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Scottish independence and principles in tax
10 September 2014

How do you design a tax system? The Scottish Government has said that it wants its tax system to be based on the principles of the Scottish economist, Adam Smith: these are fairness, certainty, convenience and minimising the compliance burden.

Tax specialists often refer to other principles in addition, such as simplicity, proportionality, effectiveness, presumption against double taxation and neutrality; but these are simply features of the main principles. For example, simplicity is essential to certainty – you cannot expect taxpayers to know their obligations if taxes are over complex.

At the CIOT, we think that when designing tax policy and systems, there are further important features of a good tax system: there must be good public education about how the system works; the system must be coordinated with the rest of government policy – especially the benefits system – and not be drawn up in isolation; there must be a fair balance between the powers of tax collectors and the rights of taxpayers; and the practicalities of dealing with the tax system should be taken into account through consultation and careful parliamentary scrutiny.

Devolution and independence

Opportunities

Independence would afford an opportunity for Scotland to develop a tax system and tax authority that matches these principles. Devolution of taxes offers a similar opportunity, but it is necessarily more piecemeal and only applies to the devolved taxes.

Independence offers the opportunity to design a new system for tax, welfare and employment, by providing full control of all taxation and expenditure levers, tax design, collection and implementation. The Scottish Government would have an opportunity to re-examine the tax framework as a whole and to design a system, if it wished, based upon specific Scottish circumstances, preferences and principles.

Risks

A significant risk is over how to deal with the post-independence regime transition. Currently, the Scottish Government proposes continuing the UK system until it can institute change. It will then make amendments, introduce new laws and repeal old laws as necessary.

An implication of this approach is that once the current UK and Scottish laws were in place, there could be more resistance by taxpayers and tax authority alike to each further change, no matter how gradual. This is because the debate that precedes tax reform tends to focus on winners and losers of a particular tax change rather than considering wider results such as how individuals or groups of taxpayers are treated by the system as a whole. This may prevent the achievement of a tax system that lives up to the principles of Adam Smith.

The Scottish Government would need to develop a clear plan for how it might migrate, over time, towards its own modern Scottish-specific tax system. However, going for a “big bang” birth of a totally new system without trial has its own risks.

The risk of devolution, of course, is that while devolved taxes are dealt with under one framework, the reserved taxes will continue to be dealt with under the UK framework, making it hard for anyone to take a strategic overview of the system.

Conclusion

The Scottish Government has said it wishes to base Scotland’s tax system on the design principles set out by the Fiscal Commission: simplicity, neutrality, stability and flexibility. These align with the principles of Adam Smith. They are sound principles, but there is a tension and therefore a balance will need to be found between some of them. There will also be the inevitable desire any government has to tweak the system to support particular groups (eg families with children) and incentivise particular behaviour (eg environmentally-friendly actions). Whatever their other merits every step in these directions is likely to make the system less neutral and less simple.

The tax system interacts with various other systems, in particular the welfare benefits system. People travel and companies trade beyond national borders. It is essential to take into account all these interactions when developing tax policy and designing a 21st century tax system.

Moira Kelly, Chair of the CIOT sub-committee on Scottish Taxes
Chartered Institute of Taxation
Wednesday 10 September 2014

NB. The CIOT is a strictly non-partisan organisation and is strictly neutral in the referendum campaign. This posting is intended to inform and nothing within it should be interpreted as advocating or opposing any of the options mentioned. We are pleased to have been closely involved in discussions on the devolution of tax powers, working with both the Westminster and Scottish Governments, regardless of their political complexions, to assist them at a technical level in the implementation of their objectives.

Media and Politics
 
Scottish taxation - the referendum and beyond
9 September 2014

On Thursday 18th September the people of Scotland will vote on whether to become an independent country. In the run up to the vote the CIOT will be blogging about what the tax implications of a yes or a no vote might be and how they might affect people who live and work in Scotland. This series will cover the main taxes, including income tax, National Insurance, corporation tax and VAT amongst others, providing a practical insight into how they might be applied and what their effects are likely to be. This first article looks at what is on offer from the unionist parties in the event of a no vote.

Á la carte or set menu?

If Scotland votes ‘yes’ next week that will clearly be a momentous decision and the expectation will be that huge changes are on the way in pretty much every aspect of Scottish governance, including the tax system. Less recognised is that substantial changes – in tax in particular – are set to take place even if Scotland votes to remain within the UK.

