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Answer: There will be further tax increases before the end of this Parliament. They won’t include a wealth tax or a mansion tax, but the wealthy will still pay more

This is the first of a short series of blog entries looking at what we learnt about the direction of tax policy at this year’s political party conferences. 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.

There will be further tax increases before the end of this Parliament…

As you would expect, the coalition parties continue to stand robustly behind their austerity measures, including the current mix of roughly 80% spending cuts and 20% tax rises, while Labour condemn the Government for what they describe as a failed ‘too far, too fast’ plan that has led to a double-dip recession.

The consequence of the Government extending the period of austerity by a year is that the coalition government will need, before the 2015 election, to set out plans for a further £16 billion of deficit reduction for 2015-16. Lib Dem Chief Secretary to the Treasury Danny Alexander acknowledged this in his conference speech and accepted that the current 80-20 mix should be broadly kept to, but he vowed that Lib Dems would “not allow the books to be balanced in a way that hits the poorest hardest”. Exchequer Secretary David Gauke, interrogated by Jeremy Paxman on Newsnight, did not challenge the assumption that the 80-20 mix would mean a further £3.2 billion of tax increases in 2015-16. Negotiations on this area are expected to run throughout the second half of the Parliament.

Chancellor George Osborne even conceded to the Financial Times that austerity could last until 2018. The FT predicted that Britain would not get the deficit under control until then and put this to Osborne, who responded: "Yes, the road is longer than anyone hoped. We've got to find more cuts."

A brief report on tax debate and announcements at the 2012 Conservative conference in Birmingham

This is the third of a series of reports on each of the main parties' autumn conferences

There was no sign of any backtracking from the Government’s austerity measures, which are now expected to run well into the next Parliament. Chancellor George Osborne confirmed the need to find £16 billion of further savings in 2015-16, which will need to be agreed by the coalition before the 2015 general election, and that this would come roughly 80 per cent from savings and 20 per cent from tax increases (a formula both coalition parties appear signed up to). Negotiations on this area are expected to run throughout the second half of the Parliament. Osborne conceded to the Financial Times that austerity could last until 2018. There is a battle between the Conservatives and Labour to frame the economic debate: for Labour it is about growth, for the Conservatives it is about borrowing levels.

One tax increase that will not happen in this Parliament is a new mansion tax or wealth tax. In his conference speech, George Osborne said a new tax on people’s homes “would be sold as a Mansion Tax. But once the tax inspector had his foot in the door you’d soon find most homes in the country labelled a “mansion”.” In an interview with the Mail on Sunday he was even clearer, ruling out adding new top end council tax bands, any kind of “wealth tax or annual tax on assets, temporary or otherwise”. This categorical statement is thought to have come as a surprise to the Lib Dems, who believed there was the chance of a deal where they would support further cuts in welfare (see below) and public spending in return for a mansion tax or similar.

However, despite this, both George Osborne and David Cameron stated that the wealthy would face higher taxes before the next election. The Chancellor said that he was “going to have to ask the rich to make another contribution” but refused to provide any details on the extra levy. There was much speculation about how the promise will be delivered. A further increase in capital gains tax was one suggestion. However, the phraseology used by the Chancellor and PM means that the promise could theoretically be delivered by proposals already on the table, such as the general anti-abuse rule, the cap on income tax reliefs and the new tax on high-value residential properties owned other than by individuals that the Government have already legislated to prepare for. Further anti-evasion and avoidance measures such as the work of the newly expanded Affluence Unit could also qualify. Osborne said in his speech that the first place he would look when targeting the rich would be continuing a ‘ruthless pursuit’ of tax evasion and making aggressive tax avoidance ‘more and more uncomfortable’.

David Cameron and George Osborne both gave vigorous defences of the cut in the top rate of income tax. In his keynote speech at the end of the conference Cameron responded directly to Ed Miliband’s characterisation of the cut as “David Cameron… writing a cheque for £40,000 to each and every millionaire in Britain”. “Ed... Let me explain to you how it works,” said Cameron. “When people earn money, it's their money. Not the government's money: their money.” However as well as defending the cut on competitiveness grounds both the Prime Minister and the Chancellor also stressed that the rich would still pay a greater share of tax in every year of this Parliament than in any one of the thirteen years under Labour. It is clear there will be no further cut in the top rate to 40p in this Parliament, but that did not stop London Mayor Boris Johnson, the darling of this year’s conference, from calling for it.

George Osborne and Work and Pensions Secretary Iain Duncan Smith have agreed that the next spending review will include cuts in the welfare budget of around £10 billion by 2016-17. There are no specific proposals at this stage, but the article hints that unemployed parents could be deprived of extra support if they have another child and that further restrictions on housing benefit for young people could also be on the table. The Osborne – Duncan Smith agreement is part of a deal which also includes the Treasury giving the final political go-ahead for universal credit. The Lib Dems are believed to have been promised that the cuts will be balanced by a bigger contribution from the rich (see above), and have agreed to consider further welfare cuts, but are not signed up to the £10 billion figure.

George Osborne announced a new, voluntary, share ownership scheme, aimed at fast growing start-ups, which would offer an exemption from capital gains tax where employees give up certain employment rights in exchange for shares in their business. The Chancellor explained: “It’s a voluntary three way deal. You the company: give your employees shares in the business. You the employee: replace your old rights of unfair dismissal and redundancy with new rights of ownership. And what will the Government do? We’ll charge no capital gains tax at all on the profit you make on your shares.” However the proposal faced widespread criticism. The CBI said that it was "a niche idea and not relevant to all businesses". The TUC suggested it could open up new avoidance opportunities. Companies will apparently be allowed to give back employment rights to selected workers who receive tax-free shares under the scheme. There are also concerns the scheme could meet opposition from Brussels. The Government wants to fast-track the plan through Parliament to come in in April 2013.

The Conservatives are promising further cuts in business taxes. In his keynote speech George Osborne said these were part of “the fundamental, deep-rooted changes needed so our country can grow and compete and prosper”. David Cameron set out an ambition to “make Britain the best place in the world to start a business, grow a business and help that business take on the world and win”.

George Osborne used his speech to launch a government consultation on “a generous new tax regime for shale”. He put both investing in renewable energy and opening up the newly discovered shale gas reserves beneath the UK at the heart of his enterprise strategy. Green campaigners accused him of making a “reckless dash for gas”.

