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Finance Act 2014
21 July 2014

Finance Bill 2014 has received Royal Assent and is now Finance Act 2014. The final stage of the Bill passing into law took place on Thursday 17th July.

Among the measures which come into force at Royal Assent are the parts of the Bill relating to follower notices and accelerated payments, and to high risk promoters.

The final text of the Act can be read at http://www.legislation.gov.uk/ukpga/2014/26/contents/enacted/data.htm

Other documents relating to the Bill during its passage can be read at http://services.parliament.uk/bills/2014-15/finance/documents.html

George Crozier
Head of External Relations
21 July 2014

Media and Politics
 
Cross-border tax experts appointed
2 July 2014

Tax barristers Jonathan Schwarz (Temple Tax Chambers) and Jeremy Woolf (Pump Court Tax Chambers) have been appointed as CIOT representative and alternate on a new European Commission "Group of experts on removing tax problems facing individuals who are active across borders within the EU".

The Commission have set up the expert group to identify tax problems facing individuals who are active across borders within the EU and good practices that could remove or at least reduce those problems. The group will bring together stakeholders to look principally at elements of direct taxation that may affect an individual’s cross-border activity in the Single Market. Personal income taxation and inheritance taxation will be particularly focused on. However, if need be, the group may also look at other taxes that affect the mobility of persons, such as the taxation of vehicles and the taxation of e-commerce.

The group will first meet on September 9th and the work of the group is scheduled to last till the end of the year. Other members of the group are not currently known but it was expected there would only be around 20 members of the group in total from across the EU, primarily drawn from the arenas of tax, business, academia and wider civil society.

George Crozier
Head of External Relations
2 July 2014

Media and Politics
 
Finance Bill 2014 Committee of Whole House debates
19 May 2014

This is the second of a series of reports on the progress of this year's Finance Bill, as it goes through its various parliamentary stages.

This report covers the two days of committee of whole House debate. As previously noted, these reports focus on the aspects of the debates most relevant to the CIOT and our members, which is primarily the technical elements of the Bill, although the reports will aim to give a flavour of the main issues debated, which will often be more political.

A note on the stages the Finance Bill goes through appears here.
Links to the various debates are available here.

Overview

Committee stage is the stage of a Bill’s passage when it gets (in theory at least) detailed clause-by-clause analysis by MPs. Most Finance Bill 2014 clauses will be debated by a standing committee of 35 MPs ‘upstairs’ in a committee room, starting from April 29th. However the opposition gets a chance to choose a small number of clauses (generally the most contentious or those that help them make an important political point) to be debated in ‘Committee of the whole House’, ie. on the floor of the Commons. This year these were corporation tax rates, income tax rates, childcare, the transferable tax allowance for married couples, the bank levy and air passenger duty. Predictably all government clauses in these areas were approved and all opposition amendments and new clauses were rejected, with no noticeable rebellions.

Day One: Tuesday 8th April

Day one of the Committee Stage focused on corporation tax rates, income tax rates and childcare

Clauses 5 to 7 and Schedule 1– Corporation tax rate

Shadow Exchequer Secretary, Shabana Mahmood, tabled an amendment proposing a review of the next year’s cut to the main rate of corporation tax with a particular focus on the impact on businesses with fewer than 50 employees and whether alternative measures would benefit them more. Although a number of Labour members conceded that there were some benefits to be gained from the corporation tax cut, Mahmood claimed that it was mainly helping a minority of the largest corporations and said that a reversal back to 21% would be implemented if Labour attained power, in order to fund a business rates freeze and then cut.

Coalition members sharply criticised Labour policy to reverse to the cut in corporation tax and strongly rejected the need for a review. Conservative John Redwood led the attack, claiming that the policy would cause significant damage to those businesses which were benefiting from the CT cut. Priti Patel (Con) said that Labour’s corporation tax policy was a cynical attempt to pit small and big businesses against each other. Nigel Mills (Con) pointed out that in any case corporation tax was unlikely to be cut further than 20%, since if it was lower than the basic-rate income tax, it would create ‘interesting’ tax-planning opportunities.

Summing up, Exchequer Secretary David Gauke said that clauses 5 to 7 of the Bill provided further evidence that the Government were continuing to make progress towards the delivery of a simpler and more competitive tax regime. The minister said that, next year, this section of the Bill would be far simpler, thanks to the unification of the small profits rate and the main rate of corporation tax, as had been recommended by the Office of Tax Simplification. Gauke added that, for those outside the ring-fence regime, it would mean the end of the complex marginal relief system that currently captures 45,000 companies. It would also enable the Government to abolish the complex “associated companies” rules and replace them with a much simpler rule based on 51% ownership of a firm (which is what schedule 1 does). He noted that the CIOT had welcomed the abolition of the “associated companies” rules when this was announced.

Labour’s amendment was defeated 288 to 219. Clauses 5 to 7, and schedule 1, were agreed to.

Clause 1 – Income tax charge, rates, basic rate limit and personal allowance for 2014-15

Plaid Cymru’s Jonathan Edwards led debate on this clause, after tabling a new clause which would have required the Chancellor to publish a report on the impact of setting the additional rate of income tax at 50 per cent. Edwards claimed that the cut to 45p had disproportionately benefited the wealthy and this argument was repeated by others from the opposition benches during what was a highly politically charged debate. Edwards explained that the reason both the nationalists and Labour had tabled calls for a review of the policy was because parliamentary rules do not allow anyone other than the Government to propose legislation altering tax rates (known as financial initiative of the Crown).

Ian Swales (Lib Dem) reminded members of other measures the Coalition had implemented to increase tax revenue from the wealthy including the personal allowance withdrawal and capital gains tax measures. Sheila Gilmore (Lab) said that the Government’s tax changes had done little to improve the lot of the working poor. Leading for the opposition, Shabana Mahmood quoted statistics from the Government which showed that the Treasury lost £3billion as a result of reducing the rate from 50 to 45p in her support of the amendment.

Winding up the debate for the Government, David Gauke rejected the nationalist new clause and Labour’s amendment on the grounds that it would be illogical and unfair to reintroduce a tax rate that was ‘ineffective at raising revenue from high earners’ and that would end up making ordinary taxpayers pay more and risk damaging growth. The nationalist new clause proposing a review of the additional rate was defeated 295 to 231, and Labour’s amendment calling for the same thing was defeated 296 to 231. Clause 1 was passed.

New Clause 1 – Childcare provision

Labour’s Catherine McKinnell (Shadow Exchequer Secretary) proposed a new clause on childcare provisions which would require a review of the ways in which changes to the tax and childcare system could be used to increase the affordability of childcare. Labour’s rationale was that the Government has not adequately combatted the rising cost of childcare for working parents. She called on the Government to extend the free childcare that is available for three to four-year-olds. Lorely Burt (Lib Dem) reminded the Shadow Minister that the Government had announced in the Budget that the tax-free child care cost cap would be raised to £10,000. McKinnell responded that families where both parents work would be £2,073 a year worse off and that the raise would disproportionately benefit the wealthy.

Meg Hillier (Lab) said that the study proposed by Labour’s new clause could investigate how to support quality through a tax voucher system. She noted that childcare in Denmark is free for families on the lowest incomes: “the subsidy is tapered, depending on the family income - in this country, it would need to be done sensibly through the tax and tax credit systems - which means that three quarters, 76%, of Danish women are working”.

Nicky Morgan (in her final speech as Economic Secretary before her promotion the following day), dismissed the need for a review; the Government was committed to full flexibility and that could be realised through the provisions of tax-free child care, she said. Morgan re-emphasised that the Government had increased the child tax credit to £3,265 a year and touted other taxation measures aimed at easing the cost of living including the increase in the personal income tax allowance and the freeze in council tax. Labour’s new clause was defeated 286 to 226.

Day Two: Wednesday 9th April

Day two of the Committee Stage focused on the transferable tax allowance, the bank levy and air passenger duty.

Clause 11 - Tax relief for married couples and civil partners (transferable tax allowance)

This measure will allow someone earning below the personal allowance to transfer £1,050 of their allowance to their spouse or civil partner in the first year (provided that spouse or civil partner is themselves a basic rate taxpayer), with effect from April 2015. Labour oppose this policy, as do the Liberal Democrats, with the coalition agreement stating that the party’s MPs can abstain on the proposal.