Legislation has already been passed to devolve Landfill Tax to Scotland and to replace Stamp Duty Land Tax with a Scottish Land and Buildings Transaction Tax, both from April 2015. These will be administered by a Scottish tax authority, Revenue Scotland, which has already been established in statute. A separate Scottish tax tribunal will hear appeals in relation to devolved taxes. A Scottish ‘general anti-avoidance rule’, or GAAR, more restrictive than its UK counterpart (also a GAAR, but a ‘general anti-abuse rule’), will be applied. Additionally, while income tax would continue to be administered by HMRC, from April 2016 a new Scottish rate of income tax would be introduced, giving the Scottish Parliament the power to raise or lower income tax rates by up to 10p in the pound, though only in lock step, moving all three current rates by the same amount. Council tax and business rates are already fully devolved to Scotland.

However it appears that these changes, introduced by the UK Parliament’s Scotland Act 2012 and a number of subsequent Acts of the Scottish Parliament, would not be the end of the story. The three unionist UK parties have all promised greater tax (and other) powers if Scots vote against independence. On Sunday UK Chancellor George Osborne declared: “You will see in the next few days a plan of action to give more powers to Scotland: more tax powers, more spending powers, more plans for powers over the welfare state.” Those hoping for an actual list of powers to be devolved will have to be patient though, as the plan of action is a schedule for agreeing which powers will be devolved rather than the list of powers itself. There will be a consultation through the autumn leading to a white paper in January.

So we will have to wait and see what emerges (and of course this will only happen if Scots vote ‘no’ on the 18th). Nevertheless, by looking at the declared starting point – the separate proposals now on the table from the three main UK parties – we can gain some idea of the likely direction of further tax changes.

Personal taxes

Income tax is our biggest national revenue raiser, generating about a quarter of all tax receipts across the UK. As mentioned above the Scottish Parliament already has some income tax powers, and further changes have already been legislated for. But these only apply to varying the three existing rates (20p, 40p and 45p), and require all three rates to be changed in lock step (ie. all three rates need to be changed together).

All three main UK parties have announced their intention to further devolve income tax to varying degrees. Labour proposes increasing the maximum variation allowed from 10p to 15p, and also proposes new Scottish Progressive Rates of Income Tax, so that the Scottish Parliament can increase – but not reduce – the rates of tax in the higher (40p) and additional (45p) bands, giving them the option of restoring the 50p rate for top earners. Under this arrangement Scots would only be able to cut the 45p rate if the basic rate was cut as well.

The Conservatives and Lib Dems would go further, both proposing that Scotland should be allowed to vary the different income tax rates independently and also set the size of the various income tax bands. However setting the size of the personal allowance would be reserved to Westminster, allowances and reliefs more generally (including rules on tax relief for pension contributions) would remain a Westminster prerogative and the administration of income tax would remain the responsibility of HMRC. Additionally both parties propose that tax rates on income generated from savings and investments would be reserved to Westminster to protect the single market in financial services across the UK.

The other big tax levied on income is National Insurance. The unionist parties have stated that while National Insurance could be devolved in theory, the transfer of the tax would be unsuitable due to its association with welfare spending on pensions and other benefits, neither of which have been proposed by the unionist parties for devolution (though the Conservatives have floated giving Holyrood ‘more responsibility’ on cash benefits such as housing benefit and attendance allowance which are closely related to devolved policy areas).

The Liberal Democrats are alone among the three parties in wanting Capital Gains Tax and Inheritance Tax devolved. The party proposes that Scottish rates of CGT would be payable by Scottish taxpayers, irrespective of the location of the capital gain, and everyone domiciled or deemed to be domiciled in Scotland would pay the Scottish Inheritance Tax on their estates. Labour had been sympathetic to devolving CGT but its Devolution Commission report in March 2014 concluded that it should remain reserved, as a result of potential administrative complexities and the potential for tax avoidance. Labour also opposes devolving IHT. The Conservatives have similarly rejected the prospect of devolving the two taxes, saying that they have low-visibility and a low-yield in Scotland.