During the conference season, the Scottish Conservatives became the first party to break ranks and declare an intention to use the new Scottish income tax powers. In an interview, party leader Ruth Davidson said that she wants to cut income tax by 1p in the pound, financed by ending some free universal benefits, such as free university tuition, free prescriptions and concessionary travel for those over 60. In her conference speech Davidson said the cut would provide a £560m boost for the economy. She attacked the SNP for ‘hammering business’ with £100m of Scotland-only taxes. The income tax powers will not be devolved until 2016, a year and a half after Scotland’s independence referendum (and assumes a ‘no’ vote in that referendum).

One of the most expensive announcements of the week was of funding for a further one year extension to the council tax freeze. One commentator suggested that, with both the Westminster and Holyrood governments refusing to sanction council tax increases, the local government funding model was becoming unworkable and this suggested the system was ‘bust’. There have, of course, been no council tax revaluations in England or Scotland since the tax was introduced in 1991.

Most new policy thinking for the Conservatives seems to be taking place under the aegis of think tanks and campaign groups such as Policy Exchange, Reform and the Taxpayers’ Alliance (TPA) (as well as groups of MPs, such as the Free Enterprise Group, see below). Low taxes and a smaller state continue to be articles of faith for the Conservative grassroots. The TPA’s plan for a lower, flatter tax system was discussed in a number of places during the conference and is widely supported. However, there was little sign at the conference of any British equivalent of the evangelical fervour of the ‘tea party’ movement in the United States, which argues against all tax increases.

The Free Enterprise Group of Conservative MPs is increasingly prominent and influential. This pro-business group published a paper during the conference containing 15 ideas for the Conservative manifesto in 2015. These included finding the savings to deliver a supply-side tax cut for business and offering companies very generous but time limited capital allowances. Another idea in the paper – this one suggested by the Director General of the Institute of Economic Affairs rather than by a Conservative MP – was for a company’s first twelve staff to be treated as self-employed for employment law and tax purposes. A paper published since the conference argues for indexing income tax thresholds to earnings, to counter fiscal drag; aligning the basic rate of income tax, the Small Profits Rate and main rate of corporation tax at 20% (and then lowering them all together as government spending is reduced); and raising the income tax basic rate limit to £50,000 and the corporation tax threshold to £500,000. The head of the group is now Kwasi Kwarteng MP. Others involved with it include the new Economic Secretary Sajid Javid, new BIS Minister Matthew Hancock, former tax advisers Karen Bradley and Charlie Elphicke, and Treasury Committee Chairman Andrew Tyrie. Analysis in The Economist said the group has the Chancellor’s ear.

Iain Duncan Smith is leading the fight for a transferable allowance for married couples. Duncan Smith said that next year’s Budget should bring in the tax relief to show the Coalition is pro-marriage. At a fringe meeting former minister Tim Loughton blamed Lib Dem ministers for blocking attempts to introduce the tax breaks. The other substantial Conservative tax policy which is not part of the Government’s programme is increasing the IHT threshold. Both this and the transferable allowance continue to be popular with activists. They will probably appear in the 2015 manifesto, but it is unlikely they will be introduced in anything more than a tokenistic way in this Parliament.

The signs from the conference were not good for those who want corporation tax devolved in Northern Ireland with the new Northern Ireland Secretary, Theresa Villiers, saying there were still significant issues to be resolved. However, in a speech since the conference, Villiers said ‘real progress’ had been made and “we now know the broad shape of what a devolved corporation tax regime for Northern Ireland might look like”. The decision will be put on the Prime Minister’s desk by about mid-November.

George Crozier
CIOT External Relations Manager
Friday 2 November 2012

A brief report on tax debate and announcements at the 2012 Labour conference in Manchester

This is the second of a series of reports on each of the main parties' autumn conferences

Labour are continuing to take every opportunity to contrast the ‘tax cut for millionaires’ (their characterisation of the cut in the top rate from 50p to 45p) with the ‘tax on pensioners’ (scrapping the age related allowance) and cuts in benefits and tax credits. It is clear that the party’s MPs and advisers believe this is their most potent attack on the coalition at the moment. Ed Miliband attempted to personalise the issue in his leader’s speech with the claim that, “Next April, David Cameron will be writing a cheque for £40,000 to each and every millionaire in Britain... And here’s the worse part. David Cameron isn’t just writing the cheques. He is receiving one. He’s going to be getting the millionaire’s tax cut.” If Labour were in government now, Miliband has said, the first budget change it would make would be keeping the 50p rate.

Labour’s central economic message is that the route to growth is to slow the rate of cuts and deliver an economic stimulus, even if it requires more borrowing in the short-term. Shadow Chancellor Ed Balls argued in his speech that the ‘double dip’ recession had vindicated his warning two years ago that spending cuts and tax rises were “too far, too fast”. One element of Labour’s stimulus package would be a two-year stamp duty holiday on purchases by first-time buyers of properties worth up to £250,000. Additionally, the party would use the (up to) £4 billion from the sale of 4G mobile telecoms licences to build 100,000 new affordable homes over the next two years. These are in addition to the existing five point ‘plan for growth’, which was unveiled a year ago and still stands:
1. Tax bankers’ bonuses and use the money to build 25,000 social homes for rent and guarantee a job for 100,000 young people.
2. Bring forward long-term investment in infrastructure.
3. Temporarily reverse the damaging VAT rise.
4. Give every small firm taking on extra workers a one year national insurance tax break.
5. Cut VAT to 5 per cent for a year on home improvements and repairs.

Labour are thought unlikely to set out what their tax and spending policy would be if they won the next election until the six months before the election. Ed Balls stressed in his speech that he would not promise that a Labour government would reverse particular tax rises or spending cuts. Media reports suggest “mezzanine” policies, halfway to manifesto commitments, will be laid out over the next few months in a series of speeches under the ‘one nation’ banner, but these are not expected to set out substantive new tax policy. In the meantime, Labour’s ‘holding policy’ is the ‘plan for growth’ (see above), plus the ‘action plan for family budgets’, launched back in March, which includes reversing the abolition of the age-related allowance and cut in the top income tax rate, and “reversing the Government’s pension tax break for those earning over £150,000” which Labour believes would save £1.6bn which could be used to avoid cuts in tax credits. The party is keeping an open mind on policy development. In the words of Exchequer Secretary Catherine McKinnell: “everything needs to be looked at and everything needs to be considered and everything needs to be reviewed”.