Labour’s Shadow Economic Secretary, Catherine McKinnell, proposed an amendment calling for a review of the impact of the relief, and an assessment of alternative tax reliefs that would benefit a much greater number of families. She argued that the allowance was perverse and unfair, a poorly targeted use of resources and overly complex. The current proposals would, she said, offer tax benefit to only a third of married couples. It would exclude married couples and civil partners on the very lowest incomes where both spouses earn below the income tax personal allowance, couples where both spouses have incomes higher than the personal allowance, and couples where either spouse pays the higher rate or the additional 45% rate. Men would benefit from the policy more than women, she said. McKinnell cited representations from the Low Incomes Tax Reform Group when commenting on the need to make the allowance accessible. LITRG were pressing to ensure that a claim for the marriage tax allowance can be made on paper, as well as online, and for the claim/election process to be made as simple as possible – “preferably a joint election rather than separate claim and election.”

Conservative MPs defended the relief. Tim Loughton argued that in 13 years of power, Labour did ‘nothing’ to support the institution of marriage. Stewart Jackson said that the clause ‘may not yet be worth a huge amount, but it is of seminal importance in supporting marriage in the tax system’. David Burrowes refuted Labour’s claim that the Government want to ‘hive off men against women’, saying that recipient households would benefit as a household rather than on an individual basis. Other Conservative MPs also commented throughout the debate that the policy was a ‘start’ in the right direction, stating an aspiration to extend the transferable allowance to more married couples as time goes on. Responding to the debate, David Gauke, Exchequer Secretary, accepted that the 1.8 million couples in which both partners are non-taxpayers would not benefit from the relief. However, he said, “It is worth pointing out that since 2010 about 350,000 couples have become non-taxpayers because we have taken them out of income tax. It is impossible to provide an income tax cut for people who do not pay income tax.”

Labour’s proposal to amend the Bill failed 276-217. The clause was then approved 279-214.

Clause 112 - Bank levy (and debate on a bank payroll tax)

The Opposition, led by Shadow Financial Secretary Cathy Jamieson, proposed a new clause calling for a review of the feasibility of reintroducing a bank payroll tax (specifically on bankers’ bonuses), and of whether the additional revenue could be used to fund a job guarantee scheme for people in long-term unemployment (Labour’s policy). Jamieson also moved an amendment which would compel the Government to produce a report specifically detailing all the tax receipts (including corporation tax, the bank levy and bank payroll tax) received from banks since 2010.

Turning to the bank levy, Jamieson argued that given the ‘consistent failure’ of the Government’s levy to raise the projected amounts, it would appear not only that the Government have miscalculated its behavioural impact upon banks, but they have failed to accurately predict the impact on the banks of their cuts to corporation tax. Labour have labelled this the ‘secret tax cut’ for banks. Jamieson explained that Labour would increase the bank levy to raise an additional £800 million a year, in order to fund an expansion of free child care places for working parents of three and four-year-olds to 25 hours a week.

From the backbenches David Mowat (Con) expressed surprise that the Labour Party appeared to be concerned with variable pay but not with fixed pay: “Labour Members appear to be quite sanguine about a pay level of £2 million a year, but not about a pay level that consists of a £1 million basic salary and a £1 million bonus. That strikes me as rather odd.” Winding up the debate David Gauke said that there was no need for the Government to produce a separate report on the tax receipts from banks as HMRC already published annual statistics on PAYE, the bank levy, corporation tax and bank payroll tax receipts from the banking sector. Responding to Labour’s proposal of a repeat of the bankers bonus tax, he pointed out that the then Chancellor Alistair Darling had said in 2009 that the bonus tax should be a one-off.

Labour’s bank payroll tax new clause failed by 293 votes to 219. The amendment proposing a report on tax receipts from banking fell by 286 votes to 217.

Clauses 72-74 - Air passenger duty

Jonathan Edwards of Plaid Cymru moved a new clause and new schedule proposing the devolution of air passenger duty (APD) to the Welsh Assembly. He said that APD devolution was an essential part of the recommendations of the Silk Commission (the cross party UK Government commission on devolution in Wales). He argued that the Westminster government has ‘cherry picked’ its favoured recommendations and it had been a slap in the face for Wales when it was omitted from the Wales Bill, which is currently progressing through Parliament. Edwards argued that the devolution of the tax would increase Wales’ ability to attract long-haul flights and also significantly improve its competitiveness as a regional economy. Angus MacNeil of the SNP explained that the Scottish Government aim to reduce APD by 50% within the first term of an independent Parliament, and to abolish it completely when circumstances allow, with a proposal for a straight reduction in bands. He proposed amending the Bill to allow for the devolution of APD on flights to all destinations.

Henry Smith (Con) stated that he would love to see the abolition of APD, saying that the rate is uncompetitive, with only Chad charging more than the UK. David Rutley (Con) spoke in support of government policy, arguing that it was right and fair that the Government had brought private jets into the scope of APD. From the Labour frontbench, Catherine McKinnell said that Labour remains to be convinced of the merits of devolving APD.

Responding to the debate for the Government, David Gauke said that the devolution of duty for Northern Ireland was in specific response to Northern Ireland’s unique circumstances. It shares a land border with Ireland, leading to a risk of flights relocating from one part of the shared land mass to another. The Government recognised that risk and acted to ensure that Northern Ireland was not disadvantaged. He argued that variable rates within the mainland of the UK could create the same market distortions which Northern Ireland sought to prevent.

Plaid Cymru’s proposal to amend the Bill failed by 9 votes to 254. The SNP proposal was not voted on. The Government’s clauses were approved.

George Crozier
CIOT Head of External Relations
Monday 19 May 2014

Media and Politics
 
Finance Bill 2014 Second Reading Debate
16 May 2014

This is the first of a series of reports on the progress of this year's Finance Bill, as it goes through its various parliamentary stages.

For those not familiar with the parliamentary process for scrutinising bills (which is anyway a bit different for Finance Bills), it runs like this:
First reading - Presentation of Bill, no debate
Second reading - Full day's debate (about 6 hours) on the floor of the House of Commons on any aspect of the Bill MPs want to raise
Committee of Whole House - The opposition (mostly Labour but with a bit of say for the smaller parties) choose the key bits of the Bill which they want to have high profile debate and votes, with the opportunity to propose amendments, on the floor of the House of Commons. Two days of debate on these.
Standing Committee - c35 MPs, appointed from each party in proportion to their representation in the House of Commons, debate the remaining clauses and schedules of the Bill in order, in a committee room 'upstairs', with the opportunity to propose amendments.
Report stage - One or two days (probably two) debate on the floor of the House with another opportunity to present amendments.
Third reading - One hour debate on the Bill as amended, immediately after report stage.
Lords second reading - Peers debate any aspect of the Bill they wish to raise. (NB. There is no opportunity for Peers to amend the Finance Bill, and third reading is taken without debate.)

The CIOT, our Low Incomes Tax Reform Group and our sister body the Association of Taxation Technicians, take a close interest in tax legislation and provides briefing to parliamentarians debating the Bill. (We remain, of course, strictly politically neutral.) The reports on this blog are a by-product of our work following the Bill. They focus on the aspects of the debates most relevant to the CIOT and our members, which is primarily the technical elements of the Bill, although the reports also aim to give a flavour of the main issues debated, which will often be more political.

This year’s Finance Bill is now over halfway through its committee stage. This report covers second reading debate. Future reports will cover the two days of committee of the whole House, and standing committee debates.

Finance Bill Second Reading Debate – Tuesday April 1st

The second reading of the Finance Bill took place on April 1st. Second reading is when the House debates the Bill as a whole, including the things they would have liked to see in the Bill but which are not there. No amendments are made to the Bill at this stage, and most discussion tends to be political rather than technical.

Chief Secretary to the Treasury Danny Alexander opened the debate by explaining that the Bill’s measures will “boost growth and investment, deal with those that cover avoidance and aggressive tax planning, consider those that help working people and savers, and finally come to pensioners.” Leading for the opposition, Chris Leslie, Shadow Chief Secretary to the Treasury, moved Labour’s ‘reasoned amendment’ to the motion to approve the Bill’s second reading. This argued for rejection of the Bill “because it fails to address the cost-of-living crisis which will see working people worse off at the end of this Parliament than at the beginning; because while working people are £1,600 a year worse off it prioritises a tax cut for millionaires of on average £100,000; because it offers a marriage tax allowance which will help only a third of married couples, rather than a 10 pence starting rate of tax which would help millions more families; and because it fails to set out measures to tackle rising energy bills, get young people into work, boost housing supply and help families with childcare costs within this Parliament.”

Frowns and smiles

As might be expected, Labour speeches in the debate were generally pretty downbeat about the Bill, the Budget, the cost of living and the economy generally. For David Rutley (Con) the ‘sea of gloom’ on the Opposition Benches reminded him of A.A. Milne: “‘It is snowing still,’ said Eeyore gloomily…‘And freezing… However,’ he said, brightening up a little, ‘we haven’t had an earthquake lately.’” With the Ukraine in mind, his colleague Charlie Elphicke said Labour MPs reminded him of the charge of the Light Brigade in the first Crimean war: “They were very game, very determined and, in complete denial of the situation in which they find themselves, carried on regardless.”

