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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
 
After the conferences (2): Boon for basic rate taxpayers
4 November 2013

Income tax and the broader tax cutting agenda

This is the second 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 Liberal Democrats, Labour and the Conservatives are likely to go into the next election promising to cut income tax bills further for basic rate income tax payers.

Raising the threshold

Lib Dem leader and Deputy Prime Minister Nick Clegg gave a strong indication at Liberal Democrat conference that increasing the income tax personal allowance to the level of the National Minimum Wage (currently around £12,300) would be one of his "red lines" in any coalition talks after the next election. The proposal was the headline in a Lib Dem tax paper adopted at the conference. In a TV interview Clegg went further. While he declined to reveal which policies he would ‘die in a ditch for’, he said: "I can give you a clue that tax fairness will of course be one of the signature tunes for the Liberal Democrats. We are committed as a party - and I am committed to this - to raising the allowance further so that everybody on the minimum wage pays no income tax." The achievement of raising the personal allowance to £10,000 was a fixture of all the big speeches of the week. Clegg, Alexander, Business Secretary Vince Cable and Party President Tim Farron all held it up as the party’s proudest achievement.

The Lib Dems have said that they would phase this change in in stages over the course of the next parliament. It would be paid for through the other tax changes the party proposes to make, such as introduction of a Mansion Tax, Capital Gains Tax and pension tax reform, and a range of measures designed to tackle tax avoidance. (These will be covered in later blog posts.)

While the Lib Dem move came as little surprise, more unexpected were post-conference reports suggesting that further increases in the personal allowance may be the Conservative tax priority at the election too. In the week following the conference the Financial Times quoted ‘one of the Conservatives’ most senior figures’ as saying: “We will have to see if the numbers add up nearer to the election, but of course we are very keen to do it” in relation to increasing the allowance to £12,500. A cabinet member went further, insisting the policy would be pushed through come 2015. He said it would carry well on the doorstep and enable the party to answer Labour’s populist interventions on energy bills and the 10p tax band. The Lib Dems, seeing the prospect of their flagship policy becoming somewhat less of a USP, unsurprisingly reacted robustly, with Treasury minister Danny Alexander saying: ““The other parties may try to imitate our policy. But if you’re after the real thing, you need the Lib Dems in government.”

Tax cuts: stimulus or reward?

These rumours follow evidence that, as the economy slowly recovers, pressure on the Conservative leadership for bigger tax cuts, both from pressure groups such as the Taxpayers’ Alliance (TPA) and the IoD and from some Conservative MPs, is growing. The TPA’s radical ‘cut and simplify’ plan, the 2020 Tax Commission report, was prominently advocated on the fringe (admittedly mostly by those who helped write it). John Redwood MP, who is chairing the Conservative Economic Affairs Committee, and will produce a report for George Osborne next year as part of the party’s manifesto process, argued strongly for much lower taxes in a lecture. However, despite David Cameron’s vow that “we will keep on cutting the taxes of hardworking people”, it is thought any cuts in the overall tax burden are unlikely to come into effect before the end of the next Parliament. This is because Osborne has ruled out borrowing more to fund tax cuts. A key dividing line between the Chancellor and the tax cut cheerleaders appears to be that the Chancellor sees (or at least they perceive he sees) tax cuts mostly as a reward that can be delivered for good economic performance, while the TPA and fellow-travellers see them as the key to achieving growth in the first place. This is a slightly simplistic analysis, but it helps explain why so many on the Tory right are frustrated with the Government’s tax policies which they see as insufficiently ambitious.

National insurance – the levy left behind?

With all the focus on the income tax personal allowance it was easy to forget during the conference season that all those being ‘brought out of tax’ are still paying national insurance as the IT threshold speeds away from the NI entry level. With this in mind it was noteworthy that Lib Dem MP Lorely Burt, Danny Alexander’s PPS, said during the party’s tax debate that once a Lib Dem government had got to the minimum wage level on the income tax personal allowance they would start reducing NI contributions. Given the ambitiousness of the first of these that may well envisage a timetable beyond the next Parliament.