There are growing signs that Labour are warming to the idea of a ‘mansion tax’. In an interview in September Ed Balls dismissed the one-off wealth tax mooted by Nick Clegg, but said he would be happy to discuss what he called Vince Cable's "serious" proposal for a high-value property tax. In his conference speech, Balls criticised: “A Chancellor who tried to raise taxes on pasties, caravans, churches and charities, but who refuses to look seriously at proposals for a mansion tax.” Commentator Steve Richards, who interviewed Balls in September, has predicted that he will pledge to increase spending on the NHS and training, and do so “through a popular tax increase, possibly a mansion tax that would impact on a tiny proportion of the electorate” (as Labour did in 1997 with a tax on the privatised utilities).

A few weeks before the conference Ed Miliband made a speech in which he promoted the concept of ‘predistribution’, a word for which he took some flak. In essence, predistribution is about trying to make society more equal in terms of the outcomes that the economy delivers before government intervenes with the redistribution measures of the tax and benefits system. In practice it appears to mean primarily higher skills (especially for those who don’t go to university) and higher wages. While Miliband did not use the word in his conference speech he put a little more flesh on the concept, including a promise that, under the next Labour Government, private sector companies will only win public sector contracts if they provide apprenticeships (though there may be an exemption for small firms). On wages, the living wage had a particularly high profile throughout Labour’s conference week. Labour local authorities such as Glasgow, Birmingham and a number of London boroughs were praised for becoming living wage employers. Also under the predistribution / ‘making work pay’ heading, Labour are thought to be working towards a big announcement on childcare subsidies.

The work of Labour’s Prosperity and Work Policy Commission continues, with delegates voting to approve the Commission’s uncontroversial annual report and policy document during the conference. The Commission is one of six set up by Ed Miliband in early 2011, as part of the policy development process, to engage with local Labour parties and others in producing consultation and policy documents, to discuss public submissions, and to feed back to party members and affiliates. Members of the policy commissions are drawn from Labour’s National Executive, National Policy Forum and Shadow Cabinet. Most of the Commission’s policy document echoes the words of Ed Balls (one of the two co-convenors of the Commission) and other Labour spokesmen (e.g. it sets out and endorses both the Five Point Plan and the ‘action plan for family budgets’). There is no tax policy not previously announced. However it does provide an indication of the broad priority areas where party activists want action. Those with tax implications include opposing tax avoidance, helping small business and turning Ed Miliband’s vision of “responsible capitalism” (ref. 2011’s conference speech) into policy.

In other policy news from Manchester:
• Labour will set out in their manifesto “tough new fiscal rules to get our country's current budget back to balance and national debt on a downward path”. These will be independently monitored by the OBR
• Ed Balls and Ed Miliband both promised to continue working for an international financial transactions tax, but Labour’s position remains that they will only adopt it if all other major financial centres do
• Labour would introduce an Economic Crime Act in a drive against financial crime, including fraud, money-laundering and manipulating interest rates
• Companies that pay large amounts of tax will be “celebrated” by a Labour government in an attempt to encourage social responsibility in the boardroom
• Labour has promised ‘active support’ for mutuals and co-operatives
• The Scottish Labour leader has hinted that the party is considering using new Scottish tax-raising powers to pay for public services
• Labour has relaunched its Small Business Taskforce, which is looking at the best ways of providing support including on finance, procurement, skills, exports and how government operates for small businesses

George Crozier
CIOT External Relations Manager
Friday 19 October 2012

A brief report on tax debate and announcements at the 2012 Liberal Democrat conference in Brighton

This is the first of a series of reports on each of the main parties' autumn conferences

The conference took place under the slogan ‘Fairer taxes in tough times’ and ‘fairer tax’ is also the party’s big campaign for the year ahead. The campaign aims to highlight the raising of the income tax threshold and tax increases for the well-off (capital gains tax increase and action against tax avoidance), and also the party’s calls for a mansion tax and a temporary new tax on the wealth of the super-rich. It also calls for ‘an even playing field for small businesses’.

Chief Secretary to the Treasury, Danny Alexander, used his keynote speech to pledge not only that the £10,000 income tax threshold would be reached but that, at the next election, the Lib Dems will promise to raise that figure yet further, to £12,500. He accepted that the coalition government would need, before the election, to set out plans for £16 billion of savings for 2015-16 and promised that he and Nick Clegg would “not allow the books to be balanced in a way that hits the poorest hardest”. Negotiations on this area are expected to run throughout the second half of the Parliament.

Alexander also made his now traditional announcement of additional resources for tax compliance. Wealthy Britons who own property abroad are to be the newest target of HMRC’s Affluence Unit. The Unit will hire an extra 100 experts, and widen its scope from people worth over £2.5m to £1m. He also announced a doubling of the size of the team dealing with the Liechtenstein Disclosure Facility, saying this would enable up to three times more than the original £1bn target to be recovered. He said that the extra £900m announced two years ago to raise an additional £7bn a year by the end of the Parliament was already on track to raise an additional £4bn this year. Alexander also promised to tackle tax avoidance among firms receiving taxpayers’ money. The Chief Secretary said he has tasked HMRC and the Cabinet Office with coming up with a way to ensure that the small minority of firms that don’t ‘play by the rules’ are not able to win government contracts. More details will be provided later this year.

In his leader’s speech, Nick Clegg announced that there would be no further reductions in the 45p top rate of income tax in this Parliament, adding: “All future cuts in personal taxation must pass one clear test: do they help people on low and middle incomes get by and get on? It’s as simple as that.” In an interview earlier in the week, Clegg said it would be "wholly unrealistic" to cut more money from welfare spending without increasing taxes on Britain's richest 10%. Some media (e.g. Daily Mail) interpreted this as an attack on the middle class, on the basis that it appeared to extend the scope of those in the Lib Dems’ targets beyond ‘the rich’, but this was refuted by Clegg.

The party continued to stress its commitment to a ‘mansion tax’ on houses worth over £2m. Nick Clegg insisted he would continue to argue with David Cameron and George Osborne in support of such a tax, and expressed his confidence that new tax measures targeting the richest would be introduced before 2015. He also suggested council tax should be extended, saying to ITV's Daybreak: "An oligarch in a £4m house in central London should not pay the same council tax as someone in a four bedroom family home.”