All three parties are wary of devolving excise duties. They all oppose devolution of alcohol and tobacco duties, citing the potential to increase illegal trafficking between different parts of the UK (the Conservative case), that it would create economic distortions (Labour) and EU rules and other technical arrangements (Lib Dems). Devolution of fuel duty is also broadly opposed, though Labour express support for the idea of derogation to allow a lower rate of fuel duty to be charged in some remote rural areas (presumably allowing Holyrood to take further what has already been introduced by Westminster), and also acknowledge the possibility of assignment of revenue from fuel duty in Scotland if various obstacles can be overcome. Labour had considered devolving Vehicle Excise Duty but have since rejected this. Labour also explicitly reject devolving Insurance Premium Tax and betting and gaming duties (the other two parties have not mentioned these and are therefore presumably also opposed to their devolution).

The one duty that has some support for devolution is Air Passenger Duty. Both Conservatives and Liberal Democrats support devolving APD while Labour takes a more open position, saying that devolution should not be progressed until further consideration has been given to the environmental impact and how else the tax might be reformed.

Business taxes

All three UK parties have ruled out the devolution of corporation tax. The Conservatives argue that a separate rate would be uneconomical to collect on a small scale and would not generate a reliable yield (indeed they say it is the least suitable of all taxes for devolution). Labour have said differential rates of corporation tax within the UK would be uneconomical and incite a ‘race to the bottom’ in UK taxation. The Lib Dems think that variable rates within the UK would encourage negative economic behaviours. However, the Lib Dems also stated that they would be in favour of assigning corporate receipts generated in Scotland in order to provide an incentive to improve the economic position of Scotland, add to the overall Scottish tax take, and reduce reliance on an equalising payment from the UK government.

There is similarly little support for devolving powers over the taxation of North Sea oil and gas (which is dealt with by a distinct tax regime). Labour’s report explains that while it would be technically possible to devolve oil revenues, doing so would push Scottish finances towards a ‘fiscal cliff’ and place the future of Scottish public services at unacceptable risk. Conservatives and Lib Dems are also opposed, though the Lib Dems add that consideration should be given to the establishment of an oil fund, when the deficit situation has been brought under control, allocating the proceeds to the benefit of Scotland, England, Wales and Northern Ireland on federal principles.

VAT is the second biggest revenue raiser from Scottish taxpayers. However EU rules require all member states to apply a common rate of VAT within their jurisdictions, ruling out its devolution. Both the Conservatives and Labour suggest that, but for this, it would be a good candidate for full or partial devolution. EU rules do not prevent assignment of Scottish VAT revenues, however. The Conservatives propose ‘serious examination’ of the case for a share of VAT receipts raised in
Scotland being assigned to the Scottish Parliament, saying Scottish Ministers would get the benefit of any increase in economic activity in Scotland and would thereby reap a fiscal reward were their economic policies to prove effective. Labour can see the case for assignment, but ultimately come down against it believing it would import a high degree of risk and volatility into the Scottish Budget, without providing any tools to manage that risk.

The Westminster Government has already legislated for the devolution of the Aggregates Levy to the Scottish Parliament and has committed to devolve the levy to the Scottish Parliament when EU state aid clearance has been given. This has cross-party support. There is no identifiable support for the devolution of another ‘green tax’, the Climate Change Levy, to Scotland. Labour argues that creating a separate Scottish climate change tax system and schedule would result in economic distortions. The other two parties do not mention the tax.

Summary

In conclusion, based on the published recommendations (links below) of the three main UK parties, any consultation on further tax devolution in the event of a ‘no’ vote on the 18th is likely to focus around personal taxation, and income tax in particular. There is some support for devolving Air Passenger Duty, and to a lesser extent Capital Gains Tax and Inheritance Tax. A key part of the debate is likely to be whether there can be greater assignment of the revenues from particular taxes in Scotland and, if so, which taxes. There appears to be little support for devolution of additional business taxes to Scotland.

George Crozier, Head of External Relations
Matthew Oliver, External Relations Officer
Chartered Institute of Taxation
Tuesday 9 September 2014

NB. The CIOT is a strictly non-partisan organisation and is strictly neutral in the referendum campaign. This posting is intended to inform and nothing within it should be interpreted as advocating or opposing any of the options mentioned. We are pleased to have been closely involved in discussions on the devolution of tax powers, working with both the Westminster and Scottish Governments, regardless of their political complexions, to assist them at a technical level in the implementation of their objectives.

Further reading

Labour proposals

Conservative proposals

Lib Dem proposals

Media and Politics
 
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
 

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