TAXGUIDE 4/04 FINANCE BILL OF SPRING 2004 TAX FACULTY REPRESENTATIONS AND

TAXGUIDE 4/04
FINANCE BILL OF SPRING 2004
TAX FACULTY REPRESENTATIONS AND
INLAND REVENUE RESPONSES
Text of replies from the Inland Revenue issued in September 2004 to
representations issued as TAXREP 19/04 submitted in April 2004
and TAXREP 23/04 submitted in June 2004 by the Tax Faculty
of the Institute of Chartered Accountants in England and
Wales to the Chancellor of the Exchequer
(Amended version)
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
FINANCE BILL OF SPRING 2004
TAX FACULTY REPRESENTATIONS AND
INLAND REVENUE RESPONSES
CONTENTS
Paragraph
FOREWORD
(i)-(vi)
WHO WE ARE
1 -3
KEY POINT SUMMARY
4-32
TOWARDS A BETTER TAX SYSTEM
33-46
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
2
PART 3: INCOME TAX, CORPORATION TAX AND CAPITAL
GAINS TAX
Key point summary
121-132
The non-corporate distribution (NCD) rate
133-158
Trusts
159-164
Transfer pricing and thin capitalisation
165-178
Expenses of companies with investment business
179-188
Loan relationships and derivative contracts
189-191
Accounting practice
192-197
Duty of a company to give notice of coming within charge
to corporation tax
198-203
Construction Industry Scheme
204-213
Childcare and childcare vouchers
214-217
Vans
228-230
Gift aid
231-233
Gifts with a reservation
241-302
Minor amendments to ITEPA 2003
303
Enterprise incentives
304-305
Exemption from income tax for certain interest and
royalty payments
306-310
Chargeable gains
311-313
Avoidance involving loss relief or partnership
314-337
Avoidance – finance leasebacks
338-339
Reliefs for business
340-341
PART 4: PENSION SCHEMES
342-345
PART 6: OTHER TAXES
Stamp Duty Land Tax and Stamp Duty
346-380
PART 7: DISCLOSURE OF TAX AVOIDANCE SCHEMES
381-441
PART 8: MISCELLANEOUS MATTERS
442-445
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
3
Abbreviations
The following abbreviations apply in this memorandum:
ADP
C&E
CFC
EC
ECJ
EU
FA
FB
FII
HRA
IR
ICTA 1988
ITEPA 2003
NAO
NCD
RIA
SWA
TCGA 1992
VATA 1994
Acceptable Distribution Policy (for CFCs)
HM Customs & Excise
Controlled Foreign Corporation
European Community
European Court of Justice
European Union
Finance Act
Finance Bill
Franked Investment Income
Human Rights Act 1998
Inland Revenue
Income and Corporation Taxes Act 1988
Income Tax (Earnings and Pensions) Act 2003
National Audit Office
Non-Corporate Distribution
Regulatory Impact Assessment
Scotch Whisky Association
Taxation of Chargeable Gains Act 1992
Value Added Tax Act 1994
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
4
FINANCE BILL OF SPRING 2004
TAX FACULTY REPRESENTATIONS AND
INLAND REVENUE RESPONSES
FOREWORD
(i)
In April 2004 the Faculty of Taxation of the Institute of Chartered Accountants in England
and Wales submitted a memorandum (issued as TAXREP 19/04: see
http://www.icaew.co.uk/taxfac/index.cfm?AUB=TB2I_64552,MNXI_64552) to the
Chancellor of the Exchequer commenting on the Finance Bill issued in April 2004. A
supplementary letter was sent in June 2004 (TAXREP 23/04: see
http://www.icaew.co.uk/viewer/index.cfm?AUB=TB2I_66108). Copies were sent to, inter
alia, Treasury Ministers, members of the relevant House of Commons Standing Committee,
the Inland Revenue and HM Customs and Excise. Evidence was also provided in March,
April and May 2003 to the House of Lords Economic Affairs Committee Finance Bill Subcommittee (report and evidence published in June: see
http://www.publications.parliament.uk/pa/ld200304/ldselect/ldeconaf/109/4051201.htm)
(ii)
Meetings were held between representatives of the Tax Faculty and the Revenue and
Customs. In addition to responding to a number of matters at the meetings, the Revenue
and other Government departments have subsequently provided written comments on
the points in TAXREPs 19/04 and 23/04.
(iii)
This memorandum reproduces the text of TAXREP 19/04 so far as concerns the taxes
under the control and management of the Revenue and TAXREP 23/04 and in italics the
text of the written responses made by the Revenue. The original paragraph numbers in
TAXREPs 19/04 and 23/04 have been retained. The paragraphs in TAXREP 23/04 have
been inserted after paragraph 345. A separate representations and responses
memorandum will be published covering taxes under the care and management of other
Government departments.
(v)
The reader should bear in mind that the Clauses referred to in this memorandum are as
published in the first Finance Bill issued in April 2004, without taking account of
amendments made at the Standing Committee or Report stages of the Bill, except to the
extent that subsequent amendments are referred to in the responses.
(vi)
In order to assist reference to the legislation as finally enacted, the Finance Act 2004
section or Schedule number has been added in each main paragraph heading.
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
5
FINANCE BILL OF SPRING 2004
WHO WE ARE
1.
The Institute of Chartered Accountants in England and Wales is the largest accountancy
body in Europe, with more than 128,000 members. Three thousand new members qualify
each year. The prestigious qualifications offered by the Institute are recognised around
the world and allow members to call themselves Chartered Accountants and to use the
designatory letters ACA or FCA.
2.
The Institute operates under a Royal Charter, working in the public interest. It is
regulated by the Department of Trade and Industry (DTI) through the Accountancy
Foundation. Its primary objectives are to educate and train Chartered Accountants, to
maintain high standards for professional conduct among members, to provide services to
its members and students, and to advance the theory and practice of accountancy (which
includes taxation).
3.
The Tax Faculty is the focus for tax within the Institute. It is responsible for technical tax
submissions on behalf of the Institute as a whole and it also provides various tax services
including the monthly newsletter ‘TAXline’ to more than 11,000 members who pay an
additional subscription.
KEY POINT SUMMARY
4.
This memorandum contains points of general relevance to the 2004 Finance Bill together
with specific comments on individual clauses.
5.
This first section summarises the main points covered in the detailed commentary
sections. It is followed by a section Towards a Better Tax System which highlights the
extent to which this year’s Finance Bill fails to meet the ten principles that we believe
should underpin all tax legislation.
6.
Whilst all the points we have made need to be addressed, this initial summary highlights
our key points. In each case we have included a cross reference to our more detailed
comments later in this memorandum.
Excise duties
Duty stamps
7.
There is considerable disagreement at the present time as to the cost to the Exchequer of
spirits fraud and the Office of National Statistics is currently carrying out work on this in
conjunction with Customs and the Scotch Whisky Association. There is also considerable
disagreement as to the compliance costs of these measures: 13 p per bottle according to
the Government compared to 50p per bottle according to the industry. In the light of this
uncertainty we recommend that this provision should either be withdrawn or not brought
into effect.
[see paragraphs 47 to 60 for detailed comments] (Secretarial note: reproduced in
representations and responses guidance note covering Customs taxes.)
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
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Value Added Tax
Disclosure of VAT avoidance schemes
8.
We are concerned that the current proposals are so widely drawn that anything that does
not maximise the VAT cost to business can be classed as a tax avoidance scheme. We
have illustrated in the main VAT section a number of entirely innocuous and every day
transactions that would be caught by the current proposals.
9.
Our main concerns are as follows:







Customs have not produced any definition of what constitutes unacceptable tax
avoidance. The definition in Sch 11A is so widely drawn that it means that
anything which does not maximise the VAT cost to business is a tax avoidance
scheme. Assuming that businesses will not be required to maximise their VAT
costs, there is no clear definition of what tax planning is acceptable to
Government, and what is not.
there has been no credible estimate of the extent of tax avoidance, and thus the
financial justification for these measures is unclear
the notification requirements for VAT go considerably further than those from
the Inland Revenue
both business and Customs will incur significant compliance and administration
costs, but no estimate of these has been given
Parliamentary scrutiny and supervision of these provisions is reduced by the use
of secondary legislation (yet to appear) to define major concepts
there is considerable doubt whether the provisions comply with Human Rights
law and European Law more generally, and therefore whether they are lawful.
the notification provisions are only the first stage of a developing regime. It is
therefore even more important that the law is clear and properly focussed from
the outset.
[see paragraphs 61 to 120 for detailed comments] (Secretarial note: reproduced in
representations and responses guidance note covering Customs taxes.)
Income tax, corporation tax and capital gains tax
The non-corporate distribution (NCD) rate
10.
The Government has introduced this measure to combat what it considers to be
exploitation of the corporate legal form by small businesses simply to reduce the amount
of tax they would otherwise have to pay. This followed the decision two years ago to
introduce a 0% rate of corporation tax for the first £10,000 of business profits. The
simplest solution would have been to abolish the 0% corporation tax rate instead of
introducing nine pages of extremely complex legislation, particularly in relation to groups
of companies.
11.
The proposals have the potential effect of taxing at a 19% rate distributions of reserves
brought forward from previous years when the distributing company has low profits in the
year of distribution.
[see paragraphs 133 to 158 for detailed comments]
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
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Special rates of tax attributable to trusts
12.
The decision to increase the rate of tax trusts pay to 40% has been coupled with some
extremely complex rules introducing a FIFO matching rule for section 677 ICTA 1988.
13.
Section 677 will raise less and less money in the years following the introduction of the
new 40% trust tax regime, on 6 April 2004, so we recommend that a Regulatory Impact
Assessment should be undertaken to ascertain how much tax revenue would be at risk if
sections 677 and 678 were simply to be repealed.
14.
This is the first Finance Bill which has been drafted in accordance with the Tax Law
Rewrite principles, so it is particularly disappointing that these particular proposals are so
poorly drafted.
[see paragraphs 159 to 164 for detailed comments]
Transfer pricing and thin capitalisation
15.
We recommend that the UK Government should rethink its approach to EU
harmonisation issues and rather than increasing business burdens by ‘downward
harmonisation’ it should consider the approach of other EU member states, such as Spain,
which have disapplied thin capitalisation and CFC provisions for intra EU transactions.
[see paragraphs 165 to 178 for detailed comments]
Expenses of companies with investment business
16.
We are disappointed that after two major consultations on Corporation Tax Reform the
only change in this area is to change a long standing relief and introduce a new ‘tax
nothing’: a legitimate business expense for which the tax system provides no relief.
[see paragraphs 179 to 188 for detailed comments]
Construction industry scheme
17.
We are concerned that the proposals will impose an unreasonable burden on business
because it is so reliant on the correct identification of the employment status of an
individual which is often difficult to ascertain, particularly for a non tax specialist.
18.
We believe the penalties are overly harsh. If the status of the engagement is
misunderstood, there is a penalty of up to £3,000 per month. The correct determination of
status in the early years is vital. Honest mistakes could be too harshly penalised and there
could be a disincentive to put right earlier errors after several years of misunderstanding.
19.
We are also concerned that the online employment status tool should be accurate and
correctly implemented.
[see paragraphs 204 to 213 for detailed comments]
Childcare and childcare vouchers
20.
We are concerned that the proposals represent a piecemeal approach to this whole area of
ensuring that there is better provision of childcare in the UK. In particular we are
concerned that the existing workplace nursery scheme is going to carry on in parallel with
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
8
the new scheme but it will be more limited than at present. We also believe that the
current proposals favour employees as opposed to the self-employed. If this encourages
the self-employed to incorporate in order to benefit from the new regime are we going to
be facing a change of policy in a couple of years’ time when the relief is by then
considered to be unfairly exploited?
[see paragraphs 214 to 227 for detailed comments]
Gift aid – giving through the self assessment return
21.
Whilst we support any initiatives which encourage charitable giving, we have some
reservations about how this scheme will work in practice. Our first concern is what will
happen if the amount passed to the charity is incorrect which might happen in a number of
circumstances which are outlined in the detailed comments paragraphs. We are also
concerned about the position of unrepresented taxpayers, who may find themselves giving
more to charity than they had planned or having to account for excess repayments or
shortfalls of Gift Aid tax.
[see paragraphs 231 to 240 for detailed comments]
Gifts with reservation
22.
We believe this charge is wrong in principle. In our view the proper approach to problems
in this area is to strengthen the gifts with reservation rules.
23.
If the new provisions are introduced we recommend that the rules should only consider
ownership in the previous seven years and not go back, as proposed, to March 1986.
Taxpayers are only required by law to retain records for six years so it is unrealistic to
base a tax charge on knowledge going back nearly 20 years. We also believe that the
tracing rules will be almost impossible to comply with.
24.
Finally, we are also concerned that so much of the detailed legislation is to be introduced
in secondary legislation where it is unlikely to receive adequate scrutiny.
[see paragraphs 241 to 302 for detailed comments]
Other taxes
Stamp duty land tax
25.
We remain concerned that this new tax has been introduced on a piecemeal basis which
has led to mistakes and omissions necessitating rewritten and secondary legislation.
26.
This is a highly technical area which will take time to fully implement and we are already
hearing that our members have found it difficult to obtain answers from the SDLT
Helpline.
27.
We understand that the SDLT policy team is to be disbanded shortly and we are
concerned that this will further place in jeopardy the continuity of technical expertise.
SDLT is a self assessed tax and we see this lack of resource within the Revenue as an
indication that there is an unwelcome shift of cost and risk from the Revenue to the
taxpayer.
[see paragraphs 346 to 380 for detailed comments]
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
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Disclosure of tax avoidance schemes
28.
We are concerned to ensure that the proposals do target those areas where there is a
genuine risk of loss of tax revenue and that the new rules do not cause further unnecessary
regulatory burdens for UK business and UK taxpayers.
29.
The policy purpose behind the proposal is, we understand, to receive advance notice of
tax avoidance schemes which are actively promoted and marketed.
30.
The problem with these proposals is that they are so widely drafted that they encompass
not just marketed tax avoidance schemes but also include all kinds of other tax advice that
should not be included.
31.
The overall result is that the provisions are uncertain in scope and are not likely to achieve
their policy purpose of enabling the Revenue to receive an ‘early warning’ of marketed
schemes.
32.
We are also concerned that these provisions may be in breach of the Human Rights Act
1998 despite a specific statement to the contrary in the Regulatory Impact Assessment.
[see paragraphs 381 to 441 for detailed comments]
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
10
TOWARDS A BETTER TAX SYSTEM
Ten Tenets ‘Towards a Better Tax System’
33.
In October 1999 the Tax Faculty published a position paper Towards a Better Tax System
in which it formulated ten principles that should underpin all tax legislation (TAXGUIDE
4/99, see http://www.icaew.co.uk/taxfac/index.cfm?AUB=TB2I_43160,MNXI_43160).
34.
The ten principles were that a Better Tax System should be:
35.
1.
Statutory: tax legislation should be enacted by statute and subject to proper
democratic scrutiny by Parliament.
2.
Certain: in virtually all circumstances the application of the tax rules should be
certain. It should not normally be necessary for anyone to resort to the courts in
order to resolve how the rules operate in relation to his or her tax affairs.
3.
Simple: the tax rules should aim to be simple, understandable and clear in their
objectives.
4.
Easy to collect and to calculate: a person’s tax liability should be easy to
calculate and straightforward and cheap to collect.
5.
Properly targeted: when anti-avoidance legislation is passed, due regard should
be had to maintaining the simplicity and certainty of the tax system by targeting
it to close specific loopholes.
6.
Constant: Changes to the underlying rules should be kept to a minimum. There
should be a justifiable economic and/or social basis for any change to the tax
rules and this justification should be made public and the underlying policy made
clear.
7.
Subject to proper consultation: other than in exceptional circumstances, the
Government should allow adequate time for both the drafting of tax legislation
and full consultation on it.
8.
Regularly reviewed: the tax rules should be subject to a regular public review to
determine their continuing relevance and whether their original justification has
been realised. If a tax rule is no longer relevant, then it should be repealed.
9.
Fair and reasonable: the revenue authorities have a duty to exercise their
powers reasonably. There should be a right of appeal to an independent tribunal
against all their decisions.
10.
Competitive: tax rules and rates should be framed so as to encourage
investment, capital and trade in and with the UK.
It is now nearly five years since that position paper was issued and we are concerned that
in many respects the tax system is in worse shape than it was then. The current Finance
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
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Bill will do nothing to redress the balance.
36.
We have set out below some of the major problems we see with the 2004 Finance Bill
evaluated by reference to the Ten Tenets set out above.
Length, complexity and drafting
37.
At 574 pages this year’s Finance Bill is more than 25% longer than the 2003 Finance Bill
which was the fourth longest Finance Bill on record.
38.
Some of the provisions make already complex legislation even more complicated with
little indication that any significant amounts of tax are at stake. See the provisions
amending section 677 ICTA 1988 contained in clause 29 and Schedule 4.
Breach of Ten Tenets:
Simple,
Easy to collect and calculate and
Constant
Conflict with EC law
39.
There are several provisions which appear to us to be contrary to EC law. These include
clauses 48 and 49 as well as clause 303.
40.
It is clear from the EU treaty and a long history of judgements of the European Court of
Justice that UK domestic legislation must be compliant with the European law and we do
not believe this is the case.
Breach of Ten Tenets:
Statutory and
Competitive
Conflict with Human Rights Act 1998
41.
We are particularly concerned that the provisions on ‘Disclosure of tax avoidance
schemes breach the Human Rights Act and in our detailed representations below we have
urged the Government to publish the advice that it has received that this is not the case.
Breach of Ten Tenets:
Statutory
Use of regulations
42.
It has proved almost impossible to comment on some parts of this Finance Bill as so many
of the provisions are to be relegated to Statutory Instrument. This is particularly true of
the provisions on ‘Disclosure of tax avoidance schemes’.
43.
Statutory Instruments are subject to even less scrutiny than the Finance Bill itself and
once enacted they are more difficult to access, particularly for the ordinary taxpayer who
is not represented by a qualified advisor.
Breach of Ten Tenets:
Statutory and
Subject to proper consultation
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
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Provisions which are retroactive
44.
There are provisions which will affect transactions which taxpayers entered into many
years ago with no understanding that these actions would have consequences in the future
which could not have been anticipated. This is particularly true of the proposals on Gifts
with reservation contained in clause 84 and Schedule 15.
45.
These would appear to breach the doctrine of ‘reasonable expectations’ and ‘legal
certainty’ which have been supported very recently by the ECJ in two joined decisions
(Case C-487/01 Gemeente Leusden and (Case C-7/02) Holin Groep BV v Staatssecretaris
van Financien.
Breach of Ten Tenets:
Constant,
Properly Targeted and
Fair and reasonable
Regulatory impact assessments
46.
We support the publication of RIAs but are concerned that many of them do not make a
sufficient case to justify the proposals set out in the Bill. We believed that RIAs are an
essential tool and that they should include a detailed assessment of how the provisions
reviewed comply with the ten tenets set out above.
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
13
PART 3
INCOME TAX, CORPORATION TAX AND CAPITAL GAINS TAX
KEY POINT SUMMARY
The non-corporate distribution (NCD) rate
121.
The Government has introduced this measure to combat what it considers to be
exploitation of the corporate legal form by small businesses simply to reduce the amount
of tax they would otherwise have to pay. This followed the decision two years ago to
introduce a 0% rate of corporation tax for the first £10,000 of business profits. The
simplest solution would have been to abolish the 0% corporation tax rate instead of
introducing nine pages of extremely complex legislation, particularly in relation to groups
of companies.
122.
The proposals have the effect of potentially taxing at a 19% rate distributions of reserves
when the distributing company has low profits in the year of distribution.
Special rates of tax attributable to trusts
123.
The decision to increase the rate of tax trusts pay to 40% has been coupled with some
extremely complex rules introducing a FIFO matching rule for section 677 ICTA 1988.
124.
Section 677 will raise less and less money in the years following the introduction of the
new 40% trust tax regime, on 6 April 2004, so we recommend that a Regulatory Impact
Assessment should be undertaken to ascertain how much tax revenue would be at risk if
sections 677 and 678 were simply to be repealed.
125.
This is the first Finance Bill which has been drafted in accordance with the Tax Law
Rewrite principles, so it is particularly disappointing that these particular proposals are so
poorly drafted.
Transfer pricing and thin capitalisation
126.
We recommend that the UK Government should rethink its approach to EU
harmonisation issues and rather than increasing business burdens by ‘downward
harmonisation’ it should consider the approach of other EU member states, such as Spain,
which have disapplied thin capitalisation and CFC provisions for intra EU transactions.
Expenses of companies with investment business
127.
We are disappointed that after two major consultations on Corporation Tax Reform the
only change in this area is to change a long standing relief and introduce a new ‘tax
nothing’: a legitimate business expense for which the tax system provides no relief.
Construction industry scheme
128.
We are concerned that the proposals will impose an unreasonable burden on business
because it is so reliant on the correct identification of the employment status of an
individual which is often uncertain We are also concerned that the online employment
status tool should be accurate and correctly implemented.
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
14
Childcare and childcare vouchers
129.
We are concerned that the proposals represent a piecemeal approach to this whole area of
ensuring that there is better provision of childcare in the UK. In particular we are
concerned that the existing workplace nursery scheme is going to carry on in parallel with
the new scheme but it will be more limited than at present. We also believe that the
current proposals favour employees as opposed to the self-employed. If this encourages
the self-employed to incorporate to benefit from the new regime are we going to be facing
a change of policy in a couple of year’s time when the relief is by then considered to be
unfairly exploited.
Gift aid – giving through the self assessment return
130.
Whilst we support any initiatives which encourage charitable giving, we have some
reservations about how this scheme will work in practice. Our first concern is what will
happen if the amount passed to the charity is incorrect which might happen in a number of
circumstances which are outlined in the detailed comments paragraphs. We are also
concerned about the position of unrepresented taxpayers, who may find themselves giving
more to charity than they had planned or having to account for excess repayments or
shortfalls of Gift Aid tax.
Gifts with reservation
131.
We believe this charge is wrong in principle. In our view the proper approach to problems
in this area is to strengthen the gift with reservation rules. We recommend that the rules
should only consider ownership in the previous seven years and not go back, as proposed,
to March 1986. Taxpayers are only required by law to retain records for six years so it is
unrealistic to base a tax charge on knowledge going back nearly 20 years. We also believe
that the tracing rules will be almost impossible to comply with.
132.
Finally, we are also concerned that so much of the detailed legislation is to be introduced
in secondary legislation where it is unlikely to receive adequate scrutiny.
DETAILED COMMENTS
CHAPTER 1
CORPORATION TAX
Clause 28 and Schedule 3 (section 28 and Schedule 3) – The non-corporate
distribution (NCD) rate
133.
It is rather unfortunate that having introduced the 0% band two years ago, the
Government has now had to produce nine pages of legislation to correct the perceived
mischief caused by it, rather than to simply abolish the 0% band which caused the
problem.
134.
We understand the Government’s policy purpose behind these proposals, namely to
encourage companies to retain earnings. However, we think that the resulting complexity
from this new measure will defeat the policy purpose behind this proposal.
135.
These new rules will mean that many shareholders of owner managed companies will
need to perform simultaneous equations in order to arrive at the amount they will need to
distribute. The result is a considerable increase in complexity for very small incorporated
businesses.
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
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136.
In the interests of simplicity and certainty we believe that the 0% corporation tax rate
should be abolished and these provisions withdrawn.
Revenue response
I am sorry that you consider the new measures to be complex because others have found
that they strike a sensible balance between technical detail and avoidance of complexity.
The legislation occupies less than 8 full pages and is considerably simpler than, for
example, the ACT regime. There is very little extra that most companies affected by the
new provisions have to do compared with what was previously required and there is no
need for complex mathematical computations. The process of the basic scheme is
extremely simple and has no more additional complexity than working out a percentage
and being able to subtract. The process is as follows:

work out the company’s tax liability including marginal relief in the normal way,
as before, and if the percentage tax due is less than 19%, then:

check whether there has been a distribution to a person who is not a company,
and if so:

charge the amount of profit that matches the amount of the non-corporate
distribution at 19% and the remainder at the rate that applies in the normal way
under the first bullet above.
It is important to recognise that well over 90% of those companies affected by the noncorporate distribution rate need do no more than the above simple calculation. The
remaining measures relate to situations where distributions exceed profits, especially
where there are groups of companies. They provide the minimum level of safeguards
necessary to prevent tax avoidance.
The Government does not wish to abolish the starting rate of tax because it wishes to
encourage small business to retain profits for investment and growth. The non-corporate
distribution rate, coupled with low other rates of corporation tax, achieve this aim.
137.
We note that the NCD ‘rate’ is to be ‘such rate as Parliament may from time to time
determine’ (clause 28(1) introducing new section 13AB(3)). The rate is not specifically
linked to the small companies’ rate of corporation tax which we would have expected.
138.
Please clarify:

whether this is deliberate;

whether there is an intention that the NCD rate may in future deviate from the
small companies’ rate of corporation tax.
139.
We would also welcome an assurance that if the 0% rate band is withdrawn in the future
these provisions will be withdrawn.
Revenue response
During the debate in the Committee of the Whole House on 27 April 2004 the Paymaster
General said that the measure does not represent a strategic change in direction. She
went on to say the Government’s “deliberate and cumulative aim is to underpin all the
measures that the Government have taken to encourage businesses to grow and to be
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
TAXGUIDE 4/04
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more enterprising and productive in the medium and long term and not to operate year by
year by playing around with the tax system.”
She also commented that it is not possible for any Minister to say that there will never be
a change in the business tax regime for small businesses and referred to the discussion
document announced in the Budget.
140.
As currently drafted the NCD rate applies to a distribution to a recipient who is not a
company (paragraph 2(1) Schedule 3). It would therefore apply, for example, to recipients
which are pension funds, charities, unincorporated associations and authorised unit trusts.
We do not believe that this is the intention and that it should apply only to individuals and
trusts.
141.
We think that the clause should be amended to make it clear that it does not apply to the
above recipients.
Revenue response
The intention and effect of the clause is that the non-corporate distribution rate should
potentially apply where distributions are made to non-companies, the definition of
“company” being the existing definition contained within section 832(1) Income and
Corporation Taxes Act 1988.
142.
We would welcome clarification as to why the provisions require distributions to be
matched against basic profits for the period, up to the full amount of the basic profits,
when that amount could not actually have been distributed out of the current year profits,
assuming no FII or other non-taxable income. In our view the clause should be amended
so that the matching is limited to basic profits less the 19% tax charge.
143.
In strictness, the matching should be limited to basic profits less tax at the true rate, to
include the charge under section 13AB itself, but we imagine that would be considered to
be too complex a formula.
144.
We would welcome clarification as to why excess NCDs have always to be carried
forward. In reality they must actually represent distributions of retained earnings (again
assuming no FII), which originated before section 13AB came into force and quite
possibly before the introduction of the starting rate so to that extent should have already
borne tax at the small companies’ rate.
145.
The clause should be amended so that distributions which cannot be matched against the
current year’s basic profits, in the company or its subsidiaries, should next be set against
distributable reserves existing at 1 April 2004, and only then should any excess be carried
forward.
Revenue response
The points made in your representations do not recognise the nature of the non-corporate
distribution rate. It is not a tax on distributions made out of taxed reserves, but a rate of
tax applied to current profits. If there are no profits, there is no tax to pay.
If, for example, the Government had abolished the starting rate of corporation tax, as
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some commentators have proposed, the minimum rate of corporation tax on all profits
would be 19%. No one would have suggested that this should be calculated net of tax, or
that it should take into account distributable reserves including FII. The non-corporate
distribution rate is simply a method of establishing the appropriate tax rate for current
profits. Just as an increase in profits may trigger higher corporation tax liability, under
the new provisions the presence or absence of a distribution may also impact on the
corporation tax rate.
It is therefore irrelevant from which profits the amounts distributed arose and there is no
justification for matching profits with an amount net of tax.
You ask why excess NCDs are carried forward, not backwards. As I have explained, the
period during which distributed profits are earned is not relevant, and to carry any excess
back would cause the reopening of earlier years with attendant complexities. You will
appreciate that there is a need to carry the excess forward to prevent tax avoidance.
Your representations have mentioned the need to avoid complexity. I hope that you can
accept that the design of the measure avoids the added complexity that would follow were
the Government to follow the route of introducing a separate distributions tax and to
adopt your suggestions for matching of net profits and carry back of excess NCDs.
146.
It is also not clear why, in paragraph 7(3) Schedule 3, the parent’s excess NCDs have to
be matched against the subsidiary’s basic profits reduced only by its own NCDs. The
subsidiary’s basic profits should be reduced by the full amount of any dividends which it
has paid outside the group, whether corporate or non-corporate. Otherwise one ends up
levying the additional tax charge on profits which have been distributed by the subsidiary
to corporate shareholders through the paragraph 7 mechanism, even though such profits
are of course excluded from the section 13AB charge computed directly on the
subsidiary’s own NCDs.
147.
We believe that the clause should be amended to reflect the above comments. However,
we believe that it is appropriate to allocate excess NCDs to be matched against profits of
the subsidiary which have been distributed to the parent itself in order to make the system
work.
Revenue response
The provisions are designed to focus on non-corporate distributions when determining the
rate of corporation tax. You have rightly acknowledged that the allocation of excess
NCDs to other group companies that match distributions paid up is necessary. It follows
that any provisions that require separation of this element and further identification of
payees would inevitably be highly complex, particularly bearing in mind anti-avoidance
provisions that would be necessary.
An important objective in designing the legislation was to keep the complexity
proportionate to the risks and population of companies affected. The number of groups to
which the non-corporate distribution rate applies is relatively small, and there are far
fewer still with subsidiaries having both non-company and non-group company
shareholders which is the situation relevant to your representation.
The justified principle of focusing on non-corporate distributions when computing
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corporation tax rates is followed in paragraph 7 as drafted. In our view, there is no
significant principled, proportionate or practical benefit to be derived from introducing
the additional complexities and consequential measures that would be necessary if your
suggestion were to be adopted.
148.
We question whether the draft provisions deal fairly with a company which is in receipt of
franked investment income, when, in reality, it may well be the franked investment
income that is being distributed and when there are profits elsewhere in the group which
have paid tax at 19% or more. The following examples illustrates the problem.
Example
149.
Holdco has no income other than £5,000 from one investment. It also has two
subsidiaries, A Ltd and B Ltd, which make profits which they need to retain to develop
their business. Holdco distributes its £5,000 investment income to its shareholders all of
whom are individuals.
It appears that all of Holdco's distribution is Excess Non Corporate Distributions (NCD)
which must be allocated to A Ltd and B Ltd.
Revenue response
The measure operates by taking account of distributions to non-company shareholders
only. If franked investment income were to be taken into account, the measures would
have to identify and separate group and non-group FII including tracking non-group FII
received by subsidiaries and passed up through the group. They would also have to
provide a matching mechanism for FII and distributions made, including rules for which
type of FII were being matched. This would introduce considerable complexity, would
require anti-avoidance provisions and would not encourage overall retention of group
profits for growth and investment.
The measure as drafted in the clause has the benefit of being simple, proportionate and
principled.
150.
We question whether the existing provisions are reasonable in that a group can decide
how to allocate an excess of NCDs whereas the parent must itself utilise as much of the
NCD as it is able to.
Example
151.
Parent has £2,000 of bank interest but no other income. It has two subsidiaries, C Ltd
which has profits of £20,000 and D Ltd which has profits of £50,000. Parent pays a
dividend of £10,000. Each company pays the starting rate on £3,333 and the full small
companies rate on profits of over £16,667. Accordingly C Ltd and D Ltd are both paying
corporation tax at 19% on combined profits of £70,000 which is ample to frank the
£10,000 dividend, yet the rules require an additional 19 per cent tax to be paid on £2,000
of the dividend. This is because the legislation requires Parent to be allocated a third of
the starting rate and for £2,000 of the dividend to be allocated to it.
If the bank interest had been received by one or other of the subsidiary companies there
would have been no extra tax to pay by Parent. We question whether the provisions are
fair.
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Revenue response
The principle adopted for groups follows that for singleton companies. It is logical for
the provisions to consider the company making the distribution in the first instance before
considering where any excess should be allocated. In many cases involving groups, it
avoid consideration of other group members at all, making the system simpler to operate.
The associated company rules and their impact on rates of corporation tax are well
understood and there is no need to make special provision when the non-corporate
distribution rate is being applied.
152.
We also believe the provisions could work unfairly where there are outside shareholders
in a subsidiary.
Example
153.
Holdco owns 100 per cent of E Ltd and 50.1 per cent of F Ltd. It receives a distribution
(as group income) from E Ltd of £50,000 which it distributes to its own shareholders. The
companies can decide between them how the £50,000 is allocated. If they do not do so
the Revenue will decide.
In fairness the Revenue should decide to allocate it wholly to E Ltd but the Revenue could
allocate it in some other way. The provision should be amended so that the Revenue’s
power must be exercised to achieve a just and reasonable result and this should be capable
of appeal.
Revenue response
You state that the Revenue’s power to allocate excess NCDs should be exercised to
achieve a just and reasonable result and this should be capable of appeal.
The power for an officer of the Board to make an allocation is within paragraph 10(2)
and is relevant only where a necessary allocation has not been made by the relevant
companies. But even if a “Revenue allocation” is necessary, that allocation can be
varied by agreement between the relevant companies.
The provisions are therefore explicit in giving the companies the power to amend an
officer of the Board’s allocation and there is therefore no need for the allocation to be
capable of appeal. In the debate during Committee of the Whole House on 27 April 2004
the Paymaster General said: “The measure also provides for companies to amend those
allocations, so no further safeguards are necessary. It is not a one way street in which
the Government simply impose conditions.”
154.
We would welcome clarification as to how paragraphs 14(3) and (4) of Schedule 3 work
together.
Example
155.
Holdco owns 100 per cent of G Ltd and 40 per cent of H Ltd. G Ltd is a share dealing
company and owns a further 15 per cent of H Ltd as dealing stock. H Ltd pays a dividend
of £10,000 of which £4,000 is received by Holdco and £1,500 by G Ltd. Under paragraph
14(3) H Ltd seems to be treated as a 51 per cent subsidiary of Holdco. However,
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paragraph 14(4) excludes the shares held by G Ltd from being taken into account and
therefore we assume that H Ltd is not a 51% subsidiary of Holdco.
156.
We would be grateful for confirmation that our understanding is correct.
Revenue response
Paragraph 14(4) operates for the purpose of the paragraph and therefore overrides
paragraph 14(3). This is because income from shares held by share dealing companies is
taken into account in computing trading profits and is therefore treated in a different way
to dividend receipts of other companies. It follows that, as in other similar situations,
those shares are disregarded.
In practice, we do not expect many share dealers to be affected by these measures but
their situation was dealt with to provide consistency.
157.
We would also welcome clarification as to how paragraphs 14(3) and 15 work together?
Example
158.
Holdco owns 100% of J Ltd and 40% of K Ltd. The companies all prepare accounts to 30
June. On 1 August 2005 K Ltd pays a dividend to its shareholders of £10,000 of which
Holdco receives £4,000. On 31 December 2005 Holdco sells a property to K Ltd for
£200,000. The accounts of Holdco for the year to 30 June 2006 are selected for enquiry
and in the enquiry it is agreed that the property was only worth £197,000 on 31
December.
As a result K Ltd has made total distributions of £13,000 in the year to 30 June 2006 of
which £7,000 (£4,000 dividend plus £3,000 distribution under section 209(4), ICTA
1988) was paid to Holdco, so K Ltd is deemed by paragraph 14(3) to be a 51% subsidiary
of Holdco.
It is not clear if it is deemed to be such a subsidiary for the year to 30 June 2006, the
period 1 August 2005 to 30 June 2006 during which distributions were made, or only on
31 December 2005 when it received the offending distribution.
Revenue response
The Paymaster General said during the Committee of Whole House debate on 27 April:
“Finally, the hon. Gentleman asked me about the deeming provisions in paragraph 14
and 15 of schedule 3. Of course, the Revenue will be issuing guidance explaining exactly
how those measures work.”
That guidance will cover the kinds of situations to which you refer.
Trusts
Clause 29 and Schedule 4 (section 29 and Schedule 4) – Special rates of tax
applicable to trusts
159.
We would welcome clarification as to what paragraph 1 of Schedule 4 is trying to do. The
explanatory notes issued by HM Treasury on 8 April do not cover Schedule 4 but we
understand that this was an oversight and that notes will be published shortly. Please
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confirm that this is the intention.
160.
Given that these provisions are meant to be drafted in Tax Law Rewrite style, the result is
not satisfactory. As drafted the purpose and effect of the provisions are far from clear. We
request that the provisions are reviewed and redrafted to improve clarity.
161.
Sections 677 and 678 ICTA 1988 are already highly complex provisions and we question
why it is considered necessary to make section 677 even more complex by introducing a
FIFO matching rule (paragraph 1(4) of Schedule 4 inserting new section 677 (7A) ICTA
1988).
162.
Indeed we question whether sections 677 and 678 are necessary now that the trust rate of
tax is 40 per cent for UK resident trusts? We recommend that a Regulatory Impact
Assessment is undertaken to ascertain how much tax revenue would be at risk if sections
677 and 678 were to be repealed with effect from 6 April 2004. In other words adding to
the inherent complexities of the existing provisions with the introduction of FIFO
matching rules from 6 April 2004 seems unlikely to be justified by the tax revenues at
stake which are likely to be small in the first year and will inevitably become less and less
as each year passes.
163.
The increase in the rate applicable to trusts to 40 per cent is particularly unfair where a
discretionary trust received dividend income prior to 6 April 2004 which it distributes to
beneficiaries after that date. The deemed tax rate under section 687(3)(a1) seems to be the
rate at the time the dividend was received, i.e. 25% per cent (Schedule F trust rate) less
10% (Schedule F ordinary rate) = 15% , so the trust will have to pay an extra 25% if the
dividend was its only income. However, if it had received the dividend after 5 April 2004,
the section 687(3)(a1) adjustment would be 32.5% less 10% = 22.5% leaving only an
additional 17.5% payable by the trustees.
164.
We request that Schedule 4 is amended to include a transitional relief in respect of
payments out of the trust which are subject to section 687.
Revenue response
The Explanatory note for Schedule 4 was omitted from the published set of Explanatory
Notes due to a printing error. We apologise for this error: the note was quickly added to
the HM Treasury web-site.
Schedule 4 stops a settlor from receiving credit for tax that the trustees have not paid.
The amendment is a necessary consequence of the increase in the rate applicable to
trusts. Schedule 4 aims to ensure the tax credit given to the settlor of a trust in
calculating his income tax liability on the capital payment from the trust more closely
matches the tax paid by the trustees. The complexity of anti-avoidance legislation is
driven by the ingenuity of the tax avoidance industry.
As these anti-avoidance provisions are still needed to ensure that wealthy settlors pay the
right amount of tax their repeal has not been costed.
Income received by trustees loses its character when it is paid out: beneficiaries do not
receive dividends from trustees but annual payments. The section 687 increase follows the
increase in the Rate Applicable to Trusts. Beneficiaries get an increased tax credit, and
transitional relief is not considered to be necessary.
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CHAPTER 2
CORPORATION TAX: GENERAL
General comments on clauses 30 to 36 (sections 30 to 36) - (transfer pricing and thin
capitalisation)
165.
We understand the Government’s concern to ensure that the UK tax laws are robust and
not subject to challenge in the European Court of Justice. However, we are concerned that
the UK’s approach to EU issues appears to be ‘downward harmonisation’. Our concern is
that this will reduce the competitiveness of the UK and is not consistent with the stated
EU Lisbon Agenda which is to create in Europe the most dynamic knowledge based
economy in the world by 2010. It appears that other EU countries are tackling this issue
the other way around and adopting ‘upward harmonisation’. For example, Spain has
disapplied its thin capitalisation and CFC provisions for intra-EU transactions.
166.
We believe that the transfer pricing and thin capitalisation rules should be disapplied for
intra-EU transactions.
167.
In relation to EU harmonisation issues generally, we believe that the UK Government
should seek to approach them from a position which will enhance rather than reduce the
UK’s competitive position, i.e. to embark upon ‘upward harmonisation’ wherever
possible. We would be very happy to meet and explore the issues further.
Revenue response
The transfer pricing and thin capitalisation provisions in the Finance Bill address the
issue of competitiveness by introducing a new exemption for small and medium sized
enterprises, which disapplies transfer pricing and thin capitalisation rules from these
enterprises in most circumstances.
Transfer pricing
Clause 30 and Schedule 5 (section 30 and Schedule 5) – Provisions not at arm’s
length: transactions between UK taxpayers
168.
Paragraph 4 of Schedule 5 repeals in its entirety paragraph 20 Schedule 24 ICTA 1988.
Paragraph 20(2) provides that there is no requirement to make a transfer pricing
adjustment between two CFCs facing apportionment or pursuing an acceptable
distribution policy (ADP) but the new paragraph 6B of Schedule 28AA ICTA 1988
introduced by clause 32(3) seems to apply only to apportionment situations and not
ADPs.
169.
New paragraph 6B should be amended so that it applies to the situation where two CFCs
are pursuing an acceptable distribution policy.
Revenue response
The purpose of the enhanced rules for compensating adjustments is to address double UK
taxation where a transfer pricing adjustment is fully tax effective in the computation of
profits and losses. Dividend income returned to the UK only needs to cover 90% of the
CFC profits and can be deferred by 18 months or more. It is inappropriate to extend the
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availability of a compensating adjustment if the transfer pricing adjustment itself is not
subject to full taxation.
Clause 31 (section 31) – Exemptions for dormant companies and small and mediumsized enterprises
170.
We request confirmation that in relation to clause 31(4) ‘any such election is irrevocable’
in new paragraph 5B(3) relates only to the chargeable period concerned and does not
prevent paragraph 5B from applying in a later accounting period.
171.
We question the potential retrospective nature of the ability of the Board to give a notice
under new paragraph 5C(1)(b). It is not until a notice is given, which can be up to three
years after the transaction takes place, that a company will be told that the tax bill in
respect of a particular transaction is greater than the company believed was going to be
the case at the time it entered into the transaction.
172.
We question why in clause 31(4) new paragraph 5C is far more widely drawn than was
indicated in BN17. That stated that the change would enable the Revenue ‘in exceptional
circumstances to require a medium-sized enterprise to apply transfer pricing rules’. New
paragraph 5C contains no limitation to exceptional circumstances. It gives the Revenue a
blanket power to apply the rules for any reason whatsoever. There is no requirement to
even tell the company why it is being required to do so and the only right of appeal in the
section is in relation to whether the company was a medium-sized enterprise. This seems
to be taxation by administrative edict and lacks the necessary certainty.
173.
We request that new paragraph 5C(1)(b) be amended so that the Board can only issue a
notice in exceptional circumstances, and that there should be a requirement to give the
reason for issuing the Notice.
174.
We believe there will still be problems for companies that become dormant after the
introduction of the new legislation and request that the exemption be extended and not
restricted to companies that are dormant in the ‘pre-qualifying period’ but become
dormant at a later date.
Revenue response
We confirm that an election by an exempt small or medium sized enterprise applies for the
accounting period only.
The notice provisions do not have effect before 1st April 2004. The issue of a transfer
pricing notice is restricted to medium sized enterprises and will only be made in
exceptional circumstances where there is a significant tax risk. It should therefore come
as no surprise to the few companies affected, if they are required to make a return on an
arm’s length basis.
The exemption for Dormant Companies ensures that there is no need for Groups to
disrupt existing structures, and no need to reorganise or activate companies dormant for
a period before 1 April 2004 as a result of the changes.
The exemption has not been extended to companies that become dormant later because
we need to avoid creating loopholes that could be exploited by businesses to avoid
taxation in the future. Looking forward, businesses can plan their corporate structures in
the light of the new legislation.
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Clause 32 (section 32) – Special applications of paragraph 6 of Schedule 28AA to the
Taxes Act 1988
175.
This introduces a new paragraph 6B to Schedule 28AA that allows a UK compensating
adjustment to be claimed where an adjustment has been made in the chargeable profits
computations of a CFC. But this only applies if all those profits have been apportioned to
the UK. We believe this provision is not drawn widely enough as it would not apply to,
for example, CFCs which are not owned 100% nor to ADP paying CFCs.
176.
We request that the provision is amended to apply to any profits apportioned to the UK.
Revenue response
The principle here is the same as explained in response to comments on Clause 30, above.
Thin capitalisation
Clause 34 (section 34) – Payments of excessive interest etc
177.
We question why in clauses 34(3) (which inserts new paragraph 1A(4) into Schedule
28AA ICTA 1988) no account is taken of a guarantee if the guarantee is on commercial
terms, i.e. the guarantor receives the same fee as would be paid to a bank to give a
guarantee.
178.
We request that this paragraph is amended so that such guarantees are taken into account.
Revenue response
The role of a thin capitalisation rule is to limit interest deductions in line with the debt
that the borrower could support through its own income and assets, not the income and
assets of an entire group. So, it would be wrong to take account of a guarantee from a
connected party when assessing the debt capacity of a business.
Expenses of companies with investment business and insurance companies
Clause 38 (section 38) – Expenses of companies with investment business
179.
We remain concerned about the proposal to disallow capital expenditure which was first
put forward in the Technical Note issued in December 2003 and on which we commented
in TAXREP 5/04 Corporation Tax Reform: The Next Steps. Paragraph 11 of the
Explanatory Notes to clause 38 states that ‘The Inland Revenue has always argued that
capital expenditure is inadmissible as an expense of managing investments under the
current rules ..’ As we stated in our earlier TAXREP 5/04:
‘[The proposal] would undermine the long held distinction under which for
investment companies the costs of managing investments are allowable but not
those of acquiring investments. The former are deductible under section 75, ICTA
1988 while the latter are not. Case law, and in particular the House of Lords
decision in Sun Life Assurance Society v Davidson [1957] 37 TC 330, has for more
than 40 years determined that the costs incurred to help a company to decide to
invest are costs of managing investments (and so deductible) while costs incurred
after the decision to buy has been made are costs of acquiring the investments (and
so disallowed). This has long been the established legal position.’.
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180.
The proposal to change the law has come about because the High Court in the case of
Camas plc v Atkinson rejected the Revenue’s argument that expenses of a capital nature
can never qualify for relief as expenses of management.
181.
The approach that has been adopted goes against the proposals for reform of the
corporation tax system in that this proposal creates another situation where legitimate
business expenditure does not qualify for relief (becomes a ‘nothing’). We appreciate that
the review of the corporation tax system is still continuing but we believe that the
Government should reconsider the tax positions of trading and investment companies and
the differences between them.
182.
As we have stated above, the ‘rule’ following the Sun Life decision has hitherto been that
expenses incurred prior to making an investment decision are deductible.
183.
It may be that the Court of Appeal and/or the House of Lords will reverse the decision of
the High Court and determine that expenses of a capital nature can never qualify for relief
as expenses of management. In which case the legislation contained in this Finance Bill
will be otiose.
184.
But if it is to be retained then the Government should clarify what change it is proposing
to make to the existing law which has followed decided case law for the past 40 years.
185.
We have seen the draft guidance on the new section 75(3) recently published by the
Inland Revenue. It appears to us that they are seeking to use this opportunity not merely to
restore the position to what it was generally thought to be prior to the Camas case but to
move the cut-off point, between allowable costs of appraising investment opportunities
and disallowable costs attributable to a specific acquisition, to an earlier stage in the
process than has been accepted hitherto.
186.
The guidance notes indicate at paragraph 7 that ‘when a specific capital investment is
identified then the costs from this point cease to be severable from the costs of
acquisition’. As we have mentioned above the current law is that only once the decision to
invest has been made are further costs treated as disallowable.
187.
This is clearly, in our view, an attempt to change the existing law and we believe it should
be publicly admitted and justified; if not, the guidance needs to be amended to make it
clear that the cut-off point still comes when the decision is made to invest.
188.
We seek clarification as to how in new section 75(5) an investment can be held for a
purpose that is not a business purpose? A company with investment business is defined