Business Secretary Vince Cable dismissed calls for a Hollande-style assault on top incomes, saying very high marginal rates of income tax are counter-productive: “If I were advising Monsieur Hollande, I would recommend a ‘chateau tax’.” He also promised that the Government were working with allies to close down tax havens, adding: “No one keeps their cash in tax havens for the quality of investment advice; these are sunny places for shady people.”

Sharon Bowles MEP, Chair of the European Parliament's Economic and Monetary Affairs Committee, warned that the UK Government and financial services sector needed to engage constructively within the EU or see decisions on financial regulation being taken without them being in the room: “There is no escaping international regulation of financial services in today’s world. Either Brussels does it or Washington does it. What would the City prefer?” She said Lib Dem MEPs were working to ensure the single market in financial services survives alongside Euro area integration.

The party has begun the process of producing a new tax policy paper, which will be approved at the autumn 2013 conference. The chair of the policy working group is Jeremy Hargreaves, a business advisor and former E&Y employee who is vice chair of the party’s main policy committee. Members of the working group include MPs Stephen Williams and Tessa Munt, and Baroness Susan Kramer. A second working group will also meet over the year ahead to produce a policy paper on ‘A Balanced Working Life’, considering, among other things, how the tax system can be changed to help people on low- and middle-incomes. The CIOT’s Low Incomes Tax Reform Group are considering whether to submit some ideas to this group.

Other policy passed at Brighton included support for:
• A policy paper on mutuals, employee ownership and workplace democracy. This expresses support for various measures to make mutuals, employee-owned, and employee-share-owned businesses a more viable business option, including removing adverse tax consequences for companies which wish to transfer shares to Employee Benefit Trusts
• A new policy paper on inequality, including an amendment strongly backing a mansion tax
• Replacing SDLT with a Land Value Tax – the tax would not apply to agricultural land and would be accompanied by provisions relating to equity release after an asset changes ownership to ensure that the tax doesn’t cause cash-flow challenges for the asset wealthy and cash poor
• Investigation of the scope for further capital allowances against tax for green capital expenditure, and more favourable treatment of green venture capital funds
• Replacement of Air Passenger Duty with a Per-Plane-Duty to incentivise fully-loaded planes
• A feasibility study on combining the disparate elements of child care support including the free entitlement, the child care element of Working Tax Credits / Universal Credit and Child Care Vouchers
• Consultation on fiscal measures such as the taxation of heavily sugared drinks

George Crozier
CIOT External Relations Manager
Wednesday 17 October 2012

The House of Commons International Development Committee published their report on Tax in Developing Countries yesterday.

Media coverage has focused mainly on two of the committee’s recommendations –

• That the UK Government should scale up its technical assistance work with the national revenue authorities of developing countries, and improve their reporting on this (eg. BBC);
• That the Government should urgently conduct or commission an analysis of the likely financial impact of the revised Controlled Foreign Companies rules on developing countries and, depending on the results of this analysis, consider whether to drop its proposals (eg Guardian).

The first of these is (as the committee note in their report) one of the main recommendations made by the CIOT in our submission to the committee’s inquiry. We are delighted to see it make it into the final report.

The second of these is rather less likely to happen than the first, given that the new CFC rules (broadly supported by the CIOT) are now law thanks to the recently passed Finance Act 2012, and are set to come into effect in January 2013. Indeed the Treasury has repeated its robust response that (a) CFC rules are there to protect UK tax revenues not those of other countries, and (b) producing such an analysis is anyway unfeasibly difficult.

Another controversial area looked at by the committee was transfer pricing abuse. Campaigners such as Action Aid and Christian Aid have suggested developing countries lose $160 billion a year in tax in this way. In our submission to the committee the CIOT noted that this figure was ‘highly questionable’(see paragraphs 4.2 and 4.3 of our submission for more on this) but we acknowledged that there is an absence of reliable estimates of the extent of transfer mispricing or of other abusive or illegal practices by business in developing countries. We said that we would like to see more work done in this area using individual country and firm data.

What the committee has to say in this area is interesting. Unlike, say, country-by-country reporting where they did adopt the line pushed by campaigners, here their conclusions are far more nuanced. They acknowledge that corporations frequently transfer profits for reasons unrelated to tax - for example, because local rules sometimes make it very difficult to declare a dividend (consequently they call for host countries to establish more straightforward tax regimes for dividends). They reject Christian Aid’s call for ‘formulary apportionment’ (allocating a corporation’s taxable profits based on the proportions of total property, payroll or sales in each country) as not a workable option at present, given its lack of international support. What they do recommend as a way forward is (a) that the UK Government stress the importance of requiring 'related party transactions' (i.e. transactions taking place within the same corporation) to be declared on annual tax returns, and (b) that HMRC seek the views of both multinational businesses (via the CBI) and trade unions and civil society organisations on transfer pricing issues, reporting back to the committee before the end of 2012 on the outcome of the discussions. So that looks like a statement of intent from the committee to return to the issue.

Among the report’s other recommendations are that the UK Government should:

• Introduce legislation requiring tax authorities automatically to exchange information relating to UK citizens or corporations (as with FATCA in the US), and use its influence to persuade other governments to follow suit.
• Encourage the OECD and other standard-setting fora to require the filing of public statutory accounts in all jurisdictions, and press Crown Dependencies to meet these standards.
• Designate a DFID ministerial responsibility for the development impact of tax and fiscal policy.
• Be required to assess new primary and secondary UK tax legislation against its likely impact on poverty reduction and revenue-raising in developing countries, and to publish that assessment alongside the draft legislation.
• Make the UK an Extractive Industries Transparency Initiative (EITI) candidate.
• Enact legislation requiring UK-based multinationals to report their financial information on a country-by-country basis and continue to support the progress of similar legislation at EU level.
• Encourage and support programmes in developing countries that engage civil society and others in the tax policymaking process.

The failure to collect adequate levels of tax in developing countries is undoubtedly a major concern. This is not just about tax administration. Anecdotal evidence from tax advisers – reported by us in our submission to the inquiry – suggests that corruption and the lack of effective rule of law may be the biggest obstacles to effective tax administration – as they are to wider economic progress – in developing countries. Inward investment suffers too. As one CIOT member explained of his client who decided not to invest in a particular country: 'He was perfectly happy to pay the right rate of tax. He didn’t want to have to pay bribes and be left at the whim of local officials.'