Government contributions were more upbeat. One Labour MP suggested that: “The Conservative party will clearly go into the next election using “Happy Days Are Here Again” as its theme tune.” Jacob Rees-Mogg (Con) was accused of adopting a Marie Antoinette “let them eat cake” attitude. Willie Bain (Lab), meanwhile, had a contender for extended metaphor of the day, suggesting that “If this Government were a football club, the team would be at the bottom of the league, facing relegation at the end of the season, with rising clamours for the manager to be given the sack.” There were calls, he said, for the return of ‘the special one’ to come and lead the blues – “no, not José Mourinho, but Boris Johnson”.

Dealing with tax avoidance

Two Conservative backbenchers made speeches critical to some extent of the Government’s approach to anti-avoidance. The first of these was Mark Field. He told a story about a group of investors in the creative industries. “Their experience should be a warning sign to any investor who has sought to engage in an open and transparent relationship with HMRC… Some years ago, the group who came to see me had approached HMRC with their model for private investment in the UK creative industries. After extensive discussion on its structure, they were not only given the green light but told that their vehicle was exactly the sort of thing that the Government were envisaging. On the basis of this understanding, the group proceeded to invest more than £1 billion of risk capital into the British film industry, leading to the production of more than 60 home-grown films.” As a precaution the investors elected to place themselves on the DOTAS (Disclosure of Tax Avoidance Schemes) register. “Because tax avoidance measures are now so widely drawn, it has been common practice to err on the side of caution by signing up to HMRC initiatives of this sort,” Field explained. However, after “a flurry of high-profile scandals, or so-called scandals, came to light whereby film investment vehicles had been used by celebrities to slash their tax bills… HMRC threw a blanket of suspicion on to any DOTAS-registered scheme. Keen to establish their vehicle’s legitimacy as swiftly as possible, and exhausted by HMRC’s consistent mismanagement of their case, as they see it, the investors elected to put their scheme before an independent tax tribunal.” Field accused HMRC of “deliberately and actively” delaying the sitting of this tribunal.

Field called on the Government to rethink their accelerated payments proposals. He explained: “Legitimate investors understand the need to deal quickly with the tens of thousands of outstanding mass-marketed avoidance cases currently clogging up the courts. They simply propose an exception in the case of existing DOTAS-registered schemes whose promoters have taken all reasonable measures to enable a dispute to be brought before the statutory appeals tribunal.” More generally he warned: “Alarm bells should be ringing throughout Parliament as we preside over [an] unprecedented transfer of power to HMRC.” He wanted assurance “that legitimate investors’ previously agreed, transparent vehicles are not at some point going to be subject to unplanned for, up-front tax liabilities in the event of a sudden change to the rules by HMRC”.

Another Conservative, Jacob Rees-Mogg, also expressed reservations about the Government’s approach to anti-avoidance. He observed: “In the Budget and the Finance Bill there are schemes for investing in films and television programmes that actively encourage tax avoidance. Such schemes become part of Government policy for growing the economy. Governments then get very upset when people use the tax avoidance schemes… for purposes that the Government had not thought of. That strikes me as a fault of the legislative process and an incompetence of the legislators”. The way forward was, said Rees-Mogg, simpler tax law.

Accelerated payments were also raised by Shabana Mahmood, Shadow Exchequer Secretary, in the context of questioning the Government’s revenue predictions for the policy, which she thought looked unduly optimistic. She was one of a number of MPs on the opposition benches to remind the Government of their overestimate of the revenue which would flow from the Swiss deal (predictions of £4 billion since reduced to £1.7 billion).

Responding to the debate, Exchequer Secretary David Gauke, dealt only briefly with these comments. (In fairness he had only 14 minutes to respond to the whole debate.) Gauke stated that accelerated payments “will apply only when a DOTAS notification has been made or, in future, when the case relates to a general anti-abuse rule and HMRC believes there is a dispute. None the less, final rights will be determined by the courts.” On film finance he said that the problems were a result of the first scheme introduced by the previous Government. “The current film finance regime does not have the same difficulties as its predecessor.”

Business taxes

Danny Alexander argued that the Government’s changes in the tax system have been responsible for companies locating and expanding their operations here in the UK, but he admitted that the job is not yet done. Justifying raising the Annual Investment Allowance again Alexander said that if businesses had increased investment by just 10% in 2012, the level of GDP in this country would be £12 billion higher today. However he was challenged by Sheila Gilmore (Lab) who asked him to explain why his Government argued for cuts in investment allowances when they first came into office. Alexander replied that the Government’s first priority was to bring down the ‘uncompetitive’ corporate tax rate (then 28%). Alexander said that he believed the new tax relief for investment in social enterprises would unlock up to £500 million of additional investment in social enterprises over the next five years. He argued that the three new reliefs to support employee ownership would make the sale of a business into an employee ownership structure more attractive, thereby improving the structure of the UK economy.

On the bank levy, Labour’s Chris Leslie criticised the lack of revenue it had produced since its introduction and also the Government’s plan for ‘a secret tax cut for banks’ (in reality a tax shift, with foreign banks picking up a larger share of the burden) which would reduce the tax liability of some large banks even further. Mark Field (Con), whose constituency includes the City of London, said that efforts to raise ever-more money from banks could hinder the sector’s ability to lend money. Jacob Rees-Mogg (Con) quantified this by suggesting that Labour’s proposed £800 million extra levy on the banks would reduce the ability of banks to lend by between £8 billion and £12 billion. Leslie disagreed with this. He argued that lending has been below 2010 levels and that tax revenue must be raised one way or another.

Leslie announced that Labour would oppose the Government’s decision to abolish stamp duty reserve tax, describing it as “a tax cut of £145 million to the investment management industry.” Leslie said that a Labour Government would reinstate the tax and use the money to abolish the ‘bedroom tax’.

Personal taxes

Debate in this area fell pretty clearly along party lines. Government MPs, from Danny Alexander opening the debate to David Gauke winding it up, and most speakers in-between, highlighted the Government’s record on improving the lot of working people through rises in the income tax personal allowance. Opposition MPs highlighted the various ways in which low and middle income households were worse off, as well as the Government’s alleged enthusiasm for helping the rich and/or undeserving (“soft on the banks and hard on ordinary working families” in the words of Willie Bain (Lab)).

Some Labour MPs made the point that those on the lowest incomes aren’t benefiting from the personal allowance increases. Andy Love highlighted that 17% of taxpayers earn less than the soon-to-be-personal allowance of £10,500 and wondered whether the Government should be placing their focus upon the least well-paid. Willie Bain attempted to capitalise upon the apparent discrepancy which exists between Universal Credit and the greater tax exemption for those with low or no taxable earnings. Responding to Love, Alexander said the increased personal allowance had helped to improve incentives to work and bore some responsibility for the stronger employment performance seen in recent years. Responding to a charge by Bain that the Government are ‘giving with one hand and taking with the other’, Alexander claimed that the Universal Credit is structured in such a way which allows for a much simpler system and also produces more incentives for those with low incomes to work.

Jonathan Edwards (Plaid Cymru) challenged Chris Leslie (Lab) to explain why Labour only want a temporary return to the 50p rate as opposed to a permanent return. Leslie explained that the 50p rate needs to be a policy for the next Parliament due to the size of the deficit. He also clarified his justification, saying manifestos are made from one Parliament to the next and that tax policy should never be written in perpetuity. Responding to Jacob Rees-Mogg (Con) on whether he believed the 50p rate was inherently good for the symbolism it brings to bear, even if it does not raise money, Leslie answered that the significant sum which would be collected would alleviate the burden of the deficit from low and middle earners.

Pensions and pension contributions

There were some interesting exchanges over tax relief on pension contributions. Mark Field asked Danny Alexander whether he was concerned that the Opposition would say that the generous tax benefits on pensions would be more difficult to justify if the annuity arrangements (in other words, the guarantee that this money will be used in retirement) are no longer in place. Alexander stressed that it was “a long-established principle that there should be tax relief on pension contributions” but the Government had sought to limit it and he was “not convinced that changing the rate of relief would alter very much the amount of money spent, because of the lower limits that we have already imposed.” He implied strongly that the Lib Dems would fight the next election proposing further restrictions, flagging up that more than half of the ‘about £35 billion’ of relief on pension contributions every year goes to the top 10% of earners. Jacob Rees-Mogg (Con) reminded the Chief Secretary that money is also taxed when it is withdrawn from pension funds, and argued that it would be unfair to tax people’s money twice. Alexander recognised this point and said that no party was proposing any change to the tax-free lump sum arrangements. However, he said, some would see it as unfair for someone “to receive tax relief at 40% on the way in, but only pay tax at 20% on the way out”. He stressed that the Government has no intention of going further than the reforms that it has already announced.

