking these up.
What has happened is that the employee/employment law issues have
joined the domicile discussions somewhat late, so there is a rather
complex set of provisions that tax employees when they receive
securities. The problem that has arisen is if you are non-domiciled
when you receive the security you have to work out whether that
is attributable to your UK duties or your offshore duties, assuming
you work inside and outside the UK. Having said that the non-domiciled
people can use a remittance basis, you have to work out when they
remit the bit of their profit from the security that is non-UK
income. This was not within the UK legislation at all previously.
It has now been introduced on a remittance basis to be consistent
with the rest of the rules and it is a question of making sure
it all follows through. HMRC are pretty receptive to this, we
understand, and are looking at it and are changing the rules to
accommodate the particular concerns that have been raised which
are essentially mechanical, just making sure that people pay the
right amount of tax at the right time and know what they have
to pay. It is not particularly controversial.
Q237 Lord MacGregor of Pulham Market:
Does the same apply to some of the other points that you are raising?
These are technical points which have to be addressed?
Mr Stratton: Yes. I saw the question, "Which
would you wish to highlight for the benefit of the Committee?"
I think the one that bothered me the most was the PAYE aspect
because, as you may know, if you give an employee securities as
an employer, you are liable to account for the PAYE on value provided.
If you give them securities and they are non-domiciled, you not
only have to work out when the charge arises; you have to work
out if they have remitted an amount that you might be liable to
account for PAYE on. It is quite a tall order. We wanted a removal
of the PAYE rules so any tax due just went through on self-assessment
because we did not think it was fair on employers to be burdened
with a guessing game. Otherwise an employer will just have to
deduct from everything.
Q238 Lord MacGregor of Pulham Market:
You said at the beginning of your answers that some of these employers'
concerns were coming in rather late. Do you think this is another
example where things have not really been thought through and
the representations from HMRC to ministers just did not cover
all of these details?
Mr Stratton: It did come late. I do not think
it was thought through, no. What happened with the non-domiciled
rules is that, when you think of non-domiciles, you start with
the ownership rules for remittance for the high net worth individual.
It is a natural place to start. Then you suddenly realise there
are all these lower paid migrant workers. You had not thought
of them. Oh dear. There are all these people in the City of London
working away and coming in and out all the time. You had not thought
of them. It suddenly broadens out. I think the employment rules
did come as a late realisation because of the consequential change
that went through the statute, introducing a new regime. That
regime has knock-on effects. I suppose the fear that we have is
that there are other knock-on effects we have not yet seen in
all this stuff that will just start feeding through.
Q239 Chairman: We have a few minutes
left for encouraging enterprise which I know is not your mainstream
topic, but perhaps I can kick off with the study done at the University
of Sussex. What does that study tell us about the overall effectiveness
of the EIS and VCT schemes? Should we be surprised that the positive
effects of the schemes were not greater? Perhaps, given the results
of the study, is it appropriate for the Exchequer to be expected
to subsidise investments by sharing the high risk involved with
young, growth orientated, small companies?
Mr Stratton: I have taken a look at the study
by the University of Sussex. It takes a look at the various investments
made against a control group, as you no doubt know. It reaches
the conclusion that if you give money to a company they tend to
go out and buy things with the money and spend it on employees.
They reach the conclusion that if you have a tax advantage investment
the company buys equipment and hires people. They go on to say
that the companies do not produce any profits after doing this,
as a general conclusion of this study. I suppose I was a bit disappointed
by that, although not in some ways surprised because you have
to bear in mind—I suppose this is a plea for this end of
the market and I am always making excuses for this end of the
market—that the period of the study was 1999 to 2005. That
included the bubble on high tech. In 1999/2000 etc., there was
quite a lot of divestment in high tech that generated profits,
but there was a lot of investment which has since gone quite sour
and which may just now, in many cases, be coming through the bottom
of the curve to generate some more profits. That is the never
ending optimism of the venture capitalist. Given the results of
the study, should the Exchequer be expected to subsidise investments?
I hope so. I still think it is a good thing despite the study.
I think that investment in knowhow, IP development, in circumstances
where there is an equity gap—without first hand knowledge,
one would still expect there is an equity gap in many areas for
small companies—is a useful focus and it is a focus across
Europe.
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