As our submission noted, measures to improve governance, strengthen the rule of law and develop expertise will be at least as important to building effective tax administrations as any tax-specific measures. The committee’s inquiry has been a useful investigation into this area and produced some helpful recommendations, but there is a long way to go, and the issues involved go well beyond tax.

George Crozier
CIOT External Relations Manager
Friday 24 August 2012

The latest in an occasional series - the CIOT Q&A on a topical issue, part of our mission to explain and improve public understanding of the tax system . This one has been prepared with Gary Ashford, National Head of Tax Investigations & Dispute Resolution for RSM Tenon and a member of the CIOT's Council, and John Whiting, CIOT Tax Policy Director.

Paying cash in hand – a Q&A

Is it illegal to pay a tradesman cash in hand?

Absolutely not. But the tradesman is committing an offence if they fail to disclose their earnings to HMRC in due course in full and pay any relevant tax. Any trader with a turnover of more than £77,000 a year (excluding any exempt supplies) is required to charge VAT on their bills and pay the money to the taxman.

What about if they offer a discount for cash?

People may offer a cash discount to help with cashflow – and of course discounts get offered for other reasons too, such as bulk purchases. However, if someone offers a cash discount to hide the money from the taxman, then that is a different story. Hiding takings from the taxman is tax evasion and it is illegal. If the payer is aware this is the case they could actually be colluding in tax fraud.

I paid in cash because that suited me – if the trader is subsequently found to have omitted some takings, have I committed an offence?

Just because the trader commits an offence does not mean you have as well. If you had no idea they were going to conceal some takings, or no reason to suspect they would, you are in the clear. What draws you into the offence is if you have colluded in their fraud – if you have actively facilitated it.

Should I always expect a receipt?

No – not every trader will give you a recipt and a lack of a receipt does not mean that they are intending to hide their receipts. But receipts are a good way to control a business and as a confirmation of purchase. Some small businesses may not issue these but will still need to keep a record and fulfil their obligations to declare income to HMRC.

How much tax is lost because of undeclared cash in hand payments?

Estimates go from £2 billion a year upwards. The most recent estimate of the ‘tax gap’ (the difference between what HMRC collect and what they think should be collected) estimated that £4 billion a year is lost to tax evasion and a further £4 billion to the ‘hidden economy’. Within this, they estimate that £1.3 billion is lost to 'ghosts', those who have earnings from employment or self-employment and fail to declare any of this income, and £1.8 billion is lost to 'moonlighters', those who pay tax on their main job through PAYE but have a second job or additional income from self-employment. Of course, not all of these are tradesmen. A report from a parliamentary committee back in 2008 identified the three key ‘areas of risk’ in the hidden economy (ie where HMRC are most at risk of tax being lost) as self-employed people, such as builders and decorators, who often receive cash payments; individuals who trade on the internet; and buy-to-let landlords.

What are the Government doing about it?

Getting tougher. The Government have set a high profile target of bringing in an extra £7 billion through initiatives to tackle tax avoidance, evasion and fraud by the end of the Parliament. A key part of this are their ‘campaigns’ targeting particular trades, such as plumbers, roofers and electricians. Usually these have two stages. In the first those in the trade are targeted with publicity – articles in the trade press and personal letters – encouraging them to get their tax affairs in order if they are not already, with a reduced penalty rate, in addition to the tax itself. Hanging over this is the warning that those who do not come forward could ultimately face criminal charges. Then the second stage sees HMRC act on that threat, often using data obtained from suppliers as well as other sophisticated techniques. There have been a number of arrests of plumbers recently following that campaign and only last week a plumber from Surrey was given a 12 month prison sentence for evading income tax.

Isn’t this targeting the ‘little man’ to distract from the bigger sums lost to tax avoidance?

The other way of looking at it is that the Government are highlighting that not all tax losses are down to contrived avoidance schemes used by the wealthy. They would no doubt point out that they have strategies to tackle most if not all areas of the tax gap. Just this week they published a consultation paper with proposals to strengthen the rules on Disclosure of Tax Avoidance Schemes. They also have a consultation going on on a ‘general anti-abuse rule’ aimed at tackling artificial and abusive tax avoidance schemes.

That said, according to HMRC’s most recent ‘tax gap’ estimate, tax evasion and other illegal activity are costing the Exchequer three times as much as tax avoidance. So HMRC are right to be putting more effort into investigating and prosecuting those who seek to evade tax.

Are the government simply raising extra money without regard to how difficult things are?

Remember these are taxes that are due: the rules are there.

In all of this there is a fairness point as well. Although many people undoubtedly see a bit of ‘cash in hand’ as normal, it does mean that tax burdens fall more heavily on those who do pay all their taxes. There is a particular impact on the trader who never suppresses takings and always charges VAT: they find themselves undercut by others who flout the rules. All of that said, undoubtedly people will always be tempted by offers of getting things done more cheaply – especially in these straitened times. But this is not a new problem and there will always be a need to take action against those who seek to evade tax.

(Note to media/websites: please feel free to link to this Q&A or to quote from it provided attribution is given and it is not quoted out of context.)

George Crozier
CIOT External Relations Manager
Friday 27 July 2012

If you live or work in Scotland you may well be interested in the proposals of the Scottish Parliament to replace stamp duty land tax (SDLT) with a simpler land and buildings transaction tax (LBTT) from April 2015.

The power to do this is contained in the Scotland Act 2012.

One of the most significant reforms proposed is a move away from the 'slab' system to a band system similar to that applied in determining income tax. Thus, one alternative (Scenario 1 below) suggested is that the first £180,000 of a residential property transaction is not subject to LBTT but anything in excess of that up to £1.5 million would be subject to a tax at 7.5%. That would mean that the tax on a property worth £300,000 would be 7.5% of (£300,000 – 180,000) ie £9,000. SDLT would be 3% of £300,000, ie also £9,000. Properties sold for more than £300,000 would tend to incur more tax under this scenario. Below £300,000 and the tax would generally be the same or less.