There was a broad welcome for the far-reaching pension changes, and not only from Government MPs. For Labour Chris Leslie said that annuities are out of date and failed too many pensioners. Kevan Jones (Lab) speculated what the effect the changes would have upon the annuities market and also the cost it could impose upon the taxpayer, such as housing benefit or future care costs. Richard Harrington (Con) commented on the advice which will be given to pensioners who wish to pursue an alternative to the previous system whereby, for good and bad, the decision was handled by an insurance company through the annuity system. He was worried that the ‘advice’ would only amount to a call centre somewhere, with people who may be trained only in a limited way having to advise people on the biggest decision of their lives and finding it very difficult to do so. He argued that a lot of thought must go into how such people are informed.

The Bill passed its second reading.

George Crozier
CIOT Head of External Relations
Friday 16 May 2014

Media and Politics
 
Wanted: New Tax Judges
1 May 2014

The First-tier Tribunal (Tax Chamber) and Upper Tribunal (Tax and Chancery Chamber) are looking for tax professionals with appropriate legal experience to be appointed judges of the two tribunals.

The attached letter from Mr Justice Warren, President, Upper Tribunal (Tax and Chancery Chamber) and Judge Colin Bishopp, President, First-tier Tribunal (Tax Chamber) provides information on forthcoming selection exercises for the appointment of judges to the two tribunals.

The letter also gives details of a presentation for interested candidates, to be given by judges of both chambers, and the Judicial Appointments Commission, which will take place at the Law Society's Hall in Chancery Lane on 28 May 2014, commencing at 6.30pm.

The judicial authorities are keen to disseminate this information as widely as possible within the profession. They are keen that the selection is made from the broadest possible pool of eligible candidates, and that prospective candidates are given the opportunity to learn more about the work of the Tribunal by coming to the presentation.

Stephen Coleclough
CIOT President
Thursday 1 May 2014

Other areas
 
Tax names in Power List
8 January 2014

Accountancy Age’s new ‘Financial Power List’ for 2014 is out, and features CIOT President Stephen Coleclough at number 25.

The magazine notes: “CIOT presidents only have a year to make their mark, and Coleclough wasted little time in making his agenda clear after accusing the UK of a "slapdash" attitude to Europe. Instead, he set his sights on improving the UK's approach to Europe on issues such as compliance with EU law, broadening the institute's education provisions and engaging further with the ongoing public debate on tax.”

Other tax professionals in the 50 include Paul Aplin, ICAEW tax faculty technical committee chair and AC Mole & Sons tax partner, at number 5 and John Whiting, tax director of the Office of Tax Simplification and non-executive director of HMRC – and former CIOT President and Tax Policy Director – at 44.

In addition to the usual crop of politicians, including Exchequer Secretary to the Treasury David Gauke at 19, other tax people in the 50 include Richard Murphy of Tax Justice UK at 29, Andrew Bonfield, FD of National Grid and head of the Hundred Group's tax committee, at 35, and Algirdas Šemeta, EU taxation commissioner, at 41.

You can read the full list here.

George Crozier
CIOT External Relations Manager
Wednesday 9 January 2014

Media and Politics
 
After the conferences (5): Sunlight, loopholes and unsafe havens
18 November 2013

The debate on tax avoidance and other compliance issues at the party conferences

This is the fifth of a short series of blog articles looking at what we know about the direction of tax policy following this year’s political party conference season. These are based on the extended version of an article by CIOT External Relations Manager George Crozier that appears in this month’s edition of Tax Adviser.

Both the Government and the Opposition announced measures to close anti-avoidance ‘loopholes’ while campaigners kept the pressure on politicians over tax havens and big companies not paying their ‘fair share’.

Still plenty of mileage in closing down ‘loopholes’

“Nothing is certain except death and taxes. And a conference announcement from Danny Alexander on tax avoidance”, is how the Chief Secretary trailed the now customary section of his Liberal Democrat conference address on ‘going after tax dodgers’. He claimed that, thanks to the Government’s efforts, by 2015 HMRC would be ‘clawing back an extra £10bn a year’.

There were three announcements on this front in Alexander’s speech:

1. “Closing the loophole that allows private equity shareholders to siphon money out of their firms while dodging the intended income tax”(Alexander claimed that the “vast majority” of private equity partners were exploiting loopholes that allow them to pay corporation tax of 22% on their earnings rather than 45% income tax; in a strong response, the BVCA disputed that this was a loophole; after the announcement there was a brief consultation on this proposal, which has now closed)

2. “Closing the loophole that allows partners in partnership firms to structure their staff arrangements so that they avoid paying the correct amount of income tax”

3. A new campaign targeting ‘the rogue minority of landlords’ who fail to pay the right tax due on the rents they receive (Alexander claimed there was £500m owed to HMRC)

Not to be outdone, Labour leader Ed Miliband announced at the start of his party conference that a Labour Government would scrap the ‘bedroom tax’ (a cut in housing benefit for social housing tenants deemed to have a spare bedroom) by “abolishing the shady schemes of tax loopholes for the privileged few which the Tories keep inventing.” Specifically these were:

1. “Tax cuts for hedge funds” (Labour would reinstate the stamp duty reserve tax charge, which the Government are planning to abolish. While Labour characterise this as a tax cut for hedge funds the Government argue that it affects pension funds more)

2. “The billion pound black hole created with a scheme for workers to sell their rights for shares” (that is, the Government scheme, which came into effect in September, which involves employees potentially giving up their statutory rights over unfair dismissal, redundancy and flexible working in order to get between £2,000 and £50,000 in shares as an "employee shareholder". If the shares are sold at a profit they will be exempt from capital gains tax)

3. “Tackling scams which cheat the taxpayer in construction” (specifically Labour plans to stop construction firms attempting to reduce their tax bills by falsely listing workers as self-employed. Accusing the current government of ignoring the issue Labour said that the starting point would be criteria proposed by the last Labour government whereby workers would be automatically deemed to be treated as employed for tax purposes if they met criteria that most people would regard as obvious signs that they were employees, rather than self-employed subcontractors)

Balance and transparency

Tax avoidance by multinationals continues to have a high profile on the conference circuit, largely the result of events organised by campaign groups such as ActionAid. Ministers and shadow ministers alike acknowledge that some companies have been unfairly pilloried for taking advantage of legitimate reliefs, but feel that others (unnamed) have deserved the flak they have taken. In terms of currently live issues, transparency is widely seen as key.

Exchequer Secretary David Gauke made this point at an event hosted by the Taxpayers’ Alliance. Challenged by a tax adviser that taking advantage of allowance should not be seen as a sin, the minister said it was unfortunate that some people failed to distinguish legitimate use of allowances from artificial, contrived behaviour. It was important that the debate becomes better balanced, and important that tax advisers contribute to that debate, he said.

Shadow Exchequer Secretary (now Shadow Economic Secretary) Catherine McKinnell made a similar point at the CIOT/IFS fringe meeting at Labour conference. McKinnell criticised some companies for ‘going to extraordinary lengths to avoid paying their taxes’ but said others under attack were making use of deliberate and legitimate reliefs. Others had been pilloried for not paying enough corporation tax when the reason for this was massive investments they were making. There was a need, she said, for balance and transparency in the debate. As a party Labour were undertaking a review on corporate tax. Transparency was key to this, for example through the proposal of country by country reporting.

However McKinnell emphasised the need for policy-makers to take on board the strength of feeling among ordinary people that there should be a tax system which is fair, transparent and offers a level playing field to individual households and businesses. She acknowledged that the UK is generally a tax compliant country but said that this should not be taken for granted. She had noticed a rise in the number of people saying ‘with all this avoidance and evasion going on I must the only mug in town, paying my taxes with no questions asked’. That was, she said, a very dangerous road to go down, and trust needed to be restored.

Labour’s Prosperity and Work Policy Commission is currently consulting on ‘Corporate Tax: Transparency and reform’. The consultation paper states: “We need to look at how the tax system can be reformed to make sure that it works properly in the modern world and for society today and delivers outcomes that are clearly and transparently fair. We also need to reform the rules that allow companies to have a lot of business in Britain but pay little, or no, tax in this country."

Also at Labour conference, at an ActionAid / Christian Aid event, Margaret Hodge MP, chair of the Public Accounts Committee, said Labour “would be mad” not to place tax avoidance at the centre of its campaign for the 2015 general election. She said the issue resonated with the electorate for two reasons. First, because avoidance created “a deep sense of unfairness” at a time when public services were being cut. Secondly, because the sums were “huge”. She was frustrated that Labour had not run with the issue like it should have, in her view. The party should have admitted ‘we got it wrong’ under Gordon Brown’s government. At the same event Ivan Lewis MP, shadow minister for international development, criticised the Government for not having done the groundwork for any serious progress on tax compliance at the G8: “You cannot rock up to a summit and expect to do a deal”, Steven Turner, assistant general secretary of Unite, said tax avoidance, and the promotion of avoidance, should become a criminal offence.