as one ‘whose business consists … partly in the making of investments’. Surely once the
company makes an investment that investment will automatically be held for the purpose
of its investment business?
Revenue response
Many of the concerns have now been met by the publication of the revised guidance on
the Inland Revenue web-site on the 11 June 2004. The Court of Appeal judgement on the
Camas case has been commented on in the guidance.
It is possible in principle for a company with investment business to have investments that
are not held for a business or other commercial purpose. There are examples of these in
the revised guidance including new section 75(5) that was published on the IR website on
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11 June 2004. The guidance does, however, make it clear that such instances are
expected to be unusual.
Loan relationships and derivative contracts
Clause 48 and Schedule 8 (section 48 and Schedule 8) – Loan relationships:
miscellaneous amendments
189.
Paragraph 5 of Schedule 8 imposes an exit charge on companies ceasing to be resident in
the UK. We believe that following the ECJ decision handed down on 11 March 2004 in
the case of Hughes de Lasteyrie du Saillant (C-9/02), this provision is contrary to EU law:
‘Therefore, the answer to the question referred must be that the principle of
freedom of establishment laid down by Article 52 of the Treaty must be
interpreted as precluding a Member State from establishing, in order to prevent a
risk of tax avoidance, a mechanism for taxing latent increases in value such as
that laid down by Article 167a of the CGI, where a taxpayer transfers his tax
residence outside that State.’ (paragraph 69 of the Judgement).
Following this decision we note that on 19 April the European Commission formally
requested Germany to end its ‘exit tax’ rules.
190.
We seek clarification as to the reasons why the Government does not consider this
provision to be contrary to EU law. In order to avoid the problem, we believe that the
provision should be amended to exclude a transfer of residence to another EU country.
Revenue response
It is not accepted that the ECJ decision in the case of Hughes de Lasteyrie du Saillant
applies to the legislation in these schedules. The new measures provide a clear rule for
the computation of profits at the close of an accounting period, where that close is the
result of the company ceasing to be resident in the UK. Applying “fair value” to loan
relationships and derivative contracts at the end of that last accounting period is the most
suitable way to do this.
Clause 49 and Schedule 9 (section 49 and Schedule 9) – Derivative contracts:
miscellaneous amendments
191.
For similar reasons as in the paragraph above we believe that paragraph 3 of Schedule 9
may also be contrary to EU law and therefore request confirmation that the Government
does not believe that the provision breaches EU law or that the provision is amended to
ensure that it does comply with EU law.
Revenue response
Please refer to reply on immediately preceding Clause.
Accounting practice
Clause 50 (section 50) – Generally accepted accounting practice
192.
It is not clear why the definitions of ‘generally accepted accounting practice’ and ‘UK
generally accepted accounting practice’ could not be incorporated into ICTA 1988 as
were the changed definitions introduced by FA 2002. The current provision means that
the revised definitions which are recorded in the Interpretation section 832 send the reader
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to a different Act, that of 2004, rather than incorporating the changes into the same Act
i.e. the amended consolidated Act of 1988.
193.
We request that the definition is incorporated into section 832, ICTA 1988.
Revenue response
This clause goes further than simply redefining the meaning of generally accepted
accounting practice. It is part of a whole package on accounting practice. This package
allows companies that choose to, to use IAS as the basis for their tax computations and
ensures that they receive broadly the same tax treatment as those continuing to use UK
GAAP. Clauses 50 to 54 form a unified whole – to place the definition in another Act
would lose that unity.
Clause 51 (section 51) – Use of different accounting practices within a group of
companies
194.
We seek clarification as to whether in subclause (1)(d) the phrase in parentheses should
be ‘apart from this section’ rather than ‘apart from this paragraph’.
Revenue response
An amendment was made at Committee stage to meet this point.
Clause 52 and Schedule 10 (section 52 and Schedule 10) – Amendment of enactments
that operate by reference to accounting practice
195.
It appears to us that where paragraph 9(2)(b) says that the gain is ‘brought into account in
accordance with section 92(4) [of FA 1996]’ this means that it is brought into account
subject to section 92(7) and (8), and that in turn means that it is treated as falling within
section 116 TCGA 1992 and can accordingly be held over under section 116(10) until an
actual disposal of the security. However it is not clear that this is what is intended. The
explanatory notes provide little comfort on the point, paragraph 34 being at best
ambiguous as to whether the gain is brought into account on the deemed or on the
subsequent actual disposal of the asset.
196.
We should be grateful therefore for confirmation that gains, and losses, arising in these
circumstances will be held over on the basis suggested above.
197.
The same issue arises in paragraph 11(2) of Schedule 10 in relation to assets currently
within sections 93, 93A and 93B of FA 1996.
Revenue response
If a company has securities falling within section 92 or 93 Finance Act 1996 when the
new rules start, any gain or loss accrued up to that point is held over and only recognised
for tax purposes when the security is sold or redeemed. This is exactly the same as
happens now if a security falls outside section 92 or 93 at any time.
Miscellaneous
Clause 55 (section 55) - Duty of company to give notice of coming within charge to
corporation tax
198.
The three-month period is very tight in those cases where it is not readily apparent when
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the first accounting period begins. Indeed, it is often far from clear on what date the first
accounting period begins, as illustrated by the example below.
Example
199.
XYZ Ltd is incorporated in the UK on 1 February 2004. It is bought by Fred on April
2004. Fred intends to make reproduction furniture. He subscribes for 10,000 shares in
XYZ Ltd on 12 April 2004. He searches for premises and finds a suitable building which
is bought by XYZ Ltd on 1 October 2004. The company fits out the premises, hires staff
and buys some materials. Between 1 February and 30 April 2005 the business
manufactures some initial stock. On 1 May 2005 it puts adverts in the Sunday papers. It
receives its first order on 14 May 2005 and dispatches its first order on 1 June 2005.
Revenue response
The three-month time limit introduces symmetry between the obligation to notify between
the self-employed and incorporated businesses. Since 2001, unincorporated businesses
have had to notify starting in business within three months. This clause puts companies
on the same footing.
The three-month time limit is reasonable. The first accounting period begins when the
company comes within the charge to corporation tax, by which time all of the information
required will almost always be available. In the rare case where a company may have
some doubt about the time of the start of its first accounting period, there are measures of
protection built into the clause, particularly the “reasonable excuse” provisions.
199A
When does the first accounting period begin? It is probably, in retrospect, 1 February
2005 but it seems doubtful that many people would have realised that by 1 May 2005.
There is also a good argument that the start of the accounting period is 1 June.
Revenue response
The trigger for the new requirement will be start of the first CT accounting period, as
defined in section 12(2) ICTA. We think that in most cases this date is relatively easy to
identify. But we can see that there may be cases of possible doubt, as in the Institute’s
example. That is one of the reasons why we have written a “reasonable excuse” rule into
the legislation. It is also why we have gone for the option of section 98 penalties rather
than automatic penalties (like those for late filing of CT returns). This means that the
Revenue can impose no penalty where the failure has already been rectified. Where a
penalty is considered appropriate proceedings would have to be brought before the
independent appeal Commissioners and the penalty cannot exceed £300. We think these
rules will ensure that penalties for failure to comply with the requirement will only be
pursued in appropriate cases.
200.
The new provisions will cover overseas companies operating in the UK through a
permanent establishment. If an overseas company carries on auxiliary activities in the UK
it may not be straightforward to determine whether such activities are sufficient to
constitute a permanent establishment in the UK.
201.
If the overseas company took the view that its activities did not constitute a permanent
establishment, and eventually agreed that that view was not correct, we would welcome
confirmation that this would be treated as a ‘reasonable excuse’ under clause 55(4). This
assumes that the position taken by the overseas company that it did not have a permanent
establishment in the UK was a reasonable position in the circumstances.
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Revenue response
Non–resident companies which are liable to corporation tax in respect of the profits of a
UK permanent establishment by virtue of section 11 ICTA are within the new clause. We
accept that in a small number of cases it may be difficult at first to determine whether a
UK-based activity constitutes a permanent establishment. The reasonable excuse rule
may apply in such circumstances, though naturally the application of those provisions
will depend on the facts of the particular case.
202.
We believe there may also be practical difficulties in implementing this new provision.
We understand the provisions will make the CT41G procedure mandatory. In order to
follow this procedure the Inland Revenue internal 10-digit tax reference and tax district
need to be known. It is not possible for agents to obtain this information without a form
64-8 being in place which in turn requires knowledge of the same two references: a
potential Catch 22 situation.
Revenue response
The prescribed information required to satisfy the new obligation will be set out in
regulations. This information will only consist of the information we need for effective
administration of company taxation. It is not intended to catch companies out. Most
companies will in any case get a CT41G to fill in soon after incorporation. The Unique
Taxpayer Reference (UTR) will be on the form CT41G and the company should therefore
be able to pass this information on to its newly appointed agent. And, where there is
difficulty or uncertainty about how the requirement should be satisfied, our local offices
will be happy to help the company secretary (or agent, if already appointed) to fill in the
necessary form or otherwise satisfy the requirement.
203.
We seek clarification whether it is proposed that a new business will only need to make
one notification to satisfy the requirements of the Revenue, Customs & Excise and other
Government Departments.
Revenue response
Alignment of notification requirements between the Revenue and Customs will be
considered as part of the legislation relating to the merger of the two Departments, which
was announced by the Chancellor on Budget Day. Further information sharing with
other Government Departments will be considered where there is a good case in terms of
effective administration or assistance to business, but subject always to considerations of
confidentiality, data protection and Human Rights.
CHAPTER 3
CONSTRUCTION INDUSTRY SCHEME
General comments
Determining employment status in the construction industry
204.
The new legislation is highly reliant on the correct identification of the employment status
of an individual. This is potentially a highly complex area and we are concerned that it
imposes an unreasonable burden on a workforce which is largely unfamiliar with the
intricacies of tax law.
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205.
If the status of engagement is misunderstood, there is a penalty of up to £3,000 per month.
The correct determination of status in the early years is vital. Honest mistakes could be
too harshly penalised and there could be a disincentive to put right earlier errors after
several years of misunderstandings.
206.
There are suggestions that there could be a separate stratum of labour only workers who
would always be considered to be employees. This could have far reaching consequences
affecting self-employed workers in other areas. We would welcome reassurance on this
point.
207.
The overuse of the ‘employed’ label for those in the construction industry could mean that
there will be excessive administrative PAYE burdens. For example, a labourer working
on several short term assignments may receive several P45s.
Revenue response
There is already an obligation on contractors to get right the tax treatment of those they
engage. The new legislation will require the contractor to confirm that he has satisfied
himself that the person has been properly treated as a sub-contractor. (The exact
wording of the declaration on the return has not yet been finalised.)
As in other cases, whether, and at what level, any penalty is sought will depend on the
particular circumstances. The industry's Joint Tax Committee has suggested to the
Government that certain classes of sub-contractors in the construction industry should be
deemed to be employed for tax purposes. Discussions on that suggestion are continuing.
Online employment status tool
208.
The new rules will be highly reliant on correct determination of employment status. This
is reflected in the current work on the online employment status tool. We would like to
take the opportunity to make a number of initial comments on this development.
209.
The online decision tree might not be as accurate as envisaged and there could be
disincentives to use this. Inputting slightly different data could change the outcome
causing confusion. For example, using a workers’ ‘log-in’ could mean that a different
‘result’ is shown indicating that the status was incorrectly logged in the past, so paving
the way for a possible application of penalties.
210.
Even with the indicator, a high proportion (30%) will be referred for individual
consultation. We would welcome clarification on what percentage of online indicator
users are expected to fall into the employed category. The Regulatory Impact Assessment
on status issues suggests that it will generate an additional £80 million, implying that
many individuals will pay more tax as a result.
211.
We are concerned that the indicator is supposed to be an industry generic tool, but fear
that the construction industry is too complex for this to be reliable. It is vital that the
indicator is accurate and correctly implemented otherwise there will be a loss of
confidence.
Revenue response
The feasibility of rolling out the on-line employment status tool is currently being piloted
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and the ICAEW are participating in that pilot. There is no assumption that any particular
percentage of individuals run through the tool will fall into the employed category.
Clause 66 (section 66) - Cancellation of registration for gross payments
212.
Currently, applications for the renewal of exemption certificates are logged every 3 years
with negligent taxpayers having their application refused. From April 2006 there will be a
two level renewal/cancellation process; one for those who are non-negligent and the other
for contractors negligent in paying tax;
213.
The option to cancel exemption certificates could mean that certificates are cancelled for
workers who have simply made a mistake. Further clarification on how this will be dealt
with is required.
Revenue response
From 2006, there will be no renewal procedure. Once a sub-contractor has gross
payment status, he will retain it indefinitely, subject to a good compliance record. There
will be periodic reviews of the sub-contractor's compliance over the previous twelve
months. If his compliance record falls short of that required to obtain gross payment
status, it will be cancelled and the sub-contractor placed under deduction. He will be
able to apply for gross payment status again once he has demonstrated a twelve month
good compliance record.
CHAPTER 4
PERSONAL TAXATION
Taxable benefits
Clause 78 and Schedule 13 (section 78 and Schedule 13) – Childcare and childcare
vouchers
General comments
214.
In general we welcome aspects of the proposals and support the principle of removing
from the employer the responsibility for the provision of childcare. However, as stated in
our earlier response to the consultation in 2003, published as TAXREP 15/03, we believe
that the proposed changes favour employees at the expense of the self-employed. Tax
relief should similarly be available for self-employed women or men who also need their
children looked after so that they can work to support their families.
215.
We believe that these changes are looking in isolation at one aspect of a much larger
issue. The Government wishes to encourage people to return to work and to provide
assistance with childcare to enable that to happen. This is a principle which underpins, for
example, the Tax Credits regime. However, in order to achieve such an aim, what is
required is a broad and practical vision of how this can be achieved. Just as the
implementation of the introduction of Tax Credits has not adequately dealt with the
practicalities of childcare and childcare provision, so these rules appear to have
overlooked certain key aspects which are outlined below.
216.
We suggest that there is a need to take a step back and look at the overall aims and
strategy behind Government assistance in relation to childcare to ensure that all aspects of
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the system operate from the same starting point and that no one group of individuals is
disadvantaged., One important aspect of this is the use of tax reliefs and exemptions and
what part they can play in this area. It will also be necessary to factor in the effects of the
Workplace Nursery Scheme, which we understand will continue in addition to these
proposals. We would be happy to participate in any such discussions.
Revenue response
You are concerned that the changes are looking in isolation at one aspect of a larger
issue and suggested a need to look at the overall aims of Government assistance in
relation to childcare. The exemptions in Clause 78 and Schedule 13 are one part of the
Government’s overall strategy on childcare, which is that all families should have access
to good quality childcare at an affordable cost if they want it. The Government has
brought forward policies to increase the supply of affordable, quality childcare and the
childcare element of Working Tax Credit is providing financial help with the cost of
childcare to low to middle income families. The Government also believes that employers
have a very important role to play in helping their staff to balance their work and family
lives and this measure provides an incentive to encourage more employers to support
their employees with childcare.
The self-employed
217.
We are particularly concerned that these proposals have not been broadened to consider
the issue of the self-employed. We can see no logic as to why some form of taxadvantaged childcare assistance should not be available to a self-employed individual as it
will be to an employed person. This may be an area the Revenue is intending to look at
separately but we believe this is a good opportunity to consider tax reliefs for the
employed and self-employed in tandem.
218.
We are concerned that this tax incentive will become unacceptable tax avoidance in
future. There has been a great drive by the Government towards encouraging
incorporation (e.g. a nil rate of corporation tax on the first £10,000 of profit) and
potentially these proposals are a further force driving the self-employed to form
themselves into limited companies in order to obtain the benefit of this proposed relief.
Considering the situation of the self-employed as part of a broader consultation would
send a positive message that incorporation should only be for commercial business
reasons rather than for tax reasons.
Revenue response
You are concerned the measure has not been broadened to help self-employed persons.
Allowing a tax deduction for the cost of childcare for all working parents, rather than
through a targeted exemption, would be expensive and poorly targeted. The Government
believes that financial help towards childcare costs for low to middle income families
should be provided through the tax credits system. Self employed people can receive help
with the cost of formal childcare through the childcare element of the Working Tax
Credit.
The Government believes that employers have a very important role to play in helping
their staff to balance their work and family lives and this measure provides an incentive to
encourage more employers to support their employees with childcare.
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School fees
219.
Schedule 13 inserts new section 318C (2) in which the meaning of qualifying childcare is
extended to out of school hours facilities. We have some difficulties with the distinction
between school fees and childcare for pre-school children in particular. Whilst the
exemption is not intended to cover private education, it might be that pre-school fees
would still apply in areas where Early Years funding is not available. A clear definition of
school fees would help.
Revenue response
The childcare approval body will determine what is childcare and what is compulsory
education. Eligibility for the exemption will be met if approval is granted.
Quality of childcare
220.
One of the stated policy objectives of these changes is to increase the availability of good
quality childcare places. Whilst these proposals may increase the amount of childcare
which is needed, this will not be a guarantee of improved quality. Furthermore, we are
concerned that imposing bureaucracy will also not necessarily improve the quality of
childcare. Targeting the exemptions on registered and approved childcare will bring with
it associated paperwork for a sector of the economy which is traditionally less able to
cope with it. A considerable amount of support will be needed. For example, what of a
new child minder who has recently registered but who has yet to receive their
documentation? The weekly childcare costs would need to be paid, but the employer
could not operate the PAYE exemption.
221.
Schedule 13 inserts new section 318C (2) which requires employers to make childcare
support generally accessible to all employees where a childcare support scheme is
operated. As we have stated previously, we do not agree that this should be a requirement.
For example, in businesses with high staff turnover, it would be entirely reasonable to
defer eligibility until employees have been there for an agreed period. Having to offer the
same benefits, on the same terms, to new starters might well be a disincentive to operating
a scheme at all. This would also be impracticable in those smaller businesses which do
not have clearly defined human resource policies. It is also not in the best interests of a
child to have their care arrangements linked to the parent’s employment. The more
flexible the new arrangements are, the more stability will be achieved for the children.
222.
The Revenue’s concern is presumably that management could exploit the tax break. We
believe that the very restrictive financial limit makes this extremely unlikely. A tax-free
benefit of £50 per week towards the cost of childcare is unlikely to be of paramount
importance to higher-earning employees. In any case, a well targeted anti-avoidance rule
to prevent abuse, such as that the average cost to the employer must not significantly or
materially exceed the financial limit, should be sufficient.
Revenue response
You are concerned about the administration associated with ensuring childcare used is
registered or approved. We must ensure that the childcare is safe, good-quality care. It
would be irresponsible to allow for childcare that had not yet been approved or
registered. Children’s safety is paramount. That is why the condition for the quality of
care will be met from the date of registration.
You disagreed with the requirement of employers to offer childcare support generally.
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When we consulted last Spring on these proposals most respondents agreed that to qualify
for the tax exemption, employers should offer childcare support schemes to all of their
employees.
We do not consider that the rule should be relaxed for new employees as it is these
parents who are most likely to need help with childcare to enable them to start work or
return to work after having children.
Number of children
223.
We note in new section 318A(8) and new section 270A(8) that the £50 weekly limit
applies per employee, rather than per child, so that the number of children is irrelevant.
As a result each parent, if both were employees, will be entitled to claim vouchers giving
a tax-free amount of £100 per week. This seems to put a single parent, with more than
one child, who does not have a partner at a considerable financial disadvantage.
Revenue response
You were concerned that applying the exemption on a one per employee basis would
disadvantage single parents. Single parent families can get financial help through the
Child Tax Credit and Working Tax Credit which is based on household income. The tax
and NICs exemptions will apply on a ‘per-employee’ basis to ensure the system is
straight-forward to operate and to minimise the regulatory burden on employers
Administration costs of irregular work patterns
224.
As mentioned in our previous representations, the new rules do not mention part-time
employees or those with irregular working patterns. New section 318A(6) and (7) and
section 270A(6) and (7) refer to £50 for each qualifying week, being (broadly) a week in
which care is provided. There are many employees who only work during school term
time. Many parents will work different hours during the school holidays. These same
parents will also incur different childcare costs during school holidays. Those with school
age children may only incur costs during the holidays. The new arrangements need to be
flexible to deal with such requirements. Employers may prefer to give vouchers in every
pay period to reduce administrative costs, but they will not necessarily know when the
children are physically using the care. A tax charge may result for part of the year. We
have recently identified significant problems with the new system of Tax Credits, which
initially failed to take account of such changing circumstances.
225.
In addition to the rules being simple, it is important that the accompanying administrative
system is also easy and inexpensive to operate.
226.
We remain concerned that the fact that employer support for formal childcare provision
impacts on a person’s entitlement to the childcare element of the Working Tax Credit,
will not easily be understood. In our opinion it does not make much sense to allow a taxfree benefit (a positive impact on family income) on the one hand, whilst reducing a tax
credit (a negative impact on family income) on the other. The practical interaction of
these needs careful thought, particularly where penalties for failing to report a change in
childcare costs are in point.
227.
Our conclusion is that although this scheme is well intentioned, it is far too complicated
for employers to understand and for employers to administer with the result that
employers will not offer the scheme.
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
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Revenue response
The new £50 exemption will be available to each employee each week regardless of the
employee’s hours or work pattern. The exemption will apply when the benefit is provided
to the employee – in the case of childcare vouchers this may not be the same as when the
vouchers are used by the employee. This will not be complex for employers to operate
and full guidance will be provided in the Employers’ pack. Guidance will also be made
available to employees and tax credit claimants in the run up to the implementation of the
exemptions in April 2005.
Clause 80 and Schedule 14 (section 80 and Schedule 14) – Vans
228.
We welcome the two year notice period before these rules take affect which will allow
employers and employees renewing company vehicles to consider the tax effects.
229.
We are concerned that two fundamental issues have still to be addressed. Namely, the
definition of a van (there is still no distinction between double cab pick-ups and vans) and
secondly private use of employer provided vans. We covered these issues in more detail
in our response TAXREP 23/03 submitted in July 2003 in response to the Revenue’s
Consultation Document issued in May 2003.
230.
We welcome the relief given for ordinary commuting, but suggest that practical guidance
on how this will be interpreted will be required. Employers will not be in a position to
monitor such employee use.
Revenue response
The Inland Revenue’s interim measure, effective from 6 April 2002, aligning the tax status
of double cab pick-ups for tax purposes with Customs & Excise is now permanent.
Broadly, vehicles that can legally carry payloads of 1 tonne or more will not be treated as
cars.
The definition for business travel remains unchanged. Generally, business journeys are
those made in the performance of the employees’ duties and travel between work places
in order to perform their duties. All use, other than business travel, is private use. The
Inland Revenue already provides detailed guidance on the definitions of business and
private travel, and will publish guidance on the new van rules later this year.
Gift aid
Clause 83 - Giving through the self-assessment return
231.
Whilst we support any initiatives which encourage charitable giving, we have some
reservations about how this scheme will work in practice. These are set out below.
232.
Our first concern is what will happen if the amount passed to the charity is incorrect. This
might happen:

due to Inland Revenue error in calculating the repayment. We have come across
a number of instances of incorrect repayments, apparently due to tax return
processing errors on the Revenue’s part;

as the result of a subsequent amendment to the self-assessment, for example by
the taxpayer to correct an error, or as the result of an enquiry.
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233.
It would be difficult for any charity to repay a donation received via the Revenue, due to
the anonymous nature of the scheme, and having to pay back significant sums could
anyway be detrimental for many charities.
234.
The Revenue has not published any details of how it intends to administer the scheme or
what in its view the position would be if too much had been given to a charity. However,
we understand that it will not be seeking reimbursement from a taxpayer of a repayment
given to a charity where the repayment has come about through a Revenue error in
processing the return. We welcome this reassurance but recommend that the Revenue
should make it public. It does not of course cover the situations where the amount of the
repayment is subsequently amended other than to correct a Revenue error, or where the
Revenue does not accept that there has been official error. In these situations we assume
the Revenue would look to the taxpayer for the shortfall.
235.
Another possible situation is where the repayment is correctly calculated, but is more than
the taxpayer was expecting. He may find he has donated far more to charity than he had
anticipated. The taxpayer has the option of setting an upper limit on the amount he
donates, by ticking the relevant box on the tax return, and the Revenue has indicated to us
that this should be enough to enable the taxpayer to ensure he does not give more than he
intends. However, we remain concerned that taxpayers – particularly those who are
unrepresented – may not realise the significance of this box.
236.
The gift is qualifying at the time that it is received by the charity. (clause 83(2)) The gift
may have been indicated on the 2004/05 tax return but the repayment might be made to
the charity in 2005/06, if the tax return or the donation were not processed until then. It is
possible that the taxpayer might have paid insufficient tax in 2005/06 so that gift relief
would fail. This could leave taxpayers unwittingly liable for the shortfall.
237.
The rules for giving to charity need to be manageable and controllable. Practitioners are
unlikely to advise their clients to use the new scheme to give tax repayments straight to
charity, unless they can be confident that it will result in the correct amount being
donated, and will not have any repercussions for themselves or their clients. The same
result can be achieved by the taxpayer receiving the repayment and then giving it to
charity, via Gift Aid if he chooses. By this route the taxpayer also has the option of
carrying the gift back.
238.
We also remain concerned about the position of unrepresented taxpayer, who may find
themselves giving more to charity than they had planned or having to account for excess
repayments or shortfalls of Gift Aid tax, in the situations we have outlined.
239.
If the Government wishes to use the tax system to encourage charitable giving, we believe
that a better approach would have been to continue with the 10% addition to amounts
contributed under the Payroll Giving scheme.
240.
Finally, we would like to express our concern about the lack of consultation on this
proposal. Although it was announced in the Budget 2003, there have been no further
announcements, no draft legislation in advance of the publication of the Finance Bill
2004, and no consultation, either formal or informal, with taxpayers or their
representatives. Nonetheless, the new 2004 tax returns include (at Question 19A) the
facility to give tax repayments straight to charity, as though the final legislation were
already in place. Consultation at an early stage would have enabled practitioners to
express their reservations and would have allowed the potential practical problems to be
addressed.
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Revenue response
Concerns have been raised about repayments being made incorrectly. The ‘Working
Together’ article published in May 2004 covers what would happen if an incorrect
payment is made to a charity. The following is an extract from that article: ‘The scope
for the wrong charity to receive a donation has been minimised by the use of unique code
numbers. The code has built-in checks that prevent minor errors in entering the code on
the Tax Return resulting in a repayment being made to the wrong charity. Where a code is
not recognised, the repayment will go to the taxpayer who can, of course, make a tax
efficient donation to the charity. Where a repayment has been donated to a charity and
that repayment arose because of a taxpayer error, the Inland Revenue will recover the
excess repayment from the taxpayer. This is in line with current practice where an excess
amount has been repaid to a nominee. Where because of a mistake by the Inland Revenue,
a repayment is sent in error to a charity, the Inland Revenue will request return of the
payment from the charity. The individual will not need to take any action.’
It will be possible to trace all repayments passed to charities as donations. Although
some donors will be anonymous, the charity will have a notification of each donation
which will contain enough information for Inland Revenue to identify it where necessary.
Any request for the return of a donation made incorrectly will be handled sensitively.
Taxpayers can and do nominate others to receive their repayments already, without any
cap. With this new facility the taxpayer has the option to set an upper limit on the
donation which is explained in the guidance and the separate insert sent out with tax
returns this year.
It is suggested that if the tax return is not processed until the tax year following that in
which the return was filed, the donation will not be made until that later year and some
taxpayers might unwittingly find they have a tax shortfall to cover if they don’t pay
enough tax for that year. Returns are to be filed by 31 January. Inland Revenue has a
target to process 99% of those by 31 March and it is therefore unlikely that returns filed
on time will not be processed until the next tax year. If taxpayers file their returns as
early as possible or electronically they will have more certainty about the year in which
the qualifying gift is made, but problems of the type suggested should be extremely rare.
It has been suggested that the donor should receive the repayment and give it to the
charity himself using Gift Aid, and have the option to carry the gift back. The taxpayer
can of course choose to receive the repayment and donate it to charity. But the carry
back facility would not be available in that situation either – the repayment is only
generated after the return is filed so the taxpayer would have to enter the donation in the
next SA return. If the donor wishes to give his repayment to charity with as little effort as
possible for the charity as well as himself, and wants to be certain of the amount given,
then capping the donation is the best approach.
The Payroll Giving supplement was always intended to be a time limited measure to boost
an under used method of giving. But the supplement has not significantly increased the
number of employers offering PRG schemes and government has announced a grant for
employers to be administered by the Home Office. This measure makes use of the existing
SA repayment procedures to offer donors another way of making Gift Aid donations.
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Concern has been expressed about the lack of consultation on this measure. The scheme
was announced by the Chancellor in Budget 2002. This measure operates within the
existing repayment processes of the Self Assessment system (taxpayers can already
nominate others, including charities, to receive repayments) but the facility has been
enhanced to allow donations to charities to be capped and Gift Aid to be used. As the
scheme works within the existing SA systems and there is little flexibility within such a
system to deliver it in different ways. All of the practical problems raised have already
been considered and we hope the information published in Working Together offers some
reassurance. Of course, if practitioners find that there are problems in practice then we
would be keen to hear about those and to address them.
Gifts with a reservation
Clause 84 and Schedule 15 (section 84 and Schedule 15) – Charge to income tax by
reference to enjoyment of property previously owned
General comments
241.
We remain convinced that this charge is wrong in principle. The measure is likely to
result in real difficulties and will impact upon many perfectly ordinary taxpayers. We
welcome the fact that the rules included in the Finance Bill have been amended in the
light of representations which we and the other professional bodies made at the time of
the Pre-Budget Report. Nevertheless, there remain a number of serious weaknesses with
this proposal.
242.
Specifically, this provision fails to satisfy a number of our ten tenets:

not all the rules are set out in the Finance Bill: key points of the new regime are
delegated to regulations rather than included in the Finance Bill;

in many cases it will be uncertain whether the provision applies;

the provisions are highly complicated;

it will be difficult if not impossible for many ordinary taxpayers to understand
their obligations and calculate the tax charge;

the proposals are not properly targeted at the problem they seek to address;

the measure was not subject to proper consultation;

in many cases the measure is not fair and reasonable; and

the measure will harm the attractiveness of the UK as a place to live and work.
243.
Our conclusion is that the measure fails eight of our ten tenets and confirms our view that
this measure should be withdrawn and that the Government should consult on properly
targeted legislation to strengthen the gifts with reservation rules.
244.
In our view, the proposals amount to retroactive taxation as they are changing the
outcome of decisions which were made and followed through at the time. We are
concerned that such an approach is vulnerable to challenge under EU law and Human
Rights legislation on the grounds that the measure lacks proportionality and could be
regarded as discriminatory. Recent ECJ jurisprudence has developed the concepts of the
need for appropriate transitional provisions and the need to preserve the legitimate
expectations of taxpayers. On this basis, the new regime should not apply to transactions
prior to the date the announcement about the new regime was made, i.e. 10 December
2003.
245.
A penal measure such as this should be issued wholly as primary legislation so that it has
the opportunity to be debated in Parliament. We do not accept that leaving much to
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secondary legislation provides more leeway for government to take account of comments
made during the course of consultation, because experience demonstrates that where, as in
this case, the primary legislation has been drafted in haste, the drafting of secondary
legislation and what happens in practice will be constrained by primary law which has
been passed in the absence of the detail and therefore in ignorance of the implications.
Example
246.
Let us assume that someone gives his son £10,000. Seven years later the son buys a house
for £50,000. Seven years after that the father, being elderly, moves into a granny annex at
the house which is now worth £150,000. Under the current proposals, it appears that the
father will be liable to the new income tax charge. What happens where gifts are made,
perhaps as gifts out of income, by a father over a long period to his son who later buys a
house which many more years later the father moves into? How will the tracing
provisions work in such an example? We understand from comments made at the recent
Revenue open day that the Revenue will look again at the former situation but that there
will be no exemption for the latter. We urge the Revenue to consider a similar exemption
for small gifts out of income.
247.
We would welcome examples of cases that are caught and are not caught by these
provisions as it appears that the new tax charge will catch many transactions where no
IHT avoidance was intended. We understand that a series of Q&As will be published in
due course.
248.
We consider that the new charge should be subject to a motive test. This could be
incorporated into the legislation using wording such as ‘sole or main purpose’, which is
used elsewhere in the tax legislation.
249.
If a motive test is thought to be too subjective, then we suggest that gifts before a certain
reasonable time should be ignored. In the Ingram case it was acknowledged that people
generally do not plan ahead more than seven years. In addition, taxpayers are only
obliged to retain records for the periods that the law presently stipulates, i.e. for self
assessment purposes for five years and ten months after the end of the year of assessment
and for IHT purposes for seven years from the date of the transfer of value. It is therefore
unlikely that people will have records for capital transactions prior to seven years ago.
We believe that the charge should not apply to a period for which a taxpayer is no longer
obliged to keep records for tax purposes.
250.
Whilst the charge is supposed to combat deficiencies in the IHT legislation, as this is an
income tax charge which taxpayers will presumably be expected to have to cope with on
their self assessment returns, we consider that where proceeds or assets have been
‘provided’ or ‘contributed’ there should be no need to go back more than a fixed period
prior to the start of the year of assessment for which the return is being completed. For
practical, record keeping and compliance reasons, we suggest that the period should be no
more than seven years prior to the start of the year of assessment for which the return is
being completed. At the recent Revenue open day we were given to understand that it is
not possible to change this. Nevertheless we urge the Revenue to reconsider.
Specific comments
Paragraph 1
251.
As this is an income tax provision it is disappointing that the normal income tax
definitions are not used. This will obviously both compromise the integrity of the income
tax legislation and complicate its rewrite when the rewrite project reaches settlements.
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252.
We request that provisions are amended to make them consistent with the income tax
legislation.
253.
We suggest that the definitions in paragraph 1(1) should include ‘relevant date’ which is
referred to in paragraph 4(2).
Paragraph 2
254.
The definition in this paragraph appears to derive from the IHT legislation. As the charge
is to income tax even though it is apparently seeking to address a perceived lacuna in the
IHT code, we suggest that it would be logical and make it easier to understand and hence
comply with if income tax definitions were adopted.
Paragraphs 3(2) & (3)
255.
These provisions are so widely drawn that it is impossible in many cases for a taxpayer to
know whether or not they apply. For example, if a person made a gift of cash to his son
in 1986 how can he possibly know if cash used by the son 20 years later to buy a property
for occupation by his elderly parents indirectly derives from the cash initially given? The
provision, if it is workable, is likely to prejudice the person who keeps meticulous records
of past transactions.
256.
We request that the provisions be drawn more tightly.
257.
We would welcome clarification of whether the charge will be taxable under Case VI of
Schedule D or Case V where the property is overseas and confirmation that the charge
will be able to be offset by losses, for example from other sources under the same Case.
This last point was raised at the Revenue open day but we would still welcome
confirmation in writing on the point.
Paragraph 4
258.
In sub-paragraph (1), we would welcome clarification of why the deduction is restricted
to payments made in pursuance of a legal obligation. There are many instances of elderly
relatives living in granny annexes with no formal tenancy agreement who pay rent
voluntarily to their relatives, probably their son or daughter, who is the owner of the
house. We would also welcome clarification of whether a ‘legal obligation’ means that
there has to be a formal licence to occupy, as in such cases where payment is made other
than under a formal legal agreement, it would be unfair for no deduction to be allowed.
Paragraph 4(2)(a)
259.
We request clarification of what is ‘the relevant date’? It does not appear to be defined.
For the formula to work as intended it appears to need to be the same date as the valuation
date, but if so why not say the valuation date. We understand from comments made at the
Revenue open day that this is to be changed.
Paragraph 4(4)
260.
The Chancellor said in the Budget that people were being allowed a year to unwind
existing arrangements. If issues fundamental to understanding the effect of the legislation
are left to be defined by Regulation, presumably in August or September 2004, that
undermines that promise.
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261.
We request that the year of grace be extended to run from the date that the accompanying
regulations come into force.
262.
We would welcome guidance with examples on how under self assessment a taxpayer
will be expected to determine how to attribute a gift made many years ago which may
now have grown in value many times over. Examples of situations might include where
money has been settled on trust, the trust had bought a holiday home, which is used by
several members of the family. Is the value to be used for completing the tax return the
value of the cash at the date of settlement, or the value of the house now or the cost of the
house? Or is it to be calculated on some sort of discounted present value? We consider
that the value should be assessed by reference to the value as at the date of the original
gift, otherwise the tax charge will be levied on capital and inflationary gains. To illustrate
this by way of another more common example: Mr A gives his son £3,000 in year 1; in
year 5 the son buys a house for £60,000 and in year 7, when the house is worth £100,000
Mr A moves in. The charge should be based on £3,000/£100,000.
263.
We would welcome some worked examples, cross-referred to the legislation, of how the
tracing and valuations will be applied, and guidance as to how tracing will work in
practice, given that it will involve a taxpayer in having to know the financial affairs of
those to whom he has disposed of or contributed property.
Paragraph 5(1)
264.
It is noted that the definition of annual value is identical to that in section 110(1) & (2),
ITEPA 2003, which we were assured when that legislation was rewritten means the old
style rateable value. It would also obviously be confusing to use the same expression to
mean different things in the income tax legislation.
265.
We would be grateful for clarification that it has the same meaning here.
266.
If not, please clarify whether a new annual value has to be ascertained and if necessary
agreed with the District Valuer every year. The costs of having to agree a value every year
are likely to be significant.
Paragraph 7
267.
The same point regarding ‘legal obligation’ applies here as for paragraph 4 supra. In
particular, we consider that there should be a deduction available even when payments are
made under informal agreements. We do not consider this point was dealt with adequately
at the Revenue open day.
Paragraph 8
268.
We would welcome clarification of what this paragraph is targeted at; examples would be
especially helpful. Given the nature of intangible assets, the charge should be based not
on enjoyment of the benefit but on an objective set of circumstances.
269.
There is no exact overlap between the gifts with reservation of benefit regime and settlorinterested trust regime. We would welcome clarification of why it is thought necessary to
impose a charge on gifts that fall outside the provisions of either regime.
270.
We would welcome clarification of why revertor to settlor trusts are not excluded.
271.
We consider that if business property relief is in point, then there should be no charge
under the new tax.
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Paragraph 9(1)
272.
We believe that the paragraph should be amended to give some power to prescribe the
prescribed rate.
Paragraph 10
273.
The definition of ‘the chargeable person’ differs in this paragraph (which refers to
‘person’) from that in paragraph 3 (which refers to ‘individual’). We would welcome
clarification of why they differ. Having different definitions for the same words for
different taxes is bad enough but having different definitions for the same words in the
same schedule for the same tax makes what is already an over-complex impost
unnecessarily more so.
274.
We have sought clarification as to whether the new tax charge applies to both disposal
conditions and contribution conditions. We were informed at the Revenue open day that
the legislation will be amended to clarify this and we look forward to seeing the
amendments.
275.
We suggest that there should be an exclusion for disposals to a company in which the
taxpayer owns shares the value of which would form part of his estate for IHT purposes.
This would be similar to the exclusion in paragraph 10(1)(b) for disposals to a trust in
which the taxpayer is beneficially entitled to an interest in possession.
Paragraph 11
276.
We consider that the exclusion in paragraph 11(1)(a) should be extended to include cases
where a reservation of benefit has ceased but the taxpayer dies within seven years of the
notional potentially exempt transfer which is deemed to take place under section 102(4),
FA 1986.
277.
We would welcome clarification of why certain IHT exemptions have been omitted from
sub-paragraph 11(1)(b), namely gifts between spouses, small gifts and gifts in
consideration of marriage. We consider that such gifts should be included, in particular
where they are of cash.
278.
Under sub-paragraph 11(1)(d), where a gift is made but the donor is treated under the gifts
with reservation of benefit provisions as still enjoying it, the donor will not be within the
charge to the new tax. However, where the donor gifts cash which is used to purchase an
asset which he enjoys, he is not within the gifts with reservation provisions and so will not
be excluded from the new tax. For consistency, we consider that in these circumstances
the donor should be exempt from the new charge.
279.
The gifts with reservation of benefit rules are disapplied in certain circumstances, for
example where business property or agricultural property reliefs apply. However, a donor
can come within the new charge where no IHT is due so neither business property relief
nor agricultural property relief apply. To cater for this, we consider that there should be
an additional exemption in sub-paragraph 11(1) for assets that would have been within the
charge to IHT if they had been retained by the donor.
280.
We welcome clarification at the Revenue open day that the charge applies only to part of
the year if the asset is enjoyed for only part of the year, e.g. a picture which is returned to
the donor when the donee is on trips abroad. On the assumption that the intention is that
the new tax charge is to be pro-rated on a time basis, we suggest that there should be an
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exemption to cover this.
Paragraph 12
281.
Following discussion at the Revenue open day we would welcome confirmation of the
following points in relation to paragraph 12.
282.
Sub-paragraphs (2) and (3) appear to conflict. In sub-paragraph (3), we would welcome
clarification of whether the property referred to is confined to non-UK property.
283.
We understand that the intention is to ensure foreign domiciliaries with excluded property
settlements should not be subject to the income tax charge even if the underlying assets
include UK situs property which the settler occupies provided the original gift was not of
UK property. Merely restricting paragraph 12(3) to non-UK property will not fully
resolve the conflict. For example, a non-UK domiciled settlor transfers US dollars into a
trust. The trust then subscribes for shares in a non-UK incorporated company which
purchases UK real property. The settlor who is resident in the UK has the use of the
property. In the above circumstances it is accepted that there is no charge to inheritance
tax on the UK property because the property in the settlement is actually the shares in the
non-UK company. The disposal is of the non-UK situated property and should have the
protection of a revised paragraph 12(3) provided paragraph 12(3) is amended so as to
make it clear that paragraph 12(2) does not apply in these circumstances even though
there is physical use of the UK property. We look forward to seeing the amended clause.
284.
We would note that individuals who are non-UK domiciled and who come within the
charge of the new tax but have no other UK source income will have to submit a return
just for the ‘income’ subject to the new tax.
285.
Please clarify the purpose of this provision. Sub-paragraph 12(4) is drafted as if it is a
relieving provision but it seems to be saying that in order to determine whether or not a
person is domiciled in the UK for the purposes of paragraph 12, it is necessary to have
regard to the extended meaning of domicile in section 267, IHTA 1984, part of which is
the 17 out of 20 rule. We do not consider that this is right in principle as this is an income
tax provision and the sub-paragraph is oddly drafted as it seems to be a relieving
provision but it is actually a charging one. The normal income tax rule should apply.
Paragraph 13
286.
Given the breadth of the charging provisions, many transactions will be within the charge,
including gifts by many donors the value of whose total assets is considerably less than
the top of the nil rate band, currently £263,000. We accordingly consider that the de
minimis of £2,500 is too low.
287.
A de minimis limit which requires a valuation to be done to determine whether or not it
applies is very difficult for a taxpayer to apply in a self-assessment world.
288.
We suggest that the de minimis is amended so as to exempt transactions where the
original gift was less than a specified figure.
Paragraph 14
289.
It is disappointing that significant exemptions are to be left in abeyance to be detailed
later by statutory instrument. The Government said at the time of the Budget that the
provision would not i)
affect parents or grandparents who have helped their children or grandchildren
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ii)
onto the property ladder, or
apply where the benefit is incidental, including cases where a gift comes to
benefit the donor following a change in circumstances.
290.
We request that these exemptions are set out in the legislation.
291.
We also seek clarification that (ii) above will apply to allow, for example, a couple of
weeks’ use of a holiday home?
Paragraph 15
292.
The valuation methodology in this paragraph differs from that used elsewhere in the tax
legislation for income tax, capital gains tax or inheritance tax. Having a different
methodology for this new tax makes it even more unnecessarily complex than the Bill
makes it already. We consider that for the purposes of this new tax, assets should be
valued using an established methodology, for example that in section 272, TCGA 1992
and, for unquoted shares, section 273, TCGA 1992.
Paragraph 16 - Changes in distributions of deceased’s estate
293.
We welcome the clarification in this paragraph in respect of deeds of variation.
294.
For consistency, we consider that this should be extended to include disclaimers of
interests in settled property under section 93, IHTA 1984.
Paragraph 18 - Relationship with Part 3 of Income Tax (Earnings and Pensions) Act
2003
295.
This paragraph provides for a priority rule in certain cases of potential double taxation. A
similar rule is needed for situations that might be taxable under both these provisions and
section 743(5), ICTA 1988: ‘Transfer of assets abroad: supplemental provisions’.
Paragraph 19 – Regulations
296.
This paragraph provides power to make Regulations. As it is impossible to comment
meaningfully on the Finance Bill provisions without sight of the Regulations, we would
welcome sight of the secondary legislation in draft as soon as possible. See also our
comment under paragraph 14 above.
Paragraph 20 - Transitional provisions
Subparagraph (1)
297.
The ability to elect should not be just a transitional relief applicable to those chargeable in
the year 2005/06; those affected should be able to elect if they are chargeable in any later
year as well.
Subparagraph (2)
298.
We would welcome clarification of what the election is supposed to be in respect of, for
example, is it the property formerly owned or the property in its existing state, and what
monetary sum attaches to it.
299.
Problems will arise where it is not known whether an election has been made. Double
charges to tax may arise where the donee does not realise that an election has been entered
into. The executors of a donee’s estate may account for inheritance tax not realising that
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an election has been made. Given that whether or not an election has been made will
affect the incidence of inheritance tax, it is necessary for the executor/administrator of a
deceased’s estate to be protected against personal liability where he pays tax in respect of
an asset that the estate does not own.
300.
We consider that to simplify administration and compliance, and in particular to make it
easier for executors to administer estates, paragraph 20 should include a provision making
it obligatory for the person making the election to notify the donee in writing.
301.
There should also be a provision so that executors/administrators of deceaseds’ estates
can make the election on behalf of the deceased, even if the deceased was not chargeable
in 2005/06, and the donee should not be obliged to pay the tax arising. In such
circumstances, the executors should be allowed to cause the estate to meet the tax
liabilities and the law should indemnify the executors against their being personally liable
as trustees of the estate, as might happen if beneficiaries object.
Paragraph 22
302.
In sub-paragraph 22(5), ‘31st January’ should read ‘1st February’.
Revenue response
All the representations that were made during the passage of the Finance Bill were
considered carefully: and recipients will know that a substantial number of Government
amendments were made to Schedule 15 during Standing Committee and at Report.
Those amendments have, among other things, addressed the concerns expressed which
Ministers felt had merit. Given the extent to which the detail of Schedule 15 has changed
since the initial print of the Finance Bill, and how this has cut across the comments that
were put up, we have not attempted to cover explicitly the individual examples which were
included in representations: but details of the practical application of Schedule 15 will be
included as part of the guidance that we will be producing.
If you think you have highlighted a deserving case that will be caught by Schedule 15 as
amended but which they still consider should qualify for special treatment, please write
with further details direct to the Capital Taxes Policy Team, Room 121 New Wing; or by
e-mail to [email protected].
Miscellaneous
Clause 87 and Schedule 17 (section 92 and Schedule 17) - Minor amendments of or
connected with ITEPA 2003
303.
We welcome this move to correct earlier problems rapidly.
CHAPTER 5
ENTERPRISE INCENTIVES
Clause 89 and Schedule 19 (section 94 and Schedule 19) Venture capital trusts
304.
We welcome the extension to these reliefs generally.
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305.
We recommend that consideration is given to extending the 6 April 2006 deadline from
the outset. Given the time frame within which the venture capital sector operates, there
will be a time lag before activity begins and the effect is that there will be little more than
one year for people to use the schemes.
Revenue response
The increase in Income Tax relief is aimed at providing a temporary stimulus to increase
investment in VCTs. The Inland Revenue will assess the position of this relief in detail
well before the end of the two-year period. Longer term decisions will be taken by the
government in the light of the effect of the changes made this year and in the light of
ongoing discussions with the venture capital industry as it develops
CHAPTER 6
EXEMPTION FROM INCOME TAX FOR CERTAIN INTEREST AND
ROYALTY PAYMENTS
General comments on clauses 92 to 101 (sections 97 to 106)
306.
We believe there would be very little risk of tax loss if the Government legislated beyond
the minimum required under the Directive. There are only five or so existing EU countries
that have withholding tax on interest or royalties (after the UK's Double Taxation