Scenario 2 suggested a lower starting point but a lower rate for the first band. Overall this would, as with Scenario 1, be revenue neutral based on historical data, but the distribution of the cost would be slightly different, with purchases under £325,000 paying less than under the current system, but the top 5% of the market would pay more.

There are host of other provisions and questions about any need for provisions such as anti-avoidance, which can be found in the consultation at: http://www.scotland.gov.uk/Resource/0039/00394544.pdf.

Please feel free to participate in our survey which can be found at http://freeonlinesurveys.com/v1/rendersurvey.asp?sid=w76km55ex271z4e1041912. However, you are also welcome to contribute by adding your comments below.

Kate Willis
Technical Officer
Wednesday 25 July 2012

[Update: The condoc and speech referred to in this article have now been published and are available at the following links: condoc (PDF) and speech (HTML page)]

In a speech today, Exchequer Secretary David Gauke will announce a series of new government proposals to strengthen their efforts to stop aggressive tax avoidance.

According to an article by David Gauke in The Times today, a consultation document will contain proposals to:

• Make it easier for members of the public to recognise a scheme that is in fact too good to be true;
• Strengthen HMRC’s powers further under the Disclosure of Tax Avoidance Schemes rules, so that it is better able to identify and take action against cowboy advisers and to close the net around the few schemes not already captured;
• Publish warnings about tax avoidance schemes that are effectively being missold, making it easier for taxpayers to identify a hard sell by a dodgy promoter;
• Give HMRC stronger powers to force promoters to tell them about avoidance schemes and who is using them.

According to an extract quoted in The Times, the condoc will say:

"The information that promoters are required to provide on client lists is not sufficient. At present it is inherently difficult for HMRC to identify the end users of such schemes. The Government wants to cut through the chain of introducers and intermediaries in such cases and identify who the end users are."

John Whiting, the CIOT's Tax Policy Director, has appeared on various media outlets this morning discussing the proposals and giving an initial CIOT response (ahead of actually seeing the condoc). A CIOT press statement will also be posted on this website shortly.

Anyone interested in finding out more about the proposals should look at:

Front page article in The Times(behind paywall)
David Gauke's article in The Times (behind paywall)
Guardian article(free to view)
HM Treasury press release(free to view)
Politics Home summary of John Whiting's comments(behind paywall)

George Crozier
CIOT External Relations Manager
Monday 23 July 2012

Congratulations to all those successful in the May 2012 CTA and ATT exams, the results of which were announced this week.

The Institute President, Patrick Stevens, commenting on the CTA results said:

"I would like to offer my congratulations to all 889 of the candidates who have made progress towards becoming a Chartered Tax Adviser as a result of passing one or more papers at the May 2012 examination. 253 candidates have now successfully completed all of the CTA examination and we very much look forward to them becoming members of the Institute in the very near future."

Full details of prizes and results can be viewed via this link.

The Association of Taxation Technicians (ATT) is the CIOT’s sister body and is the oldest and largest body concerned solely with tax compliance. 859 candidates took the ATT exam on 1 and 2 May 2012.

The Association President, Stuart McKinnon, commenting upon the results said:

“It gives me great pleasure to congratulate the successful candidates from the May sitting of our exams. In total 1,326 papers were sat and 1,015 passes achieved in one or more of our six papers with 73 distinctions awarded for exceptional performance.

“Our modular system allows candidates to study at their own pace. Whether they are working towards full membership by sitting the two compulsory and one optional paper together with our two E-Assessments or whether they simply wish to obtain one or more Certificates of Competency in their specialist areas the flexibility has proved very popular.

“As a result of the examinations 77 candidates have now completed the examination requirements for membership and I look forward to meeting as many as possible at our popular admission ceremonies held at the House of Lords.”

Full details of prizes and results can be viewed at the Association's website via this link.

George Crozier
CIOT External Relations Manager
Friday 20 July 2012

This is the eighth 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 sittings 17-18 of the standing committee on the Bill, which sat on Tuesday 26 June. 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.

Latest developments

These reports are running behind the Bill's progress. As of Tuesday the Bill has gained Royal Assent and is the Finance Act 2012. Reports on the Bill's report stage and Lords stages will be posted in the next week or so, as time allows.

Finance Bill Standing Committee – Sitting 17 – Tue 26 June (am)

The penultimate committee sitting covered inheritance tax and stamp duty (clauses 206-211) and lasted just short of two and a half hours. No clauses or schedules were opposed and no amendments had been tabled, but it was still a fairly lively session.

There was 50 minutes of debate on clause 206, which will limit the IHT threshold by changing the automatic index-linking of the nil rate band - the amount that can be inherited before inheritance tax is payable - to the consumer prices index inflation measure, instead of to the retail prices index. From the Conservative benches, Jacob Rees-Mogg made an impassioned argument for abolishing IHT: “We believe that this is a monstrous tax, one of the cruellest taxes that falls on people at the worst time when they are facing the loss of a member of their family, somebody to whom they were probably devoted.” He also made the economic argument that taxing capital ties it up in inefficient ways: “They may invest in or hold goods that are exempt, buy trading farms or put the money into land - raising the price of land, already currently high - and not necessarily into other productive investments.”

Other speakers were less hyperbolic. For Labour, Catherine McKinnell (Shadow Exchequer Secretary) said the party did not oppose that change, though her colleague Julie Hilling did say she thought it was “a little odd” not to raise the threshold according to RPI. John Mann (also Labour) took the debate onto tax avoidance more generally, talking about Jimmy Carr and the Chancellor’s comments about moral repugnance. For the Government, David Gauke (Exchequer Secretary) said the move would raise additional revenue (about £20m a year) but there was unlikely to be a dramatic impact on avoidance.

Clause 207 provides for a lower rate of IHT of 36% to be charged on an estate where 10% or more of the net estate has been left to charity. Catherine McKinnell accused the Government of mixed messages on charitable donations (ref. inclusion of charities in the tax reliefs cap originally) and suggested the provision was more complex than necessary (a point also made vocally by the CIOT in consultation responses and press statements. Chloe Smith (Economic Secretary) defended the proposals, saying the incentive would encourage charitable legacies from a broad range of estates.

Clauses 208 and 210 are both designed to close avoidance schemes and both were approved with about 20 minutes of debate between them. Clause 208 closes a scheme involving the acquisition of interests in offshore trusts to avoid inheritance tax charges. Clause 210 amends the stamp duty land tax rules on a transfer of rights or sub-sale, and the change puts beyond doubt that a particular SDLT avoidance scheme does not work. Clause 209 (the bank levy) had been debated earlier in committee of the whole House so was not debated in standing committee.