The tax policy paper adopted by the Liberal Democrats in Glasgow included proposals for greater tax transparency from multinationals, country-by-country tax reporting, increased disclosure of intercompany transactions, and publication of tax settlements. It also proposes strengthening the General Anti-Abuse Rule to a General Anti-Avoidance Rule, with a preclearance system.

However there were voices around defending avoidance, if you looked for them. Veteran Conservative MP John Redwood said that people should not get outraged as “this is what companies should do”. He added: “I know there are extremes, but there is a lot to be said for tax competition.” He thought competition might drive corporation tax down to the mid teens. Mark Littlewood, the director-general of the Institute of Economic Affairs, is one of the more outspoken defenders of tax planning on the political scene, and spoke at a number of events over the conference season. He began one typically combative speech with the admission ‘I’m a tax dodger’, though this referred to no more than possession of an ISA and a willingness to bring duty free cigarettes into the country. On multi-national tax avoidance, he took Starbucks as a case study, highlighting that the firm claimed that their brand was a major part of them selling in the UK but was not designed in the UK.

The havens and the have-nots

Tax havens came under fire at a series of fringes held by ActionAid at all three conference (hosted jointly with Christian Aid at two of them) under the title: ‘Tax Havens: Have we done enough?’ At the Lib Dem event a speaker from Christian Aid welcomed recent progress that had brought the issue of tax havens to the front of the G8 agenda but warned that the UK needed to clear up "its own back garden" (Overseas Territories and Crown Dependencies) first. However he was rebutted during questions by Sir Philip Bailhache, Jersey’s Foreign Minister, who was in the audience. Bailhache attacked the panel for distributing "inaccurate information". He said that Crown Dependencies were not tax havens and were "entirely transparent". He explained that all Crown Dependencies had submitted action plans to government and pointed to a recent World Bank report that had praised Jersey's "unparalleled" transparency.

Also at the Lib Dem conference event, Lord Andrew Philips of Sudbury, the vice chair of the all party parliamentary group (APPG) on anti-corruption (and a former tax lawyer), described the impact of tax avoidance as "dire" for the country. He attacked the "artificial" nature of modern banking tools that aided "unscrupulous" tax avoidance and helped Barclays pay just two per cent on its corporate profits last year. His criticism did not go unchallenged though. Again these claims were challenged during questions, with a party member (and tax adviser) in the audience intervening to argue that Barclays paid no tax because of big losses during the financial crisis.

At the Conservative event, the Foreign Office minister with responsibility for the British overseas territories and Africa, Mark Simmonds, said transparency was key in dealing with tax havens and improving tax compliance generally. The Government was consulting on whether beneficial ownership registers should be public rather than just available to tax authorities. (The Government have since announced the UK’s will be.) Simmonds said there were issues around building capacity in developing countries’ governments to enable them to deliver the services to allow people in those communities to benefit from those tax revenues. Tax evasion and competitive tax jurisdictions should not be confused, the minister told the fringe; as there was nothing wrong in having lower tax in one area than another, but there was in harbouring tax evaders. Heather Self, a tax adviser at international law firm Pinsent Masons, argued that developing countries needed to focus on building robust taxation regimes from the ground up, and building stronger systems to make sure tax revenue was not lost. She said it was worth considering whether an excise tax of x per tonne might be easier to collect, for countries reliant on extractive industries.

Labour, meanwhile, are consulting on policy on tax havens. In spring 2013 the party’s Prosperity and Work Policy Commission published ‘Tax avoidance: tax havens’, a consultation paper setting out a direction of travel and containing options for further consideration, ahead of a final policy document promised in early 2014. The paper suggests that Labour “could consider what the UK can learn from [the US Foreign Accounts Tax Compliance Act (FATCA)] and whether there is scope to build upon it in the UK.” It says the party should look at how the UK’s rules on transfer pricing differ from those of other OECD countries. It asks for views on whether a Labour Government should (a) lead by example, prioritising increasing transparency in UK crown dependencies and overseas territories, or (b) focus on reaching international agreement to tackle problems caused by the use of tax havens. The paper picks out resourcing of HMRC as a key issue. The paper sets out four principles which Labour’s ongoing work on tax avoidance should build on. Summarised these are (1) businesses should pay their fair share, (2) the tax system can create incentives such as allowances and R&D tax credits, (3) the need for a competitive system, and (4) international coordination.

Taxman under fire

A number of speakers on the party conference circuit criticised HMRC for being either too weak or too chummy with big business to enforce the tax rules properly.

At an event hosted by Oxfam, on the social impact of tax dodging, former Lib Dem Treasury spokesperson Lord Matthew Oakeshott bemoaned the fact that authorities came down “like a ton of bricks” on illegal tax bills, but not on richer individuals and big companies with corporate tax lawyers and the means to afford to undertake such avoidance. He claimed that lead figures at HMRC had been “far too close” to big business and big accountancy firms, and joked that the tax authorities were like a “fat policeman trying to catch a Ferrari” in pursuing big businesses like Vodafone and Goldman Sachs for tax claims.

Competing with Oakeshott on the metaphor front was another Lib Dem peer, Andrew Philips, who, speaking during the tax debate on the conference floor, said that. as a former tax mitigation lawyer, he thought there was ‘disgraceful’ and ‘immoral’ tax planning going on with inadequate enforcement from HMRC. He quoted someone who was ‘then head of HMRC enforcement’ telling him HMRC needed to be given the tools to do the job (it was unclear how long ago this was). ‘It’s David without his sling versus Goliath’ was Phillips’ assessment of the fight between the Government and tax avoiders.

It wasn’t only Lib Dem parliamentarians who were critical though. Labour’s Margaret Hodge, chair of the Public Accounts Committee, used a fringe meeting to repeat calls for HMRC to take a tougher approach, taking some companies to court to test the legality of their methods, naming and shaming the worst offenders, and demanding greater transparency from Companies House. Andrea Leadsom MP, a Conservative member of the Treasury Committee, said that HMRC rather than big businesses was to blame for the row over corporation tax payments. Leadsom said that the problem was "our own incompetence" which needed to be addressed.

Dividing lines

The divides between the parties on compliance issues are narrower than might be anticipated. The strongest rhetoric tends to come from the left and from backbenchers rather than ministers and their shadows, but broadly speaking the agenda here is the same for all parties. All support the OECD’s Base Erosion and Profit Shifting project and a register of beneficial ownership for companies, for example.

The main areas where there is some difference between the parties are:

General anti-avoidance rule (ie a strengthening of the current anti-abuse rule): The Lib Dems favour one, many in Labour are sympathetic, while the Conservatives are unsupportive

Country by country reporting: favoured by Labour and the Lib Dems, but the Conservatives are unconvinced

‘Shares for rights’ and stamp duty reserve tax – not really avoidance (though there is potential for abuse with the former) but Labour classify both as loopholes. Both Labour and the Lib Dems oppose ‘shares for rights’, the Conservatives support. Labour want to keep stamp duty reserve tax, the Conservatives to scrap it

More realistically the extent to which this is an issue at the election is likely to come down to whether the public perceive that the Government are doing 'enough' in this area, which is likely to come down to the media profile of the issue more than anything else.

George Crozier
CIOT External Relations Manager
Monday 18 November 2013

Media and Politics
 
After the conferences (3): Rich pickings
7 November 2013

Taxing the rich and high earners, and land and property

This is the third of a short series of blog articles looking at what we know about the direction of tax policy following this year’s political party conference season. These are based on the extended version of an article by CIOT External Relations Manager George Crozier that appears in this month’s edition of Tax Adviser. The CIOT is strictly politically neutral and nothing in this article should be interpreted as endorsement for or opposition to any of the policies mentioned.

The prospects of a return to a 50p additional rate of income tax dimmed during the conference season, but high earners are not out of the firing line entirely.

Return to 50p rate unlikely

Liberal Democrat conference representatives (the Lib Dems don’t have delegates) narrowly backed the leadership in a vote on what the top rate of income tax should be. By 224 votes to 220 they voted for an option in the party’s tax policy paper to keep it at 45p rather than adopting a policy of returning it to 50p. This followed appeals from both Chief Secretary to the Treasury Danny Alexander and Business Secretary Vince Cable. Alexander argued considerations of the overall tax take should trump symbolic rises. Bristol West MP Stephen Williams, a Chartered Tax Adviser, also spoke in the debate, saying taxes should be "effective economic tools for raising money, not political status symbols", and a 50p rate would be "the highest marginal rate of any developed economy".