10p for your thoughts

Labour are also proposing income tax cuts. Ed Balls announced at the conference that a 10p starting rate (funded by a mansion tax) will be in Labour’s manifesto in 2015. While the policy was announced in February this was the first time it was stated that it would be in the manifesto. Balls stated that the 10p rate would be “a tax cut for 25 million hard-working people on middle and lower incomes”, a clear indication that higher-rate taxpayers would not benefit from the proposal as Labour would reduce the point at which the 40p rate starts to be applied.

A transferrable allowance and marriage – go together like…?

Restricting the benefits of tax cuts to basic rate taxpayers seems to be the order of the day. The Coalition’s increases in the personal allowance have so far mostly benefited only basic rate taxpayers as well. The Conservative proposal for a transferable tax allowance – announced at the start of the conference – will only benefit couples where neither pays higher rate tax, as well as the lower or non-earner not using their full PA.

The allowance will initially be worth up to £200 a year for each couple. It will be available to same sex civil partners as well as married couples. The tax break will be applied for online (NB. This raises some possible worrying digital exclusion issues). It comes in for the 2015-16 tax year but will only be claimable after the year has ended.

The Lib Dems passed a motion critical of the policy at their conference. The speaker proposing it argued that it would be prejudicial against children who grow up in single parent families. The party’s MPs will abstain on it (this is set out in the Coalition Agreement signed back in 2010) but it will still go through.

Not all Conservatives are enthusiastic about the tax break either. It is very much associated with the David Cameron traditional wing of the party (‘Country Life Conservatives’ as they have been dubbed) rather than the more economically liberal George Osborne wing (‘The Economist Conservatives’). London Mayor Boris Johnson has been the most prominent critic, albeit using fairly guarded language in public. "It’s not something I would necessarily put at the top of my list, but what’s impressive is that it’s something that the Prime Minister promised in the 2010 manifesto and has delivered,” he told BBC News. The IFS also have various problems with the policy, warning that it could deter people from accepting pay rises in some circumstances because they stand to lose the allowance if they move into the higher tax bracket. The IFS points out this will grow as a problem if the allowance is made larger. At a fringe meeting the editor of City AM, Allister Heath, criticised the high marginal rate brought in by the transferable allowance and got a round of applause for this.

Higher rate – the new normal?

Speaking at CIOT/IFS fringe meetings during the conferences, the IFS’s Paul Johnson predicted that if the current trend of increasing the income tax personal allowance without commensurate increases in the higher rate threshold continued, most people could end up in the higher rate. Johnson even suggested that in a decade or two we could have moved to basic rate of tax of 40p ‘because we’ve been moving in that direction for the last 20 years without anyone telling us’.

The prospects of a return to a 50p additional rate of income tax dimmed during the conference season. This will be covered in more detail in the next post in this series, which deals with taxes on the wealthy and high earners.

Dividing lines

In greatly simplified form these are the main political dividing lines emerging in this area:

Keep raising the personal allowance (Lib Dems and Conservatives) versus a 10p starting rate (Labour)

Tax cuts only when growth renders them affordable (Conservative leadership) versus tax cuts to deliver growth (the low tax lobby on the political right)

Support marriage through the tax system (Conservatives) versus not doing so (Lib Dems and Labour)

George Crozier
CIOT External Relations Manager
Monday 4 November 2013

Media and Politics
 
After the conferences (1): The right kind of recovery?
1 November 2013

Public finances, austerity and the recovery

This is the first 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 battle lines are being drawn.

Unlike in previous Parliaments, politicians have the luxury of knowing when the next general election will take place – barring government collapse in the meantime it will be on May 7th 2015. Yet while that may be more than 550 days away, the ground on which the election will be fought is being staked out now, as the parties battle to set the context, frame the questions and lay down the markers on which voters will be invited to decide. As ever, tax and the public finances in general are at the centre of this.