Clause 211 introduces a new 7% rate of stamp duty land tax for residential properties worth over £2 million from 22 March 2012. Chloe Smith, the minister, explained that the new rate was one of a package of measures targeted at the wealthy. But Labour MPs were unconvinced that it would balance out the cut in the top rate of income tax from 50p. Catherine McKinnell said the idea that new taxes on the rich will raise five times more than the 50p rate has been “thoroughly debunked”. There was a fair amount of back and forth over the effectiveness of the 50p rate, why Labour waited so long before introducing it, etc. before the chairman brought the committee back to the clause under discussion. Sheila Gilmore provided various reasons why the amount generated by the tax may well be less than anticipated. John Mann supported the clause but took the opportunity to criticise the community infrastructure levy which he called “a tax on the aspiration of Britain.” For the Conservatives Jacob Rees-Mogg said that if the Government had been bolder and cut the 50p rate to 40p then, “bang!—it would have raised more revenue.”

Finance Bill Standing Committee – Sitting 18 – Tue 26 June (pm)

The 18th and final sitting of the Finance Bill committee was a marathon, running from 4.30pm until 9.11pm with a 45 minute break for votes (and to allow the minister to attend the CIOT’s annual parliamentary reception) from 7pm. Proceedings were somewhat rushed due to the need to conclude debate on the Bill by 9pm, but pretty much everything got some debate. (Of course they would not have been so rushed if they hadn’t spent the first nine sittings approving just 18 clauses, leaving more than 200 for the final nine sittings...) Issues debated included the new SDLT rate for non-natural persons, the UK-Swiss Agreement, incapacitated persons, dishonest tax agents and the OTS relief abolition. All clauses were approved. The only change to the Bill was two government amendments relating to the Swiss agreement.

Clause 212 introduces a new 15% stamp duty land tax that applies to the acquisition of UK residential property by certain “non-natural persons” where the consideration exceeds £2 million. Labour were critical. Catherine McKinnell, Shadow Exchequer Secretary, said there were “myriad problems with the plan” and warned that its scope would be too wide, catching not only owner-occupiers but institutional investors and commercial landlords. McKinnell suggested the alternative of a transfer tax on the sale of a company that would generate the same SDLT as if there had been an asset sale. She also doubted that the measure would make the contribution the Government claim to plugging “the huge gap in wealth taxation that abolition of the 50p tax has left.” Nevertheless, Labour supported the principle of the measure and did not oppose it. Exchequer Secretary David Gauke said the Government understood the concerns of property investment companies and the Treasury is talking to affected parties. The measure is broad, he said, because we want to prevent avoidance; too narrow a definition could leave loopholes.

Clauses 213 (providing for a power to modify the application of one section of the SDLT DOTAS legislation) and 214 (updating an SDLT relief for property acquisitions by bodies providing NHS services) got a few minutes debate each before the committee turned to the controversial tax agreement between the UK and Switzerland. This was the longest debate of the sitting, with seven speakers taking just over 100 minutes between them. David Gauke opened, explaining that amendments 201 and 202 were needed to ensure the effective implementation of the tax agreement. A number of Labour MPs were then critical of the agreement. Grahame M. Morris said that, by colluding in such a scheme, the Government were giving implicit support for the continuation of tax havens. Ian Lavery criticised the retention of anonymity under the arrangement and asked what the Government would do if individuals take the opportunity to move to a different tax haven. John Mann suggested the UK Government had pursued the Swiss agreement in an effort to block the EU savings tax directive (an accusation strongly denied by David Gauke) as this would threaten Crown dependencies such as Jersey and the Isle of Man. The party’s spokesperson, Catherine McKinnell, said the principles behind the deal were welcome, but the plan was “riddled with loopholes and exemptions that will severely undermine its potential to make anything like the sums the Treasury claims.” The view from the government benches was more positive. Conservative Robert Syms described the agreement as sensible. Lib Dem John Pugh described it as “a step forward”, while asking for a full report on the outcome (number of individuals reported, amount of tax regained, etc.)

Responding to the debate, David Gauke said that while anyone who takes their money out of Switzerland before January 2013 would escape the agreement, they will face the risk of criminal investigation, and the UK “remains determined to close the net on those individuals”. Responding to concerns about a limit of 500 information exchange requests he pointed out this was in addition to, rather than instead of, existing information exchange provisions, and if requests are generally successful, more requests may be made in the following year. Responding to claims that trusts and foundations would not be covered by the agreement, Gauke said that trusts would be within the scope if they are controlled by a UK taxpayer. The proposals were passed, with the two government amendments.

The CIOT and LITRG were quoted in debate on the clause 220, the removal of special provision for incapacitated persons and minors, subject of a longstanding LITRG campaign. “The proposals developed through consultation mean that the clause will go further than simply amending an archaic piece of law; it will remove it. That allows everybody to be treated the same way under tax law, while those needing extra help will still be able to rely on representatives when it comes to the administration of their tax affairs,” said David Gauke.

Debate on clause 221 (Tax agents: dishonest conduct) straddled the 7pm break. For Labour, Cathy Jamieson (Shadow Economic Secretary) said that, if someone is ‘named and shamed’, there must be adequate safeguards in place to ensure that the procedures have been properly followed. She quoted the ICAEW and sought clarification on how the Bill’s provisions would interact with the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003. Responding, David Gauke said, “Tax agents play a vital role in the delivery of the tax system, which could not function effectively without them.” He described the consultation process with agents and their representative bodies as “productive and constructive”, with HMRC adding new safeguards (eg. right of appeal to tribunal) as a result of robust points put to them by the professional bodies. Intriguingly, Gauke revealed that HMRC’s “working assumption is that the number of agents involved in dishonest behaviour at any time is about 40.” He also promised that HMRC would publish guidance in draft for comment before implementation.

Clause 222, on information powers, applies if HMRC possesses some information about a person but not enough to make their identity clear. A third party who knows basic details about that person, such as their name and address, would be required to provide them to HMRC. David Gauke said this was in response to a peer review by the global forum on transparency and exchange of information for tax purposes, which found that existing UK provisions do not meet international standards. For Labour, Catherine McKinnell asked why the minister had removed the need to obtain a tribunal notice to get this information, and also urged the Government to address the weakness of the appeal system. In response, Gauke emphasised the safeguards in the proposals and promised that they ensured that the power could not be used for ‘fishing expeditions’.