At Labour conference the additional rate was in some respects a ‘dog that didn’t bark’. There was plenty of criticism of the cut from 50p to 45p (the ‘tax cut for millionaires’ as Labour have dubbed it) but no prominence was given to reversing it. A policy document published during the conference stated: “Labour would not be cutting the 50p income tax rate, but would be using the money to protect tax credits instead.” This remains the preferred formulation, stating what Labour would do (or rather not do) now rather than what it would do in the future. It probably remains in the balance whether Labour would reverse it, with a decision to be taken closer to the election.

Most Conservatives, of course, would like to eliminate the additional rate altogether. John Redwood MP, who chairs the party’s Economic Affairs Committee, argued at a fringe meeting that the top rate should be brought back to 40% as quickly as possible. Calling the 50p rate Gordon Brown’s ‘poison pill’, he said, ‘we do have to tax the rich but the best way to maximise the take is to set a rate low enough they will stay here and they will pay it’. He added: “As a socialist who liked taxing the rich, you can rest assured Mr Brown would have set the rate higher when Chancellor if he thought it would have raised more revenue”.

But pension contributions could face a further squeeze

Labour would restrict pension tax relief for ‘the very highest earners’ to the same rate as the average taxpayer, Shadow Chancellor Ed Balls announced in his conference speech. Labour had already floated earlier in the year a cut of higher rate relief from 45% to 20%. While this is probably just a reiteration of that policy – applying only to those earning over £150,000 – there has been speculation it may also apply to some, or even all, of those paying only the 40% rate. The Telegraph suggested it might include reforms where every saver would receive tax relief of 30% or less, regardless of their income.

Labour are at pains to make clear they only want to raise taxes for the very wealthiest - "those privileged few right at the top" as then Shadow Chief Secretary (since promoted to Shadow Work and Pensions Secretary) Rachel Reeves characterised them. Questioned by the Daily Telegraph Reeves said people earning £60,000 a year were not "rich" and would not face tax increases under a Labour government.

The Lib Dems no longer favour limiting pension tax relief to the basic rate, but do want to cap the lifetime fund limit at £1 million. Justifying the proposal Danny Alexander said the tax relief on pension saving was the biggest relief of all but 58 per cent of the benefit went to the richest 10 per cent of the population. A party briefing argues that a £1m lifetime allowance “would still be a generous regime – even at the existing low annuity rates, a £1m pension pot for a typical pensioner would provide a tax-free lump sum of £250,000 on retirement plus an inflation-linked pension of around £25,000 a year (or £45,000 per year fixed). In reality the vast majority of employees will not reach a pension pot of £1m, and therefore will be unaffected by our proposal.”

And then there’s the mansion tax

Now all but certain to appear in both Labour and Lib Dem manifestos, the mansion tax would clearly be one of the first policies inked in to any potential coalition agreement between the two parties. Both are clear it would be levied on properties worth over £2 million though only the Lib Dems have said what level they would levy it at (1% of the value in excess of £2 million). Both parties have said they would use the proceeds of the mansion tax to cut income tax at the lower end. For Labour it would fully fund their 10p starting rate. For the Lib Dems it would be one of the sources of revenue for further increases in the personal allowance. Both Lib Dems and Labour will be pleased by a poll for BBC Sunday Politics that found that 86% of people support a mansion tax.

While the mansion tax has been reaffirmed as party policy for the Lib Dems there is still a lot of thinking going on in this area. Party President Tim Farron floated the idea of a ‘super mansion tax’ (the Evening Standard’s characterisation rather than his) with different rates for different property values (eg a higher rate for properties worth, perhaps, £4 million or £5 million plus). However it is clear the party leadership are not keen on this idea. David Laws, who is in charge of writing the election manifesto, said politely he was ‘cautious’ about the proposal and supported the original proposal as passed by conference.

The door though, appears to be closed to a mansion tax in the event of a second Con-Lib coalition. David Cameron responded to a question from Andrew Marr, "After the election, no mansion tax if you are PM?", with the answer, "That’s correct, yes." Given the Lib Dems have made a mansion tax a priority policy that makes it look like a second coalition agreement would be a lot harder to put together than a first. However it is always possible the two parties could compromise on extra council tax bands. Debates like this, where the parties (including Labour, and especially the Lib Dems) are asked what would be their ‘red lines’ in a hung Parliament, will no doubt take up increasing amounts of time between now and May 2015, especially if Labour’s lead in the polls narrows (as immediate post-conference polls suggest it has).

Intriguingly, at Lib Dem conference, Vince Cable revealed that there had been discussions in government about a possible deal where the top rate would have gone down to 40p in return for a mansion tax being introduced. It has been reported that George Osborne was open to this but David Cameron vetoed it. Cable orchestrated an indicative show of hands for party members to say whether such a deal would have been one they would have supported. This was close but there was a slight majority against such a deal.

Elsewhere on property and land taxes

Boris Johnson is no fan of a mansion tax, having called the idea ‘crazy’ and ‘absurd’ in the past, and now the Mayor of London has set his sights on getting stamp duty reduced. Johnson urged the Chancellor to “look at the baleful effects of stamp duty in London, which is stamping on the fingers of those who are trying to climb the property ladder.” He said the “sheer cost of stamp duty… means that there is less circulation in the market and it's stopping things moving along.”

More broadly in the area of land and property tax advocates of land value taxation (LVT) are becoming increasingly vocal. At a fringe meeting on this topic at Lib Dem conference Vince Cable backed LVT and revealed that the idea was being actively discussed at "a high level" inside the Coalition. Cable said that the land tax agenda was coming to the fore for a number of reasons. These included difficulty nailing down existing tax bases, inequality and the accumulation of wealth and a housing crisis which was being exacerbated by land banking. Additionally existing sources of taxation were proving difficult to sustain politically. Stamp duty was increasingly being recognised as inefficient. Council tax was massively unpopular. Business rates were becoming unsustainable. Cable noted that ‘quite a few’ Tory and Labour people were interested in this area too. Campaigners have launched a high quality 30 minute film (available on YouTube) making the case for LVT.

Questioned on land value taxation at Labour conference, Ed Balls said there were some complexities which mean it doesn’t always hit who you want to hit. Then Shadow Exchequer Secretary (since reshuffled to Shadow Economic Secretary) Catherine McKinnell said there were many challenges and would be winners and losers, who could include people on low incomes. She argued that mansion tax was thinking along the same lines and would be ‘fairly transformational’.

‘Jewellery tax’ off the agenda, but CGT increase proposed

The Liberal Democrats will fight the 2015 general election on the message that the Government should tax wealth rather than hard work. This was the central theme of the substantial tax policy paper adopted by the party in Glasgow. However that will be shown in ways other than an actual ‘wealth tax’. In addition to a mansion tax and further restrictions on pension tax relief (see above) the party is proposing to increase capital gains tax rates further, taxing capital gains at the same rates as the top slice of an individual’s income, and reducing the CGT annual exempt amount to £2,000 (though the personal allowance would be transferable to capital gains if not fully used on income). The party would also reintroduce indexation allowances, “in order to ensure that no-one is taxed on the portion of a ‘gain’ which has arisen simply due to inflation – and therefore ensure that no-one is penalised for holding assets over the long term.”

In summer 2012 some media coverage suggested the Lib Dems were proposing to introduce a wealth tax that went beyond property (the press dubbed it a ’jewellery tax’). This was a proposal for consultation and has been rejected. As a party briefing explains, “we invited party members (and others) to comment on the idea of a French-style ‘net asset tax’, as this was one of the ideas that had been suggested by contributors to the consultation process up to that point. Ultimately the idea was rejected by the working group.”

Dividing lines

The main dividing line on taxing the rich and high earners is simply:

The rich aren’t paying their fair share (Labour and the Lib Dems) versus the view that they are (Conservatives)

Often this presents itself in a different way, with the view that tax increases on the rich beyond a certain point (which advocates of this view believe we have reached) are counterproductive and won’t raise additional money (Conservatives, and most vocally of all the low tax lobby on the political right) versus those who disagree with this view (Labour and the political left). The Lib Dems take a slightly more nuanced position on which areas and tax levels this applies to.