The public finances: Desperately seeking surplus

At the Conservative conference in Manchester Chancellor George Osborne announced two new principles for the public finances under a Conservative Government. Firstly, he would aim to achieve an absolute surplus by the end of the next Parliament, provided the recovery is sustained. Second, he would ensure that capital spending grows at least in line with GDP. He said both of these principles could be delivered without raising taxes: “while no responsible Chancellor ever rules out tax changes, I think it can be done by reducing spending and capping welfare, not by raising taxes. That’s my plan.” Only if the Government properly control public expenditure will they “be able to keep lowering taxes for hardworking people in a way that lasts”. The verdict of most commentators was that the Chancellor’s speech was the most important one made during the conference. One described it as “an economic prospectus of striking political clarity”.

While there is no reason to think the Chancellor does not believe in the economic strategy he has set out in its own terms it does also offer tactical opportunities. By promising to run a budget surplus by 2020 he sets a challenge for Shadow Chancellor Ed Balls to meet. If Balls refuses to match this commitment the Chancellor will no doubt say that is proof of Labour irresponsibility, a message he is keen to communicate and contrast with Conservative responsibility.

At Liberal Democrat conference in Glasgow party leader Nick Clegg opened up a dividing line with the Conservatives by saying tax rises will be needed after the election to bring the deficit down. While George Osborne has said that the final two years of deficit cuts up to 2017-18 can be secured by spending cuts alone (or possibly by higher than forecast revenues) Clegg said he was "completely against" this. In a Q&A session he said: "We will go into the next election in favour of more fair taxes and not follow George Osborne's plan, since it makes further savings only out of spending cuts. Of course we are not going to do that. That's not Liberal Democrat. It won't happen under my watch." Danny Alexander had earlier warned that the next Parliament would be “another five years shaped by the necessity of fiscal restraint”. At the CIOT/IFS fringe meeting Lib Dem peer and Government Treasury Spokesman in the House of Lords, Dick Newby, said that, to the extent that further fiscal consolidation was needed in the next Parliament, he expected it to be broadly 20% tax increases and 80% cuts in expenditure.

Labour’s macroeconomic strategy is less clear. In Brighton the party pledged to get the deficit down in a fairer way than the Coalition, “to balance the current budget and get the national debt on a downward path”. They have promised ‘iron discipline on spending’ with a zero-based review of every pound spent in Government to identify savings “so that we can switch resources to Labour’s priorities.” But they have not said how fast they would reduce the deficit nor how much of the work would be done by tax rises as against spending cuts. Shadow Chancellor Ed Balls has committed that the Coalition Government’s day to day spending totals for 2015/16 will be the starting point, with any changes to current spending plans for that year fully funded and set out in advance in Labour’s manifesto. There will be no more borrowing for day to day spending in 2015-16 but Balls has left open borrowing for capital investment. Some commentators anticipate a Shadow Budget in March 2015.

A footnote on this topic: At the CIOT/IFS fringe meeting in Brighton, Paul Johnson of the IFS said that, while the past was not necessarily a guide to the future, on average over the last 30 years each Budget has raised taxes by about £1 billion. Each post-election Budget has raised taxes by an average of about £7 billion. Most of these increases had not been trailed during the election campaign.

The right kind of recovery?

What a difference a year makes! The job of balancing the budget may still have a long way to go but the debate about the deficit has already turned into a critique of the recovery. Are we getting the right kind of growth? How shall we spend the proceeds of growth? And most heatedly of all, are ordinary people feeling better off, or is it just a recovery for the few?