There was a brief 15 minutes of debate on RTI under clause 223 (PAYE regulations: information). Catherine McKinnell warned that, for many employers, the increase in reporting burdens could be considerable. She cited those who pay their staff weekly or daily, those who do not use computers in their businesses, who do not have broadband access or who pay workers before the payroll is computerised. David Gauke said that this was wrong: “The net effect is that RTI will reduce the burdens on business - HMRC estimates by about £300 million a year from 2014-15.” The pilot is working well, he said.

OTS proposals for reliefs to be abolished also got quarter of an hour of debate. There was a brief debate about what angostura bitters are used for, and Cathy Jamieson reported concerns over the withdrawal of relief relating to mineral leases and agreements (broadly that the proposals might discourage owners from allowing mineral extraction on their land). Conservative MP Nigel Mills thought this would be a good thing. He said he would wholeheartedly welcome any measure that discourages open-cast mines - “these awful blights on the countryside”. David Gauke defended the proposals. “As far as mineral royalties are concerned, the relief is redundant, and abolition would not discourage landowners from making land available for mineral extraction,” he said. Lib Dem Ian Swales intervened to observe that he did not detect the work of the OTS in the first 224 clauses of the Bill and to ask the Minister if he held out any hope “that in future Finance Bills the OTS will get deeper into our very complex system?” Yes, said the minister: “The OTS has made a good start. It has identified a number of areas where there is further work to be done.”

The existing clauses having been approved, the committee briefly debated two proposed new clauses. The first, tabled by Lib Dem Stephen Williams, proposed reintroducing the fuel duty differential for biodiesel, which ceased on 31 March 2012 as a result of a sunset clause. Responding, Chloe Smith (Economic Secretary) said the differential had proved more expensive than expected as international producers took advantage of the UK’s tax relief. Analysis suggested that, if the rebate were continued, it could cost around £200 million in 2012-13 and continue to increase in future, she said. Williams welcomed minister’s statement that she intended to continue to have dialogue with the biofuels industry and did not press the clause to the vote.

Conservative Nigel Mills raised the plight of those affected by section 58 of the Finance Act 2008, which ended a particularly awful tax avoidance scheme. “I am sure we would all agree that that scheme should have been properly closed down many years earlier, and that the Revenue should have properly litigated at the time against those who implemented it rather than letting it run on and give its users the impression that they were acting lawfully and within the tax code. People involved in the scheme have suffered distress and real financial hardship because the measure taken to close it down was deemed to apply for ever.” His new clause asked the Government to consider whether what was done was consistent with how the Government now think we should use retrospection, if at all. “Would we not be better off changing the law to close the scheme down from the date of the announcement in 2007, then litigating under the old rules to find out whether the scheme was legal?” he asked. A number of other MPs were supportive. Two (Labour’s Fabian Hamilton and Conservative Jacob Rees-Mogg said all retrospection was wrong. Responding, David Gauke said users should have been aware that HMRC was challenging the scheme, and should have ensure they would have funds to meet their liabilities. Mills withdrew his “probing clause”.

Finally came the words of thanks (light and humorous, as is the tradition), on the motion that the Bill, as amended, be reported to the House. David Gauke noted that Labour had requested 28 reports during committee stage. He suggested that Owen Smith had been moved from the Labour Treasury team because of his refusal to wear a red jacket and black blouse (apparently all three members of the Labour Treasury team present were wearing this). Catherine McKinnell, who had replaced Smith on the committee and as Shadow Exchequer Secretary, noted (tongue firmly in cheek) that there had been “much disappointment in Committee when he left because he dealt with matters succinctly, and I know that my arrival slowed progress somewhat.” (With Smith as Labour’s spokesman the committee was proceeding at a rate of roughly one clause a sitting.) She thanked the representative bodies for their “enormous help and assistance to the Opposition team in ensuring that the Bill is scrutinised”. Stephen Williams then invited committee members to what was left of the CIOT’s parliamentary reception on the Terrace, adding that “the really good news is that no one will have listen to the speeches, because the Exchequer Secretary and myself made our speeches during the vote on the Opposition business earlier this evening. The invitation is to pop downstairs and have a free drink - we all deserve it.” Proceedings were concluded by the observations of the chair, Peter Bone, who said it was “the best Finance Bill Committee that I have ever served on?” His statement that “every member has taken part” was not strictly true, though a quick analysis indicates that all but two of the 36 committee members did contribute at least an intervention during the proceedings.

The question was put and agreed to. At 9.11 pm the Committee rose.

Amendments debated during the two sittings

UK-Swiss Agreement

Amendment 201 (Government)
Clause 216, page 124, line 8, after ‘2012’, insert
‘and by a mutual agreement signed by them on 18 April 2012 implementing article XVIII of that protocol’.
Amendment passed (no vote)

Amendment 202 (Government)
Schedule 35, page 624, line 16, after ‘2012’, insert
‘and by a mutual agreement signed by them on 18 April 2012 implementing article XVIII of that protocol’.
Amendment passed (no vote)

New clauses

New Clause 3 (Stephen Williams (Lib Dem))
Fuel duty differential for biodiesel
‘(1) The Biodiesel Duty (Biodiesel produced from waste cooking oil) (Relief) Regulations 2010 (S.I. 2010/984) shall be deemed not to have ceased to have effect on 31 March 2012 and shall continue in force.
(2) No further Regulations may be made under the Hydrocarbon Oil Duties Act 1979 which would have the effect of removing or reducing the relief provided for by the Regulations mentioned in subsection (1) until a full impact assessment of the impact of the removal of a fuel duty differential for biodiesel has been laid before Parliament.’.
New clause withdrawn

New clause 4 (Nigel Mills (Con))
UK residents and foreign partnerships (review)
‘The Chancellor of the Exchequer shall review the implementation of section 58 of the Finance Act 2008, and the impact of its retrospective nature on the taxpayers involved, and place a copy of the review in the House of Commons Library.’.
New clause withdrawn

George Crozier
CIOT External Relations Manager
Thursday 19 July 2012