Agreements are taken into account) viz Belgium, Italy, Luxembourg, Portugal and Spain.
We recommend the scope of the UK's implementation of the Directive be extended to
more than one tier loans/licenses which would take the provisions beyond the minimum
required by the Directive.
307.
We believe the provisions are needlessly restrictive and the UK is in danger of foregoing
one of its traditional competitive tax advantages which is its very extensive coverage of
Double Taxation Agreements.
Revenue response
The legislation does not go further than what is required to implement the Directive.
Going beyond the Directive would not secure reciprocal benefits from other Member
States.
In relation to the points made on Clause 94 (now 99) and Clause 95 (now 100) the
legislation implements the terms of the Directive.
Clause 94 (section 99) – Permanent establishments and “25% associates”
308.
We believe the definition of associates in clause 54(4) is unnecessarily narrow.
Revenue response
Please see reply on clauses 92-101 generally.
Clause 95 (section 100) – Interest payments: exemption notices
309.
We are not clear why the Government is to require exemption certificates when they are
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not required by any other EU country.
310.
We would be grateful for clarification as to why these are considered necessary.
Revenue response
Please see reply on clauses 92-101 generally.
CHAPTER 8
CHARGEABLE GAINS
Clause 111 and Schedule 21 (section 116 and Schedule 21) – Restriction of gifts relief
etc
311.
These provisions involves an element of retrospection and there should be reasonable
transitional provisions. In paragraph 4 of Schedule 21, new section 169C(10) allows
claims for relief under section 165 or 260 to be revoked. Neither section contains any
specific right to revoke the election. Please clarify that the time limit for revocation is the
normal five years after the 31 January following the tax year when the gift was made.
312.
Please clarify whether the revocation needs to be entered into by both parties in the same
way as a claim
Revenue response
As the measure applies only in relation to gifts of assets made on or after 10th December
2003 there is no need for transitional provisions.
Gifts relief is obtained by way of a claim and not an election. Sections 165 and 260 are
claims-based sections and the normal rules relating to withdrawal of claims apply. Thus
a claim cannot be withdrawn or amended after it has become final. Within the time limit
for amending the claim it may be withdrawn at any time. If a claim was made within a
tax return and the window for amending that return has closed, the settlor cannot
withdraw the claim. Likewise, if a claim was made outside a tax return and the time limit
for amending that claim (12 months from the date the claim was made) has passed, the
settlor cannot withdraw the claim.
Only if both parties were required to make the claim would both be required to sign up to
the revocation. This will not be the case for gifts to trustees of settlements. The trustees
of a settlement are a party to a gifts relief claim only where they make the disposal in
question.
Clause 112 and Schedule 22 (section 117 and Schedule 22) – Private residence relief
313.
In paragraph 6 of Schedule 22, new section 226A(6) allows private residence relief to
continue if the hold-over claim under section 260(3), TCGA 1992 is revoked. As noted in
the previous paragraph, section 260 does not contain any specific right to revoke the
election. Please clarify that the time limit for revocation is the normal five years after the
31 January following the tax year when the gift was made and whether a revocation needs
to be entered into by both parties in the same way as a claim?
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Revenue response
Please see response to the preceding Clause and Schedule.
CHAPTER 9
AVOIDANCE INVOLVING LOSS RELIEF OR PARTNERSHIP
Individuals in partnership: restriction in relief
Clause 119 (section 124) –Restriction of relief: non-active partners
314.
This change could have a potential impact beyond that which we believe is intended. We
understand that the provision is aimed at curbing tax avoidance in the film industry.
315.
The provision is drafted too widely and includes any partnership and therefore ordinary
commercial partnerships where there is no intention to avoid tax will be within the
provision. This proposed restriction will hit instances where a taxpayer is acting as a
consultant.
316.
For example, in a family partnership where a member is offering financial advice to
safeguard his or her investment, this is not defined as a service to the business as it is not
related to the trade. However, it is a legitimate input to the business. This regulation
counters the encouragement for the involvement of ‘business angels and mentors’.
Example
317.
Bill and Ben decide to set up a burger bar. They are in their twenties and need capital
from a third partner, Ben’s uncle, who is a chartered accountant. He will review their
business plans and offer financial advice in exchange for a share of future profits. He
knows that with section 380/381 relief in prospect, he stands to lose only £60,000 if it all
goes wrong, which is why he is prepared to take the risk. They each contribute
£100,000.Within two years they have failed to become profitable and have run out of
cash. These new rules would effectively deny Ben’s uncle loss relief.
318.
This is how many small businesses obtain start up funding. In future, they would have
had to ask for a loan instead. Ben’s uncle would not have the ‘ownership’ interest and so
may not be as keen to help.
319.
We do not see the justification for using the bench mark of 10 hours (clause 119 inserting
new section 118ZH). New section 118ZH ‘a significant amount of time’ can work
unfairly where there are several parallel partnerships or a partnership and a company or
companies controlled by the partnership, as set out in the example below.
Example
320.
X Y and Z are in partnership as accountants. They decide to set up an insolvency arm and
recruit A, an insolvency practitioner, to establish it. To incentivise A they form a separate
partnership of XYZ and A. XY and Z will work less than 10 hours in the new partnership
but will work well over 10 in the two partnerships combined. They ought to be entitled to
loss relief in such circumstances.
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321.
The provision should be amended to include something like the ‘commercial association
of companies’ test that used to apply under paragraph 1, Schedule 6, TCGA 1992.
322.
Finally, we understand that the provision will also apply to certain existing film
partnerships which are not established to avoid UK tax. Whilst we are sure that those who
are affected in the film industry will be making their own representations, we recommend
that the provision is targeted at those schemes seeking to avoid UK tax. We suggest that
the provision is amended to include a suitable motive test.
Revenue response
The new rules are intended to apply generally - the avoidance schemes which these new
rules tackle have been used in a range of businesses.
Business angels and mentors will operate on the same basis as everybody else. They can
continue to claim loss relief against their general income or chargeable gains up to the
amount that they have contributed to the partnership, and they will not be affected if they
satisfy the "significant amount of time test".
The inclusion of an extra test would add considerable complexity to the legislation and
could provide scope for avoidance, for example by fragmenting a partnership into
separate bodies. In the example, the individuals can claim loss relief against their
general income or chargeable gains up to the amount of their contribution to the
partnership - that is no different to anybody else.
The legislation applies to all partnerships based on objective criteria - it is not limited to
film partnerships. A motive test would add uncertainty to the application of the clause
and could lead to protracted litigation before the outcome is reached. The provision as
introduced gives an objective answer where the result is clear to all parties. A motive test
would require clearance procedures, which would involve administrative costs for both
the taxpayers and the Government.
The inclusion of an extra test would add considerable complexity to the legislation and
could provide scope for avoidance, for example by fragmenting a partnership into
separate bodies. In the example, the individuals can claim loss relief against their
general income or chargeable gains up to the amount of their contribution to the
partnership - that is no different to anybody else.
The analysis is incorrect. The first disposal did not "give rise to a charge to tax" and
therefore did not fall within clause 125(6) as originally drafted. As a result there is no
deduction from the amount computed on the second disposal. This particular rule was
amended as a consequence of the changes to clause 125(5). The result is that the charge
became a single measure, but potentially limited in amount by reference to a different
calculation, instead of being the lower of two alternatives. This then makes it clear that
any subsequent reduction is applied to the chargeable amount and not to each of the
alternatives separately.
The Government introduced amendments and a new Clause during the Finance Bill
Committee stage to achieve the correct link between this provision and the chargeable
gains rules.
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The basic calculation of contributed capital in clause 125(2)(d) is the sum of the amount
contributed by the partner plus the amount paid by the partner for an interest in the
partnership. The purpose of the exclusion in clause 125(2)(d)(i) is to ensure that the
measure of the company's contribution to the partnership for the purposes of clause
125(1)(b) and clause 125(5) includes only the amounts actually paid out by the company.
However, this would not give the right answer for the due share of profits which needs to
compare the actual direct contributions made by the partner, plus any contribution made
by its predecessor which it has in effect assumed through acquisition, with the total of all
capital that has been introduced into the partnership. The predecessor’s capital
contribution will include any amounts it had in turn assumed already, and needs no
further definition. Clause 126(4) is therefore clarificatory to ensure that the necessary
distinction between “the company’s contribution to the partnership” in 125(2)(d) and
“capital contributed” is apparent.
Individuals in partnership: exit charge
Clause 124 (section 130) – “A significant amount of time”
323.
The same comments apply as in relation to clause 119, and new section 118ZH, above.
Revenue response
Please see response to immediately preceding Clause.
Companies in partnership
Clause 125 (section 131) – Companies in partnership
324.
In a case where there is more than one withdrawal or disposal, the calculation under
subsections (5) and (6) does not appear to produce the intended result.
Example
325.
Companies A and B form a partnership, each contributing capital of 120. Profits in the
first year are 80, and in addition there is unrealised appreciation in the value of the capital
assets of the partnership of a further 80. There are arrangements such that the profit is
allocated wholly to B and the appreciation in the capital assets accrues for the benefit of
A. A then sells a 30 per cent interest for 120. Some time later it sells the remaining 20
per cent for 80, no further profits or capital appreciation having arisen in the meantime.
326.
On the first disposal the total amount of ‘relevant withdrawals’ is 120 and the company's
contribution to the partnership is also 120. The amount in paragraph (a) of clause 125(5)
is therefore nil. The amount in paragraph (b) is 40. The Case VI charge is computed on
the smaller amount, i.e. nil.
327.
On the second disposal the amount under paragraph (a) is 200 less 120 = 80. Since the
amount found previously under this paragraph was nil there is no reduction under
subclause (6). The amount found under paragraph (b) is 40. Since the amount found
under that paragraph on the previous occasion was also 40, this is reduced by subclause
(6) to nil. This being the lower of the two amounts, there is no Case VI charge on the
second disposal.
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328.
We presume that this is not the intended result. We request that the provision is amended
so that the amount found under each of paragraphs (a) and (b) of subclause (5) should be
reduced by the aggregate amount brought into charge on the previous occasions (which is
actually what the explanatory notes say), rather than reducing the amount found under
paragraph (a) by the amount previously found under that paragraph and similarly for
paragraph (b).
329.
Double taxation is liable to arise because of the lack of any effective provision for the
interaction between the charge under clause 125 and tax on chargeable gains. Clause
125(4) generates a free-standing charge under Case VI, which is not expressed to be a
charge on any particular receipt or on the disposal of any particular asset.
330.
Consequently it appears that section 37(1), TCGA 1992 would not operate to allow the
chargeable gain arising on disposal of the company's interest in the assets of the
partnership to be reduced by the amount charged under Case VI.
331.
We request that the provision is amended to provide relief from double taxation. A
suitable model is the relief found in section 763, ICTA 1988.
332.
Even then there is the potential for double taxation where a partnership interest is
disposed of in tranches.
Example
333.
Facts as above. Assume the draft legislation is amended as suggested above, so that there
would be a Case VI charge on 40 on the second disposal, and so that any amount charged
under Case VI can be deducted from the chargeable gain arising on the same occasion.
Assume also that for chargeable gains purposes the total base cost of 120 is allocated
proportionately to the two disposals, 72 and 48.
334.
On the first disposal, the chargeable gain is 120 less 72 = 48. Since there is no Case VI
charge to set off, this is taxed in full. On the second disposal the chargeable gain is 80 less
48 = 32, reduced by set-off of the Case VI charge to a loss of 8.
335.
In aggregate the results in this example are correct: a total Case VI charge on 40 and an
aggregate chargeable gain of 40. However within this total there is a capital loss on the
second disposal which cannot be relieved by carry-back (assuming it does not fall within
the same accounting period as the first disposal), and can very likely not be relieved
against chargeable gains on other current transactions since corporate chargeable gains are
increasingly rare under current legislation. The company is therefore effectively taxed on
88, as compared with the actual profit of 80.
336.
This issue arises because of the mismatch between the ways of dealing with part disposals
under clause 125 and for chargeable gains purposes. The simplest solution and our
proposal is to redraft sub-clause (5) so that profits arising on a part disposal (defined as
for CGT purposes) are computed in a similar way. The ‘company's contribution to the
partnership’ in paragraph (a), and the excess of relevant profits referred to in paragraph
(b), would be limited to the amounts attributable to the partnership interest actually being
disposed of at that time. This attribution would be done on the A/(A+B) basis.
337.
The company's ‘due share’ of the partnership profit is defined by clause 125(2)(f) to be
the amount proportionate to its share of the contributed capital. Clause 126(4) correctly,
if rather obliquely, extends this to include the capital contributed by the person from
whom the company acquired its share. However for this principle to work correctly it has
to be extended further. The provision should be amended to include capital contributed by
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any previous owner of the interest in question.
Revenue response
Please see response to Clause 119.
CHAPTER 10
AVOIDANCE: MISCELLANEOUS
Clause 127 (section 134) – Finance leasebacks
338.
New section 228G provides a definition of ‘current book value’, although this phrase has
already been defined, in different terms, in sections 228B and 228C.
339.
We suspect that the section 228G definition is intended to be of ‘net book value’ and
request that it is amended.
Revenue response
The definition of “current book value” in what is now section 228H was amended to “net
book value”.
CHAPTER 11
MISCELLANEOUS
Reliefs for business
Clause 133 (section 143) – Deduction for expenditure by landlords on energy-saving
items
340.
New section 31A(6). A Schedule A business is the exploitation of an estate, interest or
right in land (section 15(1), ICTA 1988). The land itself accordingly does not appear to
be an asset of the Schedule A business. Improvements to a property must inevitably be
partly to increase its capital value, so can never be incurred wholly and exclusively for the
purpose of exploiting the property.
341.
We would welcome confirmation that such expenditure in these circumstances will be
treated as incurred wholly and exclusively for the purposes of the Schedule A business.
Revenue response
The condition in the new s31A (6) ICTA is to prevent the relief being claimed when the
property in which the insulation is installed is not used for a Schedule A business. One
could always argue that any capital expenditure improves a business asset and is, to that
extent, not incurred "wholly and exclusively" for the purposes of exploiting that asset in
the business. This general point is dealt with by the draft clause itself as it provides
explicitly for a deduction for a capital item to be made.
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PART 4
PENSION SCHEMES ETC
Pension schemes
General comment on clauses 139 to 270 and Schedules 28 to 34 (sections 149 to 284
and Schedules 28 to 36)
342.
We welcome the Government’s commitment to pension’s reform and the commitment to
the consultation process.
343.
We are pleased to see that many of the proposals and suggestions which we and the other
representative bodies have made have been incorporated in the Finance Bill provisions.
344.
We appreciate that the provisions are lengthy but accept that this is inevitable given the
highly complicated and fragmented nature of the existing provisions. However, it would
have been helpful if some of these provisions had been made available for review at an
earlier stage.
345.
In the limited time available we have decided not to include detailed comments on these
clauses. It is our intention to comment in more detail on these clauses shortly.
TEXT OF SUBSEQUENT SUBMISSION IN JUNE 2004
(published as TAXREP 23/04)
INTRODUCTION
1.
We have submitted previously our representations (TAXREP 19/04) on the 2004
Finance Bill. Given the length of the Bill and the short time for consideration, we
did not comment in that representation on the specific pension provisions in the
Bill.
2.
In our general comments on the pensions provisions, we welcomed the
Government’s commitment to pensions reform and the commitment to the
consultation process.
3.
We have commented previously, TAXREP 13/04, on the proposals in the earlier
Consultation Document, Simplifying the taxation of pensions: the government’s
proposals issued in December 2003 and also commented, TAXREP 11/03, on
the original proposals for pension scheme simplification outlined in the
Consultation Document, Simplifying the taxation of pensions increasing choice
and flexibility for all issued in December 2002. We were pleased to see that
many of the proposals and suggestions which we and the other representative
bodies have made have been incorporated in the Finance Bill provisions.
4.
On 1 June 2004 we wrote to all members of Standing Committee A who are
considering the Finance Bill with some further general and specific concerns in
relation to the pension scheme provisions contained in clauses 139 to 270 and
Schedules 28 to 34 of Finance Bill 2004. The substantive part of our letter is
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reproduced below.
THE TEXT OF OUR LETTER
General comments
Beneficial changes in current Finance Bill clauses
5.
We welcome the deferral of the start date of the new rules by a year, so that they
will now come into force on 6 April 2006 rather than 6 April 2005.
Drafting
6.
We welcome the drafting of the provisions in the Tax Law Rewrite (TLR) style
and the extensive use of formulas. However, whilst we appreciate that the TLR
style approach to writing formulas is intended to be helpful and intelligible, we
think that the style adopted has the opposite effect: For example, in clause
186(9), the denominator to the fraction is DCCP (the number of days in the
current chargeable period) and the numerator is DPCP (the number of days in the
previous chargeable period). Such lengthy and at first sight similar expressions
will result in confusion.
7.
As this is a stand-alone provision, we think the expressions used could be
simplified to DC/DP or even x/y. Similar comments apply throughout this Bill
and we believe that the method of presenting formulas needs to be reconsidered.
Simplification
8.
Concerns have been expressed by various people as to whether this can be real
simplification when the legislation runs to 150 pages or so. We understand that
the total amount of primary and secondary legislation which it will replace totals
about 500 pages. We appreciate that the repeals in primary legislation are listed
in Schedule 40 but it would assist the Government’s case that this is real
simplification if it quantified the total number of pages of legislation which will
be replaced.
Revenue response
We note the welcome you have given to the deferral of the simplified regime to 6 April
2006 and the use of the “Rewrite Style” of drafting in the Bill. On the use of formulae, as
you may be aware the legislation is drafted by Parliamentary Counsel who, from their
very wide experience, will express formulae in the most helpful possible way, and one
which carries the clearest meaning in the context. We will of course be developing
guidance to support the new simplified regime. We hope that members of the Pensions
Industry Working Group, on which the ICAEW are represented, will be involved in this so
that we can ensure it is simple and effective.
Specific comments
Clause 179 (section 190) – Annual limit for relief
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9.
We believe these proposals will put the self employed at a serious disadvantage
as compared to the employed and that this will undermine the Government’s
overall objective in relation to pension reform which is ‘to reduce complexity
and introduce more flexibility for those saving, or wishing to save towards their
retirement.’
10.
Clause 179 currently provides that a self employed person may pay the greater of
the basic amount, which is currently £3,600, or an amount equal to their relevant
UK earnings into a pension scheme. This is subject to a maximum annual
allowance fixed in clause 217: initially fixed at an amount of £215,000.
11.
In practice, most of the self employed will not know the likely level of their
relevant UK earnings until after the end of the tax year in question. They will
therefore be unaware of the maximum amount that they would be entitled to have
paid in that particular year. The rule does not provide the necessary certainty
which is required for financial planning.
12.
Of equal, if not more, importance will be the position of those individuals whose
relevant UK earnings fluctuate and which may be zero in a specific year, perhaps
because they have made a loss in that year. For example, it could be that the
profits for the year are eliminated by the bad debt even though the taxpayer has
made some contributions into a pension above the basic amount calculated by
reference to relevant earnings in earlier years.
13.