The change in focus was most obvious at Labour conference. In Manchester 12 months ago Labour was advocating a temporary cut in VAT as the centrepiece of an economic stimulus package to ‘kick start the economy’. A year on the VAT cut is dropped (in cash terms, the biggest policy change of the week, cutting £13 billion from the party’s spending plans) and the focus has changed entirely. As recovery has begun the balance has moved from immediate stimulus to a combination of capital investment and measures designed to help households who are suffering from wages that are not keeping up with the cost of living (see below). Labour’s main economic message is no longer that the Government are choking off the recovery, rather that whatever the GDP figures might say, ordinary families are not getting better off. If anyone is getting better off, it is only the wealthy few, is the message, or as Labour leader Ed Miliband succinctly put it: “They used to say a rising tide lifts all boats, now the rising tide just seems to lift the yachts.” The policies adopted at this conference were designed to send the message that Labour is the friend of ordinary hardworking families, the Conservatives only of the privileged few.

The need to generate sustainable growth was once again a prominent theme at all three party conferences this year, and the subject of numerous fringe meetings. At the Lib Dems, Nick Clegg and Vince Cable both used their conference speeches to take credit for the Government’s initiatives in this area, such as the £2,000 Employment Allowance (NI cut) and the Business Bank, which aims to mobilise private capital to support new banks, local banks and non bank finance. The Lib Dems’ big summer and autumn campaign – the ‘Million Jobs’ campaign – taps into this, highlighting how ‘Lib Dems in Government have helped businesses create over 1 million private sector jobs’ with measures such as the Employment Allowance and the Regional Growth Fund, and vowing to help create a million more.

The cost of living – or the fundamentals?

As mentioned above, Ed Miliband put the ‘cost of living crisis’ and Labour’s determination to help struggling households at the centre of his conference speech. The pledge of an immediate freeze to gas and electricity bills for two years for all Britain's homes and businesses was the policy announcement which got the most attention, but more help for childcare, support for an increase to the minimum wage, promotion of the ‘living wage’ and a commitment to a 10p starting rate of tax were also designed to support this message. Some dubbed it ‘consumer socialism’.

The Conservative response is to try to keep the debate on economic fundamentals. There are two strands to this. First, persuading people that, while a corner is being turned, “this battle to turn Britain around - it is not even close to being over [and the Conservatives should be allowed] to finish what we have started” (George Osborne). And second, to persuade people that the key to improving living standards is not ‘gimmicks’ like the energy proposal, but underlying sound economic policy which will keep interest rates low and encourage business to create jobs: “People know the difference between a quick fix con and a credible economic argument… The bedrock of any sustained recovery and improved living standards is economic stability” (Osborne again). This battle to frame the economic debate is heavily influenced by polling which shows that while voters believe Labour are more likely to tackle the cost of living crisis, they think the Tories are more likely to deliver economic growth. These messages (‘serious economic plan’, ‘economic responsibility’, ‘let us finish the job’) will continue to be pushed by the Conservatives between now and the election.

The Conservatives recognise the need to respond directly on the cost of living though. Real terms cuts in council tax and fuel duty, and the increase in the income tax personal allowance were emphasised here as they were by the Lib Dems in Glasgow. ‘Help to Buy’ is a key part of the Conservative message in this area, but the party is also planning to announce a series of measures such as cuts to the price of rail commuters’ season tickets and a curb on bank fees and water bills. A senior government source told The Times that the measures would be introduced in the run-up to the Autumn Statement.

The Lib Dems’ main contribution to the cost of living agenda is obviously the increase in the income tax personal allowance. But a number of other ideas are floating around too. Vince Cable 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, which "would be a far better option for tax cuts than the Tories' marriage tax allowance". Party President Tim Farron vowed: “It is time that we made the minimum wage a living wage.” The party is also increasingly claiming a share of the credit for the Government’s real terms cuts in fuel duty and council tax, as well as the pension ‘triple lock’ which did appear in the Lib Dem manifesto.