On specifics the following dividing lines are most significant:

Additional rate back up to 50p (political left) versus keeping it at 45p (Lib Dem and, for now, Conservative leaderships) versus cutting it to 40p (political right)

Pro-mansion tax (Labour and Lib Dems) versus anti-mansion tax (Conservatives, though some are more opposed than others)

George Crozier
CIOT External Relations Manager
Tuesday 5 November 2013

Media and Politics
 
After the conferences (4): A divide opens on business taxes
6 November 2013

Business taxes and regulation, and economic competiveness

This is the fourth of a short series of blog articles looking at what we know about the direction of tax policy following this year’s political party conference season. These are based on the extended version of an article by CIOT External Relations Manager George Crozier that appears in this month’s edition of Tax Adviser. The CIOT is strictly politically neutral and nothing in this article should be interpreted as endorsement for or opposition to any of the policies mentioned.

There is a growing divide between the two largest parties over business taxation, whether big firms and being favoured over smaller ones, and whether ‘international competitiveness’ is a medal of honour or short-hand for a race to the bottom.

Small business good, big business bad?

The ‘prawn cocktail offensive’, when an opposition Labour Party under Tony Blair and Gordon Brown wooed business in general and financial services in particular, seems a very long time ago. Announcements and rhetoric at Brighton were designed to send the message that this is an opposition prepared to stand up to big business and force them into line. This included a ‘double whammy’ for bankers of a higher bank levy and a reintroduced tax on bonuses (see below). Perhaps most significantly, the cut in corporation tax from 21% to 20% due to take effect in April 2015 would be reversed, and the money used to cut business rates. (NB. Unless the devolved administrations follow suit the move would apply only to businesses in England.)

It is clear that Labour have lost any fear they might have had of upsetting big business. Commentator Paul Waugh characterised it vividly: “Fatcat bankers will pay for more childcare, fatcat energy firms will be forced to halt price rises, fatcat developers who hoard land will be told to 'use it or lose it'.” But beware of interpreting this as Labour becoming anti-business per se. It would be more accurate to say the underlying message was ‘small business good, big (and irresponsible) business bad’. The corporation tax increase for a business rates cut was the obvious example of this, but there was plenty of rhetoric to reinforce it too. Small firms are “the businesses of the future”, ‘short-changed’ by the Coalition and Labour is going to ‘put it right’. A policy review document published during the conference states: “we need a new approach to business taxation. In an era when money is tight we must prioritise support for the hundreds of thousands of small businesses that are struggling, not the biggest businesses that have seen large tax cuts in recent years.” That said, there is dispute over whether the benefit of the business rates cut would principally go to small businesses. Labour claim it would, but it has been reported that the majority of business rates (about two thirds) are paid by larger firms such as the big retailers. Labour’s cut will apply to units with a rental value of under £50,000 – but that will include many large chains of high street shops.

The Conservatives, unsurprisingly, have sought to paint Labour’s stance as anti-enterprise generally. At the CIOT’s fringe meeting (held jointly with the IFS) in Manchester, Exchequer Secretary David Gauke said Labour’s announcement ‘sent a terrible signal out to international investors’. The reaction of business groups to the announcement was more mixed, with the CBI leading the critics while retail groups and small business bodies were more welcoming. At the CIOT/IFS fringe in Brighton, Catherine McKinnell, Shadow Exchequer Secretary at the time, said that Labour did support big business as well but helping small business was the priority.

The Conservative message has been more unambiguously pro-business than Labour’s. The corporation tax cut was firmly defended – indeed it was paraded proudly – at all times. On business rates there is an increasing view among Conservatives that something needs to be done and it is highly probable that, at some point before the election, something will be done. Nevertheless there is clearly disquiet among many Conservatives too about the level of business rates and it is highly probable that, at some point, the party will announce a response of its own.

Bashing the bankers

In for particular fiscal punishment from Labour would be the financial services sector. A Labour Government would bring back the additional tax on bankers’ bonuses. Alongside cuts in pension tax relief this would fund a ‘Compulsory Jobs Guarantee’ for young people and the long-term unemployed. Labour would “work with employers to make sure there will be a paid job for all young people out of work for more than 12 months and adults out of work for two years or more, which people will have to take up or lose benefits”.

Labour would also hit bankers with an increase in the bank levy of an extra £800 million a year. Justifying this, Shadow Chancellor Ed Balls said that, over the last two years, the levy had raised £1.6 billion less than the Government said it would. The money would be used, for families where all parents are in work, to increase free childcare places for 3 and 4 years olds from 15 hours to 25 hours a week.

The proposal is one of three measures the party would implement to fund scrapping the ‘bedroom tax’ (a cut in housing benefit for social housing tenants deemed to have a spare bedroom). The other two are reinstating the stamp duty reserve tax charge, which the Government are planning to abolish (Labour characterise this as a ‘tax cut for hedge funds’ though the Government argue that it affects pension funds more), and tackling false self-employment in the construction industry.

Producers versus predators, part 2

As well as being pro-small business Labour are clear they are pro-responsible business. This is in part a development of the producers versus predators rhetoric of two years ago. It includes the enforcement of social responsibility in business, such as the policies on energy bills and compulsory apprenticeships. It includes outlawing zero hours contracts where they exploit people and tougher enforcement of the minimum wage. It includes the Cox review proposals for tax changes to incentivise long-term investment. It is also likely to feed through to policies on corporate taxes, especially around avoidance.

Sir George Cox’s review on short-termism was referenced by Ed Balls in his speech, as the Shadow Chancellor announced that Labour are proposing to “change takeover rules, and corporate incentives and reform our tax system to stop short-term asset-stripping and support long-term investment”. Balls provided no more details and the Cox review is not explicit about how this should be done, though it suggested tapering of both CGT on shares (from 50% in year one to 10% after year ten) and liability for tax on dividends (from the prevailing rate of income tax in year one to 0% after year ten).

The need for responsible capitalism was also a theme of Business Secretary Vince Cable’s keynote speech at Liberal Democrat conference in Glasgow. The revelation of “industrial scale tax avoidance by prominent companies” had left trust “very badly damaged”, he said. Among the measures he touted as the Government’s response to this was establishing an open register of who owns companies, although he conceded that there was a lot more work still to do in this area. Cable also revealed that he has asked the Low Pay Commission “to advise how we might achieve a higher minimum wage without damaging employment”. Cable told The Guardian that employers could be compensated for paying the higher wage with a cut in National Insurance.

The minimum wage and a living wage might not seem natural Conservative territory but there is growing support for Conservative moves in this area. Boris Johnson said he was a "firm believer" in the London living wage and urged more companies to pay it. Conservative MP Gavin Barwell wrote an article arguing that as well as raising income tax to the minimum wage level the Government should “look at increasing the national minimum wage without increasing costs for business by making changes to the tax system (which would be funded by the savings in tax credits and in-work benefits).” A rise in the minimum wage is thought to be being carefully examined by Boris’s brother Jo Johnson, new head of the Number Ten Policy Unit.

Goodbye ‘competitiveness consensus’?

Labour are aiming to redefine what people think of as ‘economic competitiveness’. This was particularly visible in the passage in Ed Miliband’s speech where he took on David Cameron’s rhetoric about ‘the global race’, adding: “what he doesn't tell you is he thinks for Britain to win the global race, you have to lose”. It was, he argued, a race to the low-waged, deregulated, laissez-faire bottom. Labour, by contrast, would focus on high skills, good wages and an active industrial policy.

This suits the Conservatives who are happy to fight on this territory. In Manchester George Osborne and David Cameron both took on Ed Miliband’s argument that the ‘global race’ meant a ‘race to the bottom’ and tried to turn it against him. Osborne accused Miliband of essentially making a Marxist argument, and warned that “attempts to fix prices and confiscate wealth crush endeavour and blunt aspiration” with working people, not the rich, suffering most. Cameron was blunter still, stating that global companies can set up anywhere in the world: “And these companies base their decisions on some simple things: like the tax rates in each country. So if those taxes are higher here than elsewhere, they don't come here. And if they don't come here, we don't get those jobs.”

While both parties have slightly more flexibility to their positions than the speeches suggested there does now appear to be a fairly clear ideological dividing line in this area, for the first time in decades, and it is symbolised by the direction of travel on corporation tax.

W(h)ither corporation tax?

Does corporation tax have a future? Exchequer Secretary David Gauke responded to that question on the fringe at Conservative conference with a firm ‘yes’. First the case was a practical one – one can collect tax from people who otherwise wouldn’t be paying (ref. foreign shareholders). There would be a large deadweight cost if we were to abandon it. Second, it is administratively easier. Third, others do it. We are able to have an attractive location for investment even though we have corporation tax, he pointed out. He was responding to a number of speakers at a Taxpayers’ Alliance meeting who had argued in favour of a ‘Single Income Tax’ (a recommendation of the TPA’s 2020 Tax Commission) which would mean abolishing corporation tax in its current form, as corporate income would only be taxed when it left the company.