The current system accommodates for these fluctuations and uncertainties by
allowing individuals to nominate that any single year’s relevant earnings can
count for that year, and the next five years’ of assessment. In addition a payment
made by the 31 January following the tax year or, if earlier, the date the tax
return is filed can be treated as if it had been paid in the previous year of
assessment.
14.
We believe that both these existing measures provide considerable flexibility and
certainty to the self employed and think that the rules in the Finance Bill should
be amended. We recognise that that the new limit of contributions of an amount
equal to a person’s relevant earnings rather than a percentage of new relevant
earnings is more generous that the current rules and that the Government may not
wish to allow net earnings for a year to be nominated for the next five years. Our
suggestion is that the rules should be amended so that taxpayers to elect to treat a
payment made by 31 January in the following tax year as made in the previous
tax year.
Revenue response
The suggestion that the rules should be amended so that taxpayers can elect to treat a
payment made by 31 January in the following tax year as made in the previous tax year,
was raised by the opposition who tabled an amendment on this issue at the Report Stage
of the Finance Bill.
As the FST explained during the debate on the Report Stage of the Finance Bill on 7th
July, the simplified system of tax relief for pension contributions provides for generous
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limits, in which contributions can be made to a pension fund of up to 100 percent of an
individual's earnings in any given year. Whilst some self-employed people may not know
their final earnings until after the year-end, the generous new limits will enable the selfemployed to plan pension contributions over a period of time on a relatively safe basis, by
basing contributions on known levels of earnings.
The generous new limit will enable those people with fluctuating earnings who have zero
in one year to make higher contributions the next without exceeding the limit.
Very few people contribute the maximum allowed under the current rules which are much
more restrictive than the new rules. Under existing rules, the maximum allowed is up to
40 per cent of earnings, depending on age and the type of scheme. The new limit of two
and half times that figure will provide more than adequate leeway for the vast majority of
people. If someone were to inadvertently exceed the 100 per cent limit, the scheme will
have provision to make a tax free refund of excess contributions lump sum For this reason
the Government does not see the need to introduce a rule that allows pension
contributions paid in one tax year to be tax relieved in the previous year
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PART 6
OTHER TAXES
KEY POINT SUMMARY
Stamp duty land tax
346.
We remain concerned that this new tax has been introduced on a piecemeal basis which
has led to mistakes and omissions necessitating rewritten and secondary legislation.
347.
This is a highly technical area which will take time to fully implement and we are already
hearing that our members have found it difficult to obtain answers from the SDLT
Helpline.
348.
We understand that the SDLT policy team is to be disbanded shortly and we are
concerned that this will further place in jeopardy the continuity of technical expertise.
SDLT is a self assessed tax and we see this lack of resource within the Revenue as an
indication that there is an unwelcome shift of cost and risk from the Revenue to the
taxpayer.
DETAILED COMMENTS
Stamp duty land tax and stamp duty
Clause 282 and Schedule 37 (section 296 and Schedule 39) – Miscellaneous
amendments
General comments
349.
In our response to the SDLT proposals introduced by Finance Bill 2003, we stated that the
legislation was being rushed into place, on a piecemeal basis allowing inadequate time for
proper scrutiny. The new tax would have been better dealt with as a separate and
comprehensive piece of legislation. We feared then that mistakes and omissions would
lead to the need for rewritten and secondary legislation which would overcomplicate the
tax. This is not in the spirit of the current drive towards simpler legislation. Experience
over the past year culminating in yet more revising legislation in the Finance Bill 2004
has proved this to be the case.
Revenue response
The tax has not been introduced piecemeal but, as is common with new legislation,
representations and enquiries have pointed to the desirability of amendments.
350.
The draft lease duty manual which was published only two weeks ago, already needs
updating for Finance Bill 2004.
Revenue response
This will be done.
351.
Where legislation and guidance is amending existing legislation and guidance, it would be
helpful for changes to be tracked in the manual.
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Revenue response
References to Finance Act 2004 will be included.
352.
Practitioners are finding it difficult to obtain answers from the SDLT Helpline. This is
particularly so for more complex problems and there is evidence to suggest inadequate
training arising perhaps from a lack of resource.
Revenue response
We are anxious to receive specific feedback on the performance of the Helpline.
353.
We understand that the SDLT policy team is to be disbanded shortly and we are
concerned that this will further place in jeopardy the continuity of technical expertise,
SDLT is a self assessed tax and we see this lack of resource within the Revenue as an
indication that there is an unwelcome shift of cost and risk from the Revenue to the
taxpayer.
Revenue response
This is not correct.
Specific comments
Paragraph 2
354.
We welcome this change.
Revenue response
Noted.
Paragraph 4
355.
The notes on clauses claim that this clause surely puts the existing position beyond doubt.
Far from that being the case, the consensus of professional opinion is that an SDLT
charge is not currently imposed on the grant of the licence to the developer in such a case.
It is an extension of the charge. SDLT is now to catch a developer’s profit, by deeming
there to be a land transaction where there was none before.
356.
This is a policy change disguised as a point of clarification and is an example of
unjustified tax collection.
Revenue response
There is no policy change here. Section 44A catches transactions which are in substance
a sale to a developer and this has always been Government policy.
357.
We think that it should be made clear that new Section 44A does not apply to sub-sale
relief, as has been confirmed by the Stamp Office.
Revenue response
As you say we have confirmed this.
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Paragraph 11 (inserting new paragraph 12B)
358.
In our view this provision very successfully deals with assignments and could be used as
the pattern for a re-drafting and simplification of FA 2003 Section 45.
Revenue response
Noted.
Paragraph 16 (inserting new section 57A)
359.
This prevents sale and leaseback exemption from applying where the sale and leaseback
are by and to different members of a group. We do not see the policy reason for denying
this relief to groups in such a situation.
Revenue response
The Government’s policy is that group relief should be claimed in this situation.
Paragraph 22 (inserting new Schedule 17A)
360.
Para 4(4A) There is a typographical error in the second line: it should read ‘than’ rather
than ‘then’.
Revenue response
This will be corrected.
Clause 283 (section 298) - Notification, registration and penalties
361.
We welcome this clause, but suggest that the de minimis be changed to £1,000 or less for
ease of application.
Revenue response
We will bear this in mind for the future.
Clause 285 (section 300) - Assents and appropriations by personal representatives
362.
We welcome this clarification.
Clause 286 - Charitable trusts
363.
We do not have any specific drafting points in relation to this clause but wish to take this
opportunity to raise a question concerning the application of charities relief (paragraph
1(2), Schedule 8, FA 2003)
364.
Relief is available where the charity intends to ‘hold’ the property acquired
a.
‘for use in furtherance of the charitable purposes...’ or
b.
‘as an investment...
365.
We understand that this is interpreted by the Inland Revenue as denying relief where a
property or part of the property acquired is to be sold off by the charity. This is on the
basis that the purchase for re-sale is not an ‘investment’. Furthermore, we understand that
where a property is acquired, partly for use by the charity for its own purposes and partly
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to be sold on, the latter part causes relief to be denied on the entire acquisition, on the
basis that an acquisition is either entirely chargeable or exempt.
366.
There are circumstances where a charity has to acquire a particular site or building in its
entirety but has to sell on part which is surplus to its requirements. In these circumstances
the current apparent interpretation produces capricious results. If there is a delay before
re-sale, that might indicate an investment activity but it would not be possible to foresee
this at the time of acquisition. It would seem particularly unfair for the charity to bear 4%
SDLT on the entire acquisition where a small part has to be re-sold.
367.
We understand that the principle underlying your interpretation is to deny relief for
‘trading’ transactions by charities that would enjoy an unfair advantage in competing with
commercial organisations. We would suggest that paragraph 1(2) be reversed so that
relief is denied where the main purpose of the acquisition is dealing in property.
Revenue response
Amendments were tabled at Report Stage in response to this.
Clause 288 and Schedule 39 (section 304 and Schedule 41) – Application of certain
partnership provisions
General comments
368.
These provisions seem unnecessarily complex and unfair resulting in a double charge to
taxation both at rates of SDLT of up to 4%.
369.
The Revenue seems to regard all property-owning partnerships as vehicles set up for
SDLT avoidance. In fact they are a valuable form of commercial organisation. The draft
legislation fails to adequately distinguish trading partnerships which hold land only for
their business purposes from partnerships the primary function of which is to hold land.
Revenue response
There is no general exemption for trading partnerships from the charge as there is no
general exemption for individuals owning land from which they trade. Both the
partnership and the individual pay SDLT on the land that they own.
Specific comments
Paragraph 18
370.
We are not certain what the total charges are intended to be when property is moved into
and subsequently removed from a partnership. So if Dad transfers farmland to Dad and
Mum to share 50:50, it is clearly intended that there should be a charge on 50 when the
property goes into partnership. If, however, the property is then split out between Dad
and Mum, is it intended that there should be no further duty?
Revenue response
An amendment has been tabled to ensure that where land is transferred from joint
ownership to a partnership or from a partnership to joint ownership, the charge will be
based on the market value of the land that leaves joint ownership and vests in other
partners or, as the case may be was other partners and now vests in the joint owners.
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371.
If so, then we are not convinced that paragraph 18 works as envisaged. The chargeable
proportion would appear to apply to each person to whom an interest in land is transferred
by a partnership (and not looked at collectively). So, in the above example, both Dad and
Mum have to apply that formula in paragraph 18(1) i.e. it is (100 – 50) in each case. This
still leaves 50 to be charged so there is a total of 3 charges on 50 i.e. once when it goes in
and then on 50 for both Dad and Mum when it comes out. Please clarify that this is not
intended (or if it is intended what the policy objective is). Further, we are not convinced
that paragraph 18 works as intended (notwithstanding that we understand the broad
principles). Furthermore, the issue regarding relevant dates in paragraph 19 may not work
either where land is in the partnership before 20 October 2003 and is subsequently added.
There appear then to be two relevant dates which make Step Two difficult.
Revenue response
The first point concerning multiple charges has been dealt with in the answer to
paragraph 370. The charge on exit of land from a partnership is charged on each
separately identifiable piece of land so that multiple dates won’t be a problem.
Paragraph 20
372.
This paragraph is oddly worded. Is it intended that if the underlying land benefits from
the exemption, this will flow through to a transfer of an interest in the partnership. So that
if the partnership land is in a disadvantaged area, no duty will be payable on a transfer, for
consideration, of the partnership interest.
Revenue response
It is intended that reliefs such as disadvantaged area relief applies to transactions with
and inside partnerships. An amendment was tabled to ensure this policy intention is
effective.
373.
Furthermore, it is not clear whether the disapplication of certain reliefs by virtue of
paragraph 20(1) applies where there is a transfer of an interest in a partnership. So if A is
in partnership with B 50:50 and A gives B a 10% interest in the partnership, can
paragraph 12 apply given that there is no consideration?
Revenue response
In reply to the specific question there would be no SDLT to pay (as there had been no
consideration given).
Paragraph 23
374.
The inclusion of paragraph 23 seems odd given that we were led to believe that stamp
duty would be abolished for all transactions other than those relating to shares. Please
explain what is the policy decision behind the retention of stamp duty for transfers of
interests in partnership?
Revenue response
This is to combat avoidance of stamp duty and SDRT using partnerships.
Paragraph 24
375.
Whilst there is an exclusion in paragraph 24 where the partnership includes land, please
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confirm what is the position if the land is in, for example, a disadvantaged area, or indeed
the partnership contains assets which are themselves exempt from stamp duty e.g.
goodwill, intellectual property. Is there still to be a stamp duty charge on the partnership
interests, when the underlying assets are exempt? Please confirm what is the position if
the partnership holds chargeable securities (for the purposes of SDRT). Is duty payable at
4% or at the appropriate SDRT rate?
Revenue response
An amendment was tabled to charge the lesser of the price paid and the net market value
of the stock and chargeable securities held as partnership assets.
376.
More generally, given there is now both an entry and exit charge when property is put
into, and subsequently removed from, a partnership, is there any reason to have a charge
when interests in the partnership are transferred (i.e. is there any need to have paragraph
12?) What mischief is this designed to avoid? There appears to be a tension between
paragraph 12 (which treats an interest in a partnership as an asset in its own right), and
paragraph 2 of schedule 15 which treats chargeable interests owned by a partnership as
being owned by the partners (in other words conferring transparency). If paragraph 12 is
intended to ‘contradict paragraph 2, we suggest it is expressly stated to do so.
Revenue response
The requirement to have a charge on transfer of partnership interest is to charge changes
in ownership. Where partnership interest changes hands, the ownership of the underlying
assets effectively changes hands. This is dictated by the principle of transparency.
Paragraph 25
377.
The reference to a partnership share in paragraph 25(2) as being a share on income profits
rather than capital profits is strange. It is common in the case of trading partnerships for
there to be a distinction between the ownership of capital and the ownership of income
profits to reflect the day to day activities of the partners. So for example, in farming
partnerships, it is common for the land to be held in different proportions from the
income. Such a situation is also common, we understand in medical professional
partnerships. Why is the income sharing ratio chosen here rather than the capital sharing
ratio?
Revenue response
The income sharing ratio is chosen as this represents the economic interest in the
underlying land interests.
Paragraph 27
378.
This is likely to cause considerable administrative difficulties for professional
partnerships where contributions are made to capital on an annual basis. If, as is usual,
partners moving up the ladder have to contribute capital, they are inevitably increasing
their proportion of the ownership of any underlying freehold property so there is
effectively a transfer of interest within paragraph 27. This is exacerbated by the fact that
often these additional contributions are made at or around the time that new partners join
the partnership even though the new partners are not directly acquiring any share in the
property which is owned by an outgoing partner (which we believe was the original target
of this charge in the first place).
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Revenue response
Whether there is a charge under para 12 fully depends on the facts.
379.
In these circumstances (and notwithstanding paragraph 22 that a transaction may not be
notifiable) we have three comments:
i)
To decide whether it is non-notifiable i.e. below the threshold, valuations still
have to be made. The compliance burden therefore has not been removed.
Presumably a regulatory impact assessment has been undertaken on this and we
would be interested in what additional compliance cost is considered to be.
ii)
Is the £150,000 divided across all the partners who are contributing an increased
capital? Since if these are linked, it is likely that many transactions will be
notifiable.
iii)
Will contributions by a number of partners be deemed to be linked (so the
£150,000 threshold is spread across them)? Alternatively is there a ‘clock’ so that
contributions made by an individual partner are linked to contributions made by
that partner in later and earlier years and the £150,000 has to be considered on a
cumulative basis?
Revenue responses
i)
We do not believe the compliance burden to be great as in the vast majority of
cases the proportional market value of the land assets forming partnership assets
will be demonstrably below the threshold.
ii)
Where multiple partners contribute to partnership capital, these transactions will
not be linked. An amendment was tabled to ensure this.
iii)
Whether contributions by multiple partners are linked is answered at (ii) above.
Whether multiple contributions by one partner over a period are linked will
depend on the facts of the case.
Clause 289 (section 305) Liability of partners
380.
We welcome this relieving provision. We would suggest that an equivalent provision is
introduced to paragraph 5 Schedule 16 as sub-paragraph 1A of that paragraph
(responsibility of trustees of settlement).
Revenue response
The Government does not consider it appropriate to limit the liability of trustees in this
way.
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PART 7
DISCLOSURE OF TAX AVOIDANCE SCHEMES
KEY POINT SUMMARY
381.
We are concerned to ensure that the proposals do target those areas where there is a
genuine risk of loss of tax revenue and that the new rules do not cause further unnecessary
regulatory burdens for UK business and UK taxpayers.
382.
The policy behind this proposal is, we understand, to receive advance notice of tax
avoidance schemes which are actively promoted and marketed.
383.
The problem with these proposals is that they are so widely drafted that they encompass
not just marketed tax avoidance schemes but also include all kinds of other tax advice that
should not be included.
384.
The overall result is that the provisions are uncertain in scope and are not likely to achieve
their policy purpose of enabling the Revenue to receive an ‘early warning’ of marketed
schemes.
385.
We are concerned that these provisions may be in breach of the Human Rights Act despite
a specific statement to the contrary in the Regulatory Impact Assessment.
DETAILED COMMENTS
General comments on clauses 290 to 302 (sections 306 to 319)
386.
The policy purpose behind the proposal is, we understand, to receive advance notice of
tax avoidance schemes which are actively promoted and marketed. Tax policy is a matter
for the Government to decide but it seems to us not unreasonable to request details of
marketed tax schemes at an early stage. In our opinion, most members of the UK tax
profession would be able to identify clearly a marketed tax avoidance scheme.
387.
The problem with these proposals is that they are so widely drafted that they encompass
not just marketed tax avoidance schemes but also include all kinds of other tax advice that
should not be included. By including a wide definition of promoter, almost all tax advice
could potentially be included within these provisions. The result is that the provisions are
uncertain in scope, are likely not to achieve their policy purpose of enabling the Revenue
to receive an ‘early warning’ of marketed schemes, and in the process could harm UK
business.
388.
A suitable comparison is with the money laundering regulations. A constant issue with
them is that the law is not properly targeted in that instead of the need to report only more
serious cases of suspected criminal activity, advisers are forced to blanket report a whole
range of minor misdemeanours in order to cover themselves. The same position is likely
to apply in respect of these provisions.
389.
We are concerned to ensure that the proposals target those areas where there is a genuine
risk of loss of tax revenue and that the new rules do not cause further unnecessary
regulatory burdens to UK business. We note that the RIA indicates that ‘[the Inland
Revenue] intend to work closely with the accountancy and legal profession after
publication of the Finance Bill to ensure that the rules are effectively targeted.’ Paragraph
55. We have already taken part in a number of meetings relating to these proposals and
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we aim to play a full part in ensuring that the new system is reasonable and proportionate.
390.
However, we are disappointed that the provisions as drafted go far beyond the policy
purpose as stated to us. If the underlying policy is as stated above, then we believe that the
Government should work to ensure that this objective is achieved. We believe that the
focus of this provision needs to be narrowed to ensure that ordinary confidential advice
between advisers and their clients is not within the scope of this provision.
Revenue response
The rules are designed to target those areas where, in the experience of the Inland
Revenue, the risk of serious tax avoidance is greatest whilst minimising compliance
burdens for the business community.
The purpose of the disclosure rules is to protect the Exchequer, and the generality of
taxpayers. This means finding out about significant risks to the Exchequer as early as
possible, not just schemes that are marketed. Bespoke arrangements can be just as
damaging to the Exchequer as those that are widely marketed and schemes that start out
bespoke are often turned into marketed schemes later.
The Revenue has worked with tax advisors and industry representatives to refine the rules
in two key areas. Firstly to restrict the definition of a promoter to make sure that only
those at the heart of a scheme are required to disclose. And secondly, to target the rules
on those areas where experience shows the Exchequer to be most at risk from serious tax
avoidance.
The rules do not target straightforward tax planning. The Regulations contain narrowly
targeted rules. In particular, the financial products test will be limited to arrangements
where:

It would be possible for the promoter to obtain a fee attributable to the tax
advantage achieved by the scheme; or

The tax advantage arises from elements of the arrangements which a promoter
might wish to keep confidential; or

A promoter is party to a financial product on terms which are significantly
different from open market terms.
The scope of the rules
391.
The taxes covered by the legislation include income tax, capital gains tax, corporation tax,
petroleum revenue tax, inheritance tax, stamp duty land tax and stamp duty reserve tax
(clause 301(1) – definition of ‘tax’). However in the RIA it is stated, at paragraph 13 ‘It is
considered preferable to focus on areas of high risk and to construct the disclosure
requirements narrowly by targeting particular types of avoidance thereby reducing the
overall compliance costs to both promoters and taxpayers.’ The RIA also indicates, at
paragraph 7, that the majority of accountants and lawyers in the UK will not be affected
by the disclosure rules ‘[the disclosure rules] are not intended to have any material impact
upon the very large number of accountants and lawyers across the UK who merely assist
their client understand the tax system and plan their business and other transactions
appropriately.’ As noted above, as drafted we believe that the proposals will impact upon
a very large number of accountants and lawyers.
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Revenue response
The Government amended what is now section 307 in Standing Committee to make
explicit that banks are included within the definition of a promoter.
Human Rights
392.
We are concerned that these provisions may be in breach of the Human Rights Act 1998
despite the statement in the RIA at paragraph 49 ‘Leading Counsel is of the opinion that
the proposed rules do not conflict with Human Rights legislation.’ In particular we are
concerned about potential breaches of Articles 8 and 10 dealing with the right to respect
for private life and the freedom of expression without interference by public authority.
393.
In the spirit of openness and transparency which is one of the underlying aims of this new
legislation, we request that the Revenue publishes the advice it has received.
Revenue response
We are satisfied that the provisions are compatible with the Human Rights Act and the
European Convention on Human Rights. The measure is entirely proportionate to the
damage that can be caused to the economy by avoidance schemes and will give the Inland
Revenue early warning of such schemes. The Revenue is not seeking details of advice
given to specific taxpayers, but to understand how the tax advantage expected to arise
from a scheme is achieved.
It is contrary to established practice to publish the advice the Revenue has received.
Competitiveness
394.
The proposals are in the main going to impact on accountants, lawyers, banks and
financial institutions. We understand that some banks have put forward the proposition
that they will not be affected by the rules as they are in business to provide finance rather
than the ‘provision …of services relating to taxation’ (clause 291(1)(a)(i)). Furthermore
some financial institutions seem to be taking the stance that as they generally indicate to
clients that the latter need to take separate tax advice this may also exclude them from the
rules.
395.
Whilst we disagree with the above analyses, we believe that if the rules are to be
introduced then they should be amended to put beyond doubt that the disclosure rules
apply to anyone who promotes ‘tax avoidance schemes’ in their trade or profession. In
this respect we are also concerned that the ‘carve out’ for services covered by legal
professional privilege (clause 298) may also give an unfair advantage to lawyers and we
think that the ‘carve out’ should be removed.
Revenue response
The rules do not override Legal Professional Privilege but that does not prevent
compliance with the disclosure rules. Whether particular items are subject to legal
professional privilege is ultimately a matter for the courts. As the material provided by
the promoter will be anonymised, we do not think that any question of legal professional
privilege will normally arise, even if a lawyer makes the disclosure. We are working with
the Law Society to develop guidance on this issue.
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Far from being anti-competitive, the rules will help redress the balance in favour of those
businesses that suffer unfair competitive disadvantage due to the exploitation of
avoidance schemes.
The sharing of ideas
396.
We are concerned that the provisions may inhibit internal sharing of ideas if by so doing a
notifiable proposal is made. This would seem to be the consequence of clause 290(2).
Similarly if an adviser makes various suggestions to a client as to possible actions, for
example commenting upon a marketed tax avoidance scheme, would this create a
requirement to write up the proposals and present them to the Revenue as a notifiable
proposal?
Revenue response
The rules do not require anyone to disclose ideas they may discuss with fellow
practitioners and others, especially at a formative stage. Disclosure is only required at
the point that a scheme or arrangement is made available for implementation. In
practical terms, that is after a lot of checks have been made to establish that the
arrangement is capable of achieving the ends it is claimed to obtain. For example,
possibly taking advice from Counsel, and typically that other regulatory checks have been
made
The definition of schemes that have to be disclosed
397.
The definition of tax advantage in clause 301 utilises the ‘transactions in securities’
definition in section 709, ICTA 1988. However, it does not also reproduce the ‘main
benefits’ test found in section 703(1) but instead introduces a new test set out in clause
290(1)(c) . We believe the clause 290(1)(c ) test is an unsatisfactory one. It is neither an
objective test, looking at whether the tax advantage is in fact (rather than ‘might be’) a
main benefit of the arrangements nor is it a truly subjective test looking at the intentions
of the person implementing the arrangements. It is a partially subjective test looking at the
expectations of an unnamed person who is presumably an hypothetical reasonable man.
This introduces a considerable degree of uncertainty.
398.
We believe that the test should be amended and be based upon the intentions of the
promoter concerned, a matter of which the promoter could be expected to have
knowledge.
Revenue response
A main benefit test occurs elsewhere in tax legislation and is familiar to tax advisers.
Whether the arrangements have a tax advantage as a main benefit is an objective test.
We do not think that it would be helpful to replace it with a subjective test based on the
intentions of the promoter.
Changing the relationship between Government and tax advisers
399.
The new rules represent a departure from the normal pattern of the UK tax system which
requires returns primarily from the owner of assets or the persons undertaking
transactions rather than from advisers. For the first time, advisers will be required to
disclose details to the Revenue authorities of their advice to clients before the client has
undertaken the transactions concerned. That has the potential to undermine the
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relationship between the client and his adviser. It is possible that such a change might be
justified but one should not under-estimate the deterioration which it is likely to cause in
the relationship between taxpayers (and their advisers) on the one hand and the Board
(and Revenue officials) on the other.
Revenue response
We recognise it is important to ensure that the rules are carefully targeted on areas where
there is the greatest risk to the Exchequer from avoidance. It will only adversely affect
those who resent the Inland Revenue knowing and being able to make an early judgement
on schemes they peddle or use - those who rely on the secrecy of their schemes for
success.
Reducing opportunities for avoidance will increase confidence in the tax system
generally; this should improve relationships with taxpayers as a whole.
Costs of and benefits from the proposals
400.
As noted above, it is clear from the detailed analysis below that in some areas the
legislation is so widely drawn that its scope is almost impossible to determine. In other
areas we await rules which are to be made by way of regulation to determine the scope of
the new duties. It is clear that however tightly these regulations are drawn, significant
areas of uncertainty will remain. Unless the regulations are very tightly drawn the new
rules will inevitably lead to tax practitioners, taxpayers and others being forced to make
returns of transactions simply because it will be impossible to determine whether the
transactions concerned do, or do not, fall within the new rules. As a result it is quite
possible that the great majority of returns made will be made in relation to transactions
which nobody would characterise as pre-packaged ‘tax avoidance schemes’, thereby
imposing a very significant compliance cost on business and taxpayers generally.
401.
It is very disappointing that the RIA does not contain any attempt to quantify the cost to
taxpayers of these measures and refers throughout to returns made by ‘promoters’ without
considering the extent to which compliance burdens will be placed on advisers who are
not promoters of schemes in any ordinary sense.
402.
We do not think that such a fundamental change to the compliance obligations of
taxpayers’ advisers should be introduced without an attempt to quantify the costs to
taxpayers of the new system. We request that such quantification be published so that its
methodology can be the subject of informed examination.
403.
Against the risk of creating these considerable disadvantages and costs it is necessary to
balance the benefits which might arise from the change. The RIA states that ‘’tax
avoidance costs the Exchequer substantial sums in lost taxes each year’ yet the Financial
Statement and Budget Report, which in Table A1 attempts to quantify the effect on
Government revenues of the various ’anti-avoidance’ measures announced in the
Chancellor’s Budget speech, contains no estimates in relation to these disclosure
provisions.
404.
Surely, however, in order to be able to make the statement in the RIA, the Government
must have estimated the tax lost through what it considers to be tax avoidance. Equally
before making such a fundamental change to the compliance obligations of tax advisers, it
must surely have quantified the benefit to the Exchequer of the change? We would be
grateful for confirmation as to whether such estimates have been made and, if so, they
should be published so that their methodology can be subject to informed examination.
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Revenue response
The costs to most taxpayers who use such schemes is expected to be minimal since they
simply have to put the reference number on the appropriate tax return. In addition, the
clarification of the meaning of promoter and the removal of disclosure obligations from
those with incidental roles in the schemes should minimise the costs to advisors who are
not promoters.
The Financial Statement & Budget Report (FSBR) provides no estimate of the benefits of
the disclosure rules since no tax yield will arise directly from the rules. They are designed
to act as a disincentive to the development and marketing of tax avoidance schemes and
revenue yield will only be scored when specific schemes are closed by future legislation.
This is the basis on which the FSBR figures are prepared.
It is impossible to say with any precision how much UK revenue is lost through tax
avoidance and we cannot therefore provide any estimates of Exchequer loss attributable
to avoidance.
Secondary legislation
405.
We seek clarification as to why so many of the notification rules have been omitted from
the Finance Bill itself, where they would have been open to more adequate scrutiny, but
are to be included in Regulations.
Revenue response
The primary legislation sets out the broad scope of the disclosure rules. The details of the
rules are in Regulations. This had the advantage of enabling extensive consultation on the
detailed rules and the final text of the Regulations reflect the helpful and constructive
comments we received.
Refusals of clearance applications
406.
Whenever clearance is sought under section 707, ICTA 1988 and/or section 138, TCGA
1992 (and other similar clearance provisions) but it is refused, it is possible to take the
view that there is a failure to notify under clauses 290 to 302. Please clarify that the
Revenue does not intend to seek a penalty each time a clearance is refused?
Revenue response
We will only seek a penalty when the disclosure rules are breached. The disclosure rules
are non-judgemental, they are not a clearance system and they do not affect the tax
treatment of particular transactions.
Clause 290 (section 306) – Meaning of “notifiable arrangements” and “notifiable
proposal”
407.
This is a key provision if these disclosure requirements are not to place unacceptable
compliance burdens on taxpayers and their advisers. It is essential that the prescribed
description is precise. If it is drawn too widely from a mistaken desire to ensure that
every potential target is hit it will force advisers to make protective returns of large
numbers of transactions which are not the ostensible target of the new provisions.
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408.
What is subsection (2) aimed at? As we have noted above it would appear to encompass
the mere sharing of ideas! If a scheme is never implemented we question why the
Revenue should want to know about it? If it is implemented will not subsection (1) then
apply?
409.
The provision should be amended to ensure that a scheme is only notifiable once it is
marketed or sold.
Clause 291 (section 307) – Meaning of “promoter”
410.
Neither test of whether a person is a promoter restricts the definition to situations where
the actions which result in the person concerned being a promoter are undertaken as part
of the supply of a taxation service or are undertaken for remuneration. The result is an
extraordinarily wide test. The provision therefore appears to make a person a promoter if
all that they do is introduce a client to a scheme promoter.
411.
Please clarify if this is intended? If the proposal is implemented the person does not
appear to be a promoter in relation to the arrangements themselves It is difficult to see a
reason for the distinction.
412.
Similarly, it is arguable that a person lecturing at a tax conference upon a tax planning
scheme will be a promoter in relation to notifiable arrangements consisting of the
implementation of the scheme for persons on the advice of the attendees of the
conference. It is also possible that a person who, for example, acts as a professional
trustee without any knowledge that the Trust concerned is being established for tax
planning reasons, would be a promoter in relation to the arrangements.
413.
We believe that the clause should be amended so that a person is a promoter in relation to
a strategy only where the actions by virtue of which he is a promoter are undertaken for
remuneration and involve the provision of taxation services.
414.
We are not clear what making a notifiable proposal ‘available for implementation’ means
in clause 291(1)(a)(ii). At one extreme it might involve as little as writing an article
which sets out a tax advantage which could be obtained for a generic transaction. At the
other extreme it might require the full specification of a strategy with every detail of the
implementing transactions to advisers specifically for implementation by their clients.
This is not an area which is to be further clarified by regulation. It will therefore cause
great uncertainty.
415.
We request that the legislation is amended to provide greater precision.
416.
We are not clear what is meant by ‘he is to any extent responsible for the design of the
arrangements’ in clause 291(1)(b)? Please clarify if this includes mere causation or is a
higher degree of responsibility required? If so, what is the nature of that higher degree of
responsibility?
417.
Equally, it is uncertain what is meant by ‘responsible for the organisation or management
of the arrangements’. For example, in a transaction which involves the movement of
monies as well as other transactions, is somebody who organises the setting up of bank
accounts or the making of payments a person responsible for the organisation or
management of the arrangements? The provision is made even less clear by the fact that
this test is qualified by the phrase ‘to any extent responsible’. Please clarify what degree
of responsibility is so small that it can be ignored for this purpose?
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Clause 292 (section 308) – Duties of promoter
418.
According to the RIA ‘promoters will be expected to comply by providing plain English
description [sic] of the scheme etc.’ Presumably that requirement will be made by way
of prescription of the manner in which the information is to be provided.
419.
There is nothing which restricts these provisions to circumstances in which the promoter
is aware that the arrangements are tax avoidance arrangements or is aware that the
transaction concerned forms part of the tax avoidance arrangements. It will therefore
impose a duty on some promoters who do not have the knowledge necessary to comply
with it. We request that the legislation is amended.
420.
The exclusion set out in clause 292(4) is of little value. The promoter will have to know
that the other promoter’s return provides the prescribed information in the prescribed
manner. That would involve a time consuming and therefore costly examination of the
return and the attendant circumstances. As we have seen, it is possible for a person to be
a promoter in circumstances where he will have little or no knowledge of the underlying
tax planning or of the transactions taking place under the arrangements.
421.
We request that this sub-clause is amended so that the exclusion should apply where a
promoter has reasonable grounds for believing that a return of the matters by reference to
which he is a promoter has been made to the Inland Revenue.
422.
Clause 292(5) plainly envisages that two notifiable proposals can be substantially the
same even where the proposals are made to different persons. Please clarify whether
‘substantially the same’ means that the identity of the main parties of the proposed
transactions vary but the transactions are otherwise exactly the same or could there be
individual variations in the nature of the transactions being undertaken and, if so, to what
degree? Is it possible for a return of a notifiable proposal in relation to situation A to
relieve a notifiable arrangement in relation to situation B and vice versa or can the subclause only apply in relation to two proposals or in relation to two notifiable
arrangements?
423.
We request that the Revenue publishes guidance on what is meant by ‘substantially the
same’.
Clause 293 (section 309) – Duty of person dealing with promoter outside the United
Kingdom
424.
This clause would impose a duty to make a return on a person dealing with a promoter
whom he believed honestly and reasonably but erroneously to be UK resident.
425.
The provision should be amended so that it applies only where a person knows or has
reasonable grounds for believing that the promoter is not resident in the UK.
426.
This clause would also apply where a promoter provides services through a trade carried
on in the UK but the promoter is not resident in the UK; for example, the London branch
of an international bank.
427.
Because the promoter will be within the UK’s jurisdiction, we believe that the clause
should be amended so that the person dealing with the promoter does not have to notify
the Inland Revenue.
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Clause 294 (section 310) – Duty of parties to notifiable arrangements not involving
promoter
428.
It appears from the Revenue’s public statements that the target of this provision is tax
planning performed by the in-house tax departments of larger companies. It actually
applies to any tax planning undertaken by any person for himself. As we have already
seen, there is great uncertainty as to the scope of ‘notifiable arrangements’ and therefore
as to the scope of the arrangements which require a return to be made.
429.
We request that the clause is amended and restricted to companies which are not small or
medium sized enterprises so as to avoid imposing unnecessary compliance costs on a
broad range of individuals and smaller companies.
Clause 296 (section 312) – Duty of promoter to notify client of number
430.
We have noted above the imprecision of the phrase ‘substantially the same’ which also
occurs in clause 296(1)(b).
Clause 297 (section 313) – Duty of parties to notifiable arrangements to notify Board
of number, etc.
431.
The double duty imposed by clause 297 (1) means that each individual taxpayer will have
to make an assessment on how this legislation applies to him. As it is clear that many
taxpayers will fall within these provisions who are not the ostensible targets of them, this
will impose a further unnecessary cost on taxpayers.
432.
We request that the clause is amended so that a taxpayer needs only to include the
reference number on his or her return for the year in which the number is issued. The
taxpayer will be under the normal duty to reflect the transactions he has undertaken
accurately in his tax returns and the presence of the reference number will alert the
Inspector that a tax strategy has been implemented into which he may wish to enquire.
Clause 298 (section 314) – Legal Professional Privilege
433.
We request that the Revenue clarifies its interpretation of the interaction between legal
professional privilege and the duty to make a return under these provisions. Examples
would be useful to professional advisers and to taxpayers.
434.
As noted earlier, we are concerned that this provision should not create a competitive
advantage for those covered by legal professional privilege.
Clause 299 (section 315) – Penalties
435.
The level of this penalty is of considerable concern. Because it is clear that the provisions
will apply to many small transactions which are not the provisions’ ostensible target and
because there will be many transactions where it is uncertain whether the transactions
apply or not, a penalty of £5,000 will be a disproportionately high cost. Advisers advising
on such transactions will have no choice but to make protective returns to the Inland
Revenue. Even the simplest return is unlikely to cost less than, say, £300 in professional
time. That could be a very considerable additional compliance cost on ordinary taxpayers
and small businesses. The potential significance of these costs is dismissed in the RIA.
Clause 301 (section 318) – Interpretation of Part 7
436.
In a meeting at 11 Downing Street on 18 March 2004, chaired by the Permanent Secretary
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to the Treasury, the representatives of the Tax Faculty were given assurances that the tax
avoidance scheme disclosure proposals would be restricted to income tax, corporation tax
and capital gains tax. A similar assurance is given in the RIA. Clause 301(1) indicates that
‘tax’ for these purposes is to be defined much more broadly and we understand that its
scope will then be cut down by regulations.
437.
We would be grateful for confirmation that the new provisions will only apply to income
tax, corporation tax and capital gains tax. Are there plans to extend it to other taxes and, if
so, what is the proposed timetable?
Clause 302 (section 319) – Part 7: commencement and savings
438.
The application of these commencement provisions is extremely unclear. This is because
it is unclear how one distinguishes a single proposal from a number of similar proposals
and also how one determines whether notifiable arrangements implement a proposal.
439.
For example, if Firm A has identified a generic tax planning opportunity and
communicated its existence to a group of professional advisers before 18 March, meets
some of the clients of some of those firms after 18 March and proposes that those specific
clients undertake transactions implementing the strategy which they then do, has there
been one proposal or many? If there have been many proposals do the transactions
undertaken by each client implement only the generic proposal, or only the specific
proposal made to the particular client or both?
440.
We would welcome clarification of these provisions.
441.
Clause 292 (5) would not appear to be of any help because there would have been no
return made of the generic proposal so that sub-clause could not relieve the promoters of a
duty to make a return in relation to the specific proposals. Please confirm if it is the
Revenue’s intention that where there is a generic scheme in existence before 18 March
2004 which has been proposed to clients both before and after that date and which has
been implemented before and after that date that returns will be required:
(a)
in relation to the specific proposals made after that date; and
(b)
in relation to transactions taking place on or after 18 March which implement
specific proposals made before that date.
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PART 8
MISCELLANEOUS MATTERS
Clause 303 (section 320) – Exclusion of extended limitation period in England, Wales
and Northern Ireland
442.
We believe that the provisions may be contrary to EU law as there is no allowance for a
transitional period. As the Revenue are aware, this is contrary to the 11 July 2002
Judgment of the European Court of Justice in Marks & Spencer v Customs & Excise
(Case C-62/00, ECR [2002] I-6325), in which the relevant facts are identical. Citing
earlier Judgments, the ECJ held in that case that national legislation retroactively
curtailing limitation periods was incompatible with the principles of effectiveness and the
protection of legitimate expectation.
443.
In particular, the ECJ stated in its Judgment:
‘38. Whilst national legislation reducing the period within which repayment of
sums collected in breach of Community law may be sought is not incompatible
with the principle of effectiveness, it is subject to the condition not only that the
new limitation period is reasonable but also that the new legislation includes
transitional arrangements allowing an adequate period after the enactment of the
legislation for lodging the claims for repayment which persons were entitled to
submit under the original legislation. Such transitional arrangements are
necessary where the immediate application to those claims of a limitation period
shorter than that which was previously in force would have the effect of
retroactively depriving some individuals of their right to repayment, or of
allowing them too short a period for asserting that right.’
444.
If this clause is enacted, there will inevitably be litigation, with the costs of both sides
likely to be met out of the public purse.
445.
We therefore request that the clause is amended to allow for a transitional period.
Revenue response
We are well aware of the arguments that there should be a suitable transitional period
where time limits are altered or shortened. Our firm legal advice is that it is not necessary
to have a transitional period in the circumstances here.
14-4-65
PCB
29.9.04
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