The cost of living was also at the centre of a policy paper called A Balanced Working Life, containing policies for low and middle income households. Among the proposals in the paper – which was passed – are support for a ‘living wage’, which central government would guarantee to pay, flexible working and an increased allocation of free childcare. The paper also proposes a review of Universal Credit two years after its introduction with a view to possibly increasing work incentives or introducing a disregard for families with disabled children and a disregard for second earners.

The central Lib Dem message is summed up by the party’s maxim that while Labour cannot be trusted with the economy the Conservatives on their own cannot be trusted to deliver fairness (hence the conference slogan: Stronger Economy. Fairer Society).

Dividing lines

On policy going forward there are three big dividing lines on public finances, austerity and the recovery. In simplified form they are:

Eliminating the deficit: Tax rises needed (Lib Dems and, probably, Labour*) versus no tax rises needed (Conservatives)

Cost of living (1): microeconomic measures (Labour) versus focus on the ‘economic fundamentals’ (Conservatives)

Cost of living (2): cutting bills (Labour) versus cutting taxes (Conservatives and Lib Dems)

* Labour have not yet said explicitly, but they have already announced a number of planned tax increases which they have said will appear in their manifesto.

George Crozier
CIOT External Relations Manager
Friday 1 November 2013

Media and Politics
 
Both sides of the story on Eurobonds
25 October 2013

The Independent newspaper is running a series of articles this week about the taxation of UK companies, mainly those owned from overseas and particularly those owned by private equity funds. The complaint seems to be that the UK companies are paying little UK corporation tax because most of their trading profits are offset by interest paid on loans put in place when the companies were acquired. In addition, the interest is paid out without withholding tax by using the ‘quoted Eurobond exemption’ using loan instruments quoted on the Channel Islands stock exchange.

There are two pieces of tax policy here to be debated and for everyone to take a view on what the law should be.

The first is the wide question of whether interest on debt used to acquire a company should be available to set against the taxable profits of the target. This has been available for as long as I can remember (I can certainly remember it being the accepted rule for acquisitions 30 years ago). It has been thought about by successive governments (I have been part of the discussions on various occasions) and has been left as the law. It is fair to say that we have a more generous tax regime than several other countries. It is a topic up for debate. Just because past governments have decided that this is good policy does not mean that we should not change now. Is it fair to give a tax deduction for interest on an amount borrowed for capital investment, and, if not, how much will it inhibit investment in the UK. The current work being done by the OECD on the Base Erosion and Profit Shifting (BEPS) project will probably lead to further thinking in this area.

The second question is the withholding tax on interest paid to entities outside the UK. The basic rule is that tax should be deducted from interest at 20pc and retained by the UK government. If the entity receiving the interest is located in most of the 120 or so countries where we have a full Double Tax Treaty (DTT) the requirement to withhold is taken away by the DTT. However, if there is no DTT with the country of the lender there is a 20pc deduction. There is often no DTT where the country is a tax haven. Private equity funds (especially those originating in the US) are often transparent for tax purposes (that is, income flows through, so as soon as it hits the fund it becomes taxable for the investor), so the investor will immediately pay tax on interest received in their own country. The fund is located in a tax haven because, otherwise, there might be a second charge to tax.

In these cases the fund often receives the interest free of withholding tax by structuring the debt as a quoted Eurobond (that is, a loan note issued by a company quoted on a recognised stock exchange). There is an exemption for withholding tax in these cases. This also has been around for many years, including the use of it in this way. Again this has been accepted by successive governments. Only last year, HMRC put out a public consultation paper to discuss whether this withholding tax exemption should be withdrawn. After debate the government decided to leave the exemption in place. Even if this exemption was withdrawn many of the investors in the private equity fund would still receive their share of the interest free of withholding tax because they are located in a DTT country. This may have been part of the reason for leaving the exemption in place.

Both of these areas of tax policy have been accepted by successive governments as being best for the UK and they are regularly reviewed. You may take the view that this policy is wrong in one or both cases. It is reasonable for individuals or newspapers to make the case for a change in the law. To the best of my knowledge it is not the current policy of any of the main parties to make any such change.