The future of corporation tax was also raised on the fringe at Lib Dem conference. Stephen Williams, then co-chair of the party’s backbench Treasury Committee, expressed concern over a potential ‘race to the bottom’ on corporation tax. He felt 20 per cent should be as low as we go. He would be pro co-operation at an OECD level to agree no further cuts. He felt the 45p income tax rate was already the highest top rate among developed countries. He would not be supportive of any increase to it.

Industrial strategy back in fashion

Industrial strategy is back in fashion. In his keynote speech Business Secretary Vince Cable explained that the central purpose of the Government’s industrial strategy is to deliver sustainable growth by “rebalancing the economy across the UK in favour of exports and investment”. He said the partnership between government and business in sectors such as motor vehicles, aerospace and the creative industries had led to success stories which should be celebrated. He cited the relaunching of large scale apprenticeships as one way in which the Government was “attacking the country's scandalous neglect of skills”. Cable concluded: “We are building a genuine cross-party consensus around these government interventions so that they endure. But, make absolutely no mistake, without Liberal Democrats they would not have happened.”

Labour, unsurprisingly, are also strongly pro a proactive industrial strategy. At a fringe meeting I put it to Chuka Umunna, the party’s Shadow Business Secretary, and to the CBI’s John Cridland, that having an industrial strategy meant favouring particular sectors at the expense of others, and posed the question of whether there was a role for tax in that, as well as whether one of those sectors should be professional and financial services. In response Umunna drew a parallel with the Olympics, noting we had backed sectors there that could win us medals. Cridland said the CBI had identified seven sectors worthy of particular attention – these included the professional services sector. (The CBI’s industrial strategy report can be read here. The CBI is calling for a government commitment to a CT rate of 18p in the long term, and the development of a roadmap for personal tax competitiveness.)

Perhaps more surprising is the positive reference in David Cameron’s speech to the Government’s “industrial strategy”, and his picking out of particular sectors (green jobs, aerospace jobs, life science jobs) which the Government was actively supporting. Doubtful Margaret Thatcher would ever have done that!

Labour’s small business taskforce

Regularly referred to during Labour’s conference was the final report of the party’s Small Business Taskforce, which was published in March. This wide-ranging review contains 100 recommendations including:
• Publish a bottom-up review of HMRC processes from the customer perspective
• Scope the achievability and cost to benefit of single-point-of-contact relationships at HMRC
• Examine the case for simplifying complicated tax reliefs, recycling any saving back into support for business
• Equalise IT and NI thresholds, and combine class 2 and class 4 NI into one payment
• Develop a procedure for pre-approval (advanced assurance) for innovative tax structures
• Consider 0% CGT for founders of businesses with over 100 employees
• Increase the VAT registration threshold to £100,000 turnover
• Clarify definitions of self-employment so wealth-creators can ensure they are on the right side of the law
• Extend (S)EIS tax advantages to debt investors and company founders
• Extend Entrepreneurs Relief to dividends and reduce the 5% threshold to 1% or below

This does not represent official Labour policy but does feed into the party’s policy review.

Dividing lines

The main dividing lines between Labour and the Conservatives on business taxation and related areas are clearer than for a long time. In simplified form:

Has the Government been unduly favourable to large businesses at the expense of small ones? Yes (Labour) versus No (Conservatives).

Do we need low corporate taxes and personal taxes for high earners in order to be internationally competitive? Yes (Conservatives) versus No (Labour).

Should the Government be doing more to direct and incentivise business to behave more responsibly or does that constitute excessive regulation / undue interference in the free market? Yes (Labour) versus No (Conservatives).

On each of these the Liberal Democrat position is more nuanced, with the party’s instincts on balance probably a bit closer to the Conservative position on the first two and the Labour position on the third.

George Crozier
CIOT External Relations Manager
Wednesday 6 November 2013

Media and Politics
 
CIOT and IFS Lecture
5 November 2013

On Wednesday 30th October, the Chartered Institute of Taxation (CIOT) and the Institute for Fiscal Studies (IFS) hosted a successful lecture on the future of corporate taxation, delivered by Professor Michael Devereux, Director of the Oxford University Centre for Business Taxation. The lecture, held in the elegant surroundings of the Royal Society of the Arts in central London, was followed by a lively panel discussion comprising Professor Devereux, Nick Macpherson (Permanent Secretary to HM Treasury), Bill Dodwell (Head of Tax Policy at Deloitte) and Paul Johnson (Director of the IFS), who chaired it.

After CIOT President Stephen Coleclough introduced the lecture and speaker, Professor Devereux was quite unambiguous in his answer to the lecture title ‘Are we heading towards a corporate tax system fit for the 21st century?’: “no”. Critical of political efforts to address what he viewed as systemic problems, he articulated that the corporate tax system would not last in its current form before setting out what the international tax system was trying to achieve. Devereux identified a number of sometimes conflicting governmental objectives: attracting inward investment, raising revenue and ensuring that profits are taxed “somewhere” (the latter point, he acknowledged, was open to wildly differing interpretations).

A key question raised in the lecture was whether governments want to enforce the residence principle on interest and royalties. On this point, Devereux reminded the audience that a significant proportion of investors in UK companies are not UK resident. Source v residence was a key theme of his lecture and he pondered whether there should be greater focus on creation of economic activity consistent with taxing people on their income on a residence basis or with taxing earnings from intangible property where it is owned.

After talking about the technicalities of trans-national competition (including rates, interest deduction, CFC rules, patent box and residence rules), Devereux spoke about risk and opined that it made no sense for a wholly owned subsidiary to be treated as bearing risk when it is actually the shareholders who are bearing it. Risk could not be borne by a company, only by people, he explained.

The speaker then moved onto the OECD’s Base Erosion and Profit Shifting (BEPS) project which is looking at whether current tax rules allow for the allocation of taxable profits to locations different from those where the actual business activity takes place and if not, what can be done to change this. He stated that BEPS was focusing on the right question, but that its approach was flawed.

Acknowledging the impetus of the BEPS project and the pressing need for reform, he illuminated his point by remarking that the second largest foreign investor in China is the British Virgin Islands! He concluded that the OECD approach implied that we should no longer base tax on the principle of residence and that BEPS was “a confused, complex mass of arcane, arbitrary and sometimes illogical rules.”

The lecture moved on to a brief consideration of alternatives to the current corporate tax system. Formulary apportionment was one possibility. Devereux acknowledged that there were severe problems in getting global agreement on this. He also mooted a destination based tax and a simpler tax base in order to increase tax revenue.

The panel discussed key issues raised in the lecture and then took questions from audience members. Deloitte’s Bill Dodwell – who is also Chair of the CIOT’s Technical Committee – spoke first and cautioned against over-optimism on BEPS as the scale of consensus (forty-two countries working together) needed was unrealistic in terms of agreeing anything radical. His sentiments were echoed by Nick Macpherson from the Treasury who said it was an achievement that the issue even made it onto the G20 agenda.

Dodwell advised against apportionment and suggested that Corporation Tax (CT) was not a failed tax but rather that risk allocation had been manipulated by large multi-national corporations at the expense of national economies. He concluded that we should remain optimistic that we could “get something better” which should reduce some elements of artificiality but that any agreement would invariably not placate all involved parties. Macpherson was candid in saying that working in the Treasury had made him rather pessimistic and cynical and that he increasingly adhered to a pragmatic approach in trying to get the necessary amount of revenue in. Responding to Dodwell and Macpherson’s shared scepticism that an international agreement would be difficult to reach, Devereux responded that BEPS represented a once in a hundred years chance to change the system for the better.

A number of questions were posed by the audience. Edward Troup of HMRC asked the panel to reflect on the importance of operating within a legal framework and about public perception that companies ought to pay tax. He emphasised that it was important to gauge public mood in order that the system was seen to be operating legitimately. Macpherson and Dodwell felt that this was an important point to make, remarking that the public had entrenched views on what is fair and noting that tax is a political issue. Macpherson remarked that part of the problem was that people do respond to incentives – perhaps too much!

Heather Self, of Pinsent Masons, asked if BEPS would benefit developing countries. Nick Macpherson responded that there are potential spill overs and that some developing countries don’t have the necessary infrastructure to raise CT; he expressed some degree of optimism that BEPS would help. On this point, Professor Devereux remarked that the complexity of the system was the primary concern for developing countries.

Concluding, Professor Devereux remarked that, on corporation tax, we still don’t know if it falls on rich capital owners or (relatively) poor employees. He said that it would be nice think we have an idea of what we want to tax rather than just adding more and more to the system.

This lecture marked the first in what will be a series of lectures hosted by the CIOT and IFS aimed at promoting debate among policy-makers, opinion-formers and the wider tax and economics communities on the future of the UK tax system. Further lectures will be held in 2014.

IFS Conference

James Knell
CIOT External Relations Officer
Tuesday 5 November 2013

Media and Politics
 

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