It does seem a bit unreasonable to run a series of articles on this area of tax, on the first day criticising several companies for taking advantage of these tax exemptions and then on the second day revealing that the policy was consulted on publicly only last year and confirmed to be continuing government policy. But that's a story for you.

Patrick Stevens
CIOT Acting Tax Policy Director
Friday 25 October 2013

Media and Politics
 
Standing room only at third party conference tax debate
4 October 2013

Click here to read a short report on the fringes at Lib Dem and Labour conferences

The third and final of the party conference tax debates organised by the CIOT and the Institute for Fiscal Studies was at Conservative Party conference in Manchester on Tuesday October 1st. The debate was introduced and chaired by the Financial Times’ Economic Editor, Chris Giles. The audience was the highest of the three events, with around 90 people present.

Once again, Paul Johnson of the IFS spoke first. Paul explained that the IFS had been founded 45 years ago by a group of tax professionals fed up with a government reform of capital gains tax. He spoke forcefully about the need for government to have a strategy on tax. He addressed directly the Conservative Party’s announcement that there would be a married couples’ transferable allowance, saying the amount involved was very small. He wondered where it would go in the future. The proposal is that all benefit will be lost the moment one partner becomes a higher rate taxpayer. Is this sustainable in the long run if the allowance is increased, he wondered.

CIOT President Stephen Coleclough began by explaining why the CIOT had joined with the IFS to hold the party conference events. The Institute was trying to help people understand what tax means and to raise the level of understanding, he said. After exploring some of the causes of the complexity in the UK tax system he moved on to address the question of ‘who pays the taxes in Britain?’ to which the answer was, broadly, ‘all of us’. That was, he said, even true of corporation tax. Asking ‘who’s got a pension?’ Stephen pointed out that most of most people’s pensions was invested in big banks, energy companies and other large firms. ‘When somebody wants to take tax from one of those they’re taking tax from you,’ he explained. He also addressed the effect of the internet on corporate taxation, pointing out that lots of selling can now be done without physical presence. The system needs updating to deal with people who can trade with Britain while not being in Britain, he explained. He also addressed the need for greater public education in taxation (which would help improve compliance), and the need to support and help HMRC. What would help HMRC a lot, he said, would be if there were no changes to tax rules for two years to let them get the systems organised.

Exchequer Secretary David Gauke began by noting that the title of the discussion was ‘What next in tax – 2015 and beyond’ but that, as a minister, it would be extremely foolish for him to try to answer that question. ‘If I do’, he added, ‘it will be by accident.’ He did set out how the Government’s priorities – reducing the deficit, generating growth and helping hardworking people (in that order) – had led to the tax changes which had been made. On deficit reduction, he said, ‘Tax is a good lever to pull immediately. If you want to reduce your deficit by 12bn pounds straight away in order to reassure the markets the simplest thing you can do is increase VAT.’ Changes to corporation tax – cutting the main rate, a new controlled foreign companies regime, the patent box – had been motivated by the need to boost jobs and investment. The ‘brave’ decision to cut the 50p top income tax rate had been similarly motivated. The increase in personal allowance and freezing of fuel duty were designed to help hardworking people. The minister also addressed defended HMRC against criticism and explained the challenges governments face when they try to make simplifications and other tax changes. Namely that ‘the winners go ‘thanks very much’ and the losers make a racket.’

Questions addressed a wide range of topics, from green taxation to the SDLT slab system to whether aggressive tax avoidance will ever be stamped out. On the latter the minister thought ‘probably not’, but he thought government could make a lot of progress. He cited stamp duty, where he said the reputation was that it was widely avoided at top end. There was now, he added, ‘every indication that has been dealt with.’

A fuller report on the three events will appear in Tax Adviser.

George Crozier
CIOT External Relations Manager
Friday 4 October 2013

Media and Politics
 

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