would be revenue neutral;
· has few winners and losers;
· would be easy to implement; and
· would simplify the administration of the tax system or eliminate unnecessary technicalities. We accept that some of our suggestions will not pass all these tests – or will need additional work to prove they do. However, all would pass the fourth test, which we feel is in many ways the most important. If there is a loss of tax, we feel the costs of administration and collection probably outweigh the receipts.
We deliberately chose possible changes that range from (in effect) administrative simplifications through minor technical changes to involved technical issues. All, we submit, deserve serious consideration and, preferably, quick action.
Longer Term Aims
Our paper concentrates on “Quick Wins”. But we feel it would be wrong not to outline some longer-term projects. We therefore point to some wider areas where it seems to us that some work on simplification would pay dividends.
TWELVE CORPORATE TAX QUICK WINS
Treat expensive cars in the same way as inexpensive cars
In discussions between the Revenue and the representative bodies, it has become clear that the one simplification which would reduce significantly the amount of paperwork required to prepare a corporation tax computation would be the removal of the £12,000 limit in s75 CAA 2001 and s578A TA 1988. As far as capital allowances are concerned, the effect of the rule is to shift the balance of the allowances from writing down allowances to balancing allowances. Generally, the £12,000 limit penalises the users of many ordinary fleet cars. The reasons given to date for not proceeding with this suggestion appear to us to be unconvincing. The reform of car benefits taxation as from 6 April 2002 provides a good opportunity to make this change.
Quarterly instalment payments
This has been discussed at length in SACC(CT) meetings with the Revenue. Suffice it to say (again) that large companies are having to undertake significant amounts of extra work purely in order to estimate current year profits for the purposes of QIPs. We can only repeat our previous suggestion that QIPs be based on profits of the preceding accounting period, for at least the “in year” payments, preferably the first three payments and ideally all four. This change would be subject to safeguards regarding groups and major changes.
Allow capital allowances on the full cost of fixtures
The restrictions under ss185 – 187 CAA 2001 appear to us to be unnecessary bearing in mind the extensive definitions set out in ss21 - 23, and the fact that qualifying items are likely to depreciate in value due to wear and tear.
Treat industrial buildings on the same basis as long term plant or machinery
Considerable simplification could be achieved by treating industrial buildings on the same basis as long-term plant. This would mean that all expenditure on the same building could be pooled and the purchaser could claim allowances on his purchase consideration, so far as attributable to the building rather than the land on which it stands. It would, of course, follow that a balancing charge could arise to the vendor after the end of the present 25-year writing off period. This would be dealt with by adjusting the purchase price.
Under the present system, the purchaser of a second-hand building may experience great difficulty in ascertaining the amount of qualifying construction expenditure on which he can claim IBAs and the writing off periods for each item. It is for consideration whether the purchaser’s qualifying expenditure should continue to be restricted to the vendor’s qualifying expenditure (as it is for fixtures, for example).
The CIOT is preparing a more detailed paper on this whole subject. Whilst we list it as a quick win, we do so to highlight the potential for administrative savings. We realise that more work will be needed because there would be winners and losers with the change.
Simplify the consent rules for consortium relief
At present, Sch 18 para 70(2) FA 1998 requires every member of a consortium to sign a consortium relief claim or amended claim. We believe that this is unnecessary. In practice, there will be an agreement between the members of a consortium as regards the utilisation of losses and payment for tax relief thereon. In a self assessment environment where simplified arrangements for group relief are available, it should be possible to rely on these arrangements, coupled with a claim signed only by the claimant and surrendering companies.
Deduction for remuneration
We understand fully the reasons for the provisions in s43 FA 1989. However, at the same time it must be appreciated that small businesses in particular can take a lengthy period to sort out final results and indeed cash flow considerations may be a factor. These may lead to perfectly genuine reasons for the delay in payment and so we think that the s43 rules should apply only in cases involving tax avoidance. This would reduce the administrative burden on businesses.
Reduce the 6-year time limit in s179 TCGA 1992 to 2 years
Section 179 was originally enacted to counteract the “envelope trick” whereby an asset pregnant with gain could be transferred to a company in the same group at market value and that company could then be sold. In drafting the section, the draftsman went for overkill. In practice, it is impossible to plan events even two years ahead in a business, let alone six years.
Meanwhile, several anomalies have emerged in the operation of the section and there are traps for the ill-advised. The Revenue have sought to justify the present six-year rule on the basis that gains arising whilst the asset was in the transferor company are taxed at asset level and gains arising thereafter at the shareholding level. However, it appears to us that this is an ex-post facto justification which is invalid. A two-year time limit would be sufficient to counteract avoidance, and it would remove some of the anomalies and traps from the operation of the section. It would also reduce administration – the six-year time limit brings with it a considerable extra burden when mergers and acquisitions are under consideration.
Simplify the accounting period rules in s12 TA 1988
The rules in s12 can catch out the unwary - in particular the rule in sub-section (3)(c), which brings an accounting period to an end when a company ceases to trade. It is suggested that these rules are unnecessarily complex and should be simplified.
Harmonise the EIS rules with the corporate venturing scheme rules
The definition of qualifying company, which is set out in the new re-write style in Sch 15 FA 2000, should also apply verbatim for EIS purposes, instead of ss293, 297 TA 1988. There seems no reason for two detailed codes to exist for such similar provisions; if there is a reason for differences, these should be dealt with by specific provisions in a common code.
Double taxation relief: relief for underlying tax
Despite the extensive consultation in this area, unnecessary complexities remain.
Dividends received in the UK from direct subsidiaries are, in some circumstances, treated more favourably than those received via an intermediate holding company. The key area is the fact that a dividend which has been subject to the Mixer Cap is not a Qualifying Foreign Dividend. Difficulties also arise in the calculation of the Upper Rate Amount where the intermediate holding company is subject to an exemption system. We believe that these complexities should be addressed, particularly in respect of holding companies resident in EU Member Sates.
Abolish s765 TA 1988 or replace it with a reporting requirement
Section 765 was originally part of the legislation enforcing exchange controls. Since it was enacted, not only have exchange controls been abolished, but the CFC legislation has been enacted and the transfer pricing legislation has been tightened up. There has also been the development of the single market within the EU. In the circumstances, s765 has outlived its usefulness and should be repealed or replaced by a reporting requirement.
Review s703 TA 1988 and confirm it does not apply for CGT purposes
The provisions, which are now in s703, were originally enacted as s28 FA 1960 to counteract dividend stripping. At that time, there was no tax on capital gains. Since then, corporation tax and capital gains tax were introduced in 1965. The classical system of corporation tax was replaced by the imputation system in 1973. Income tax rates went up to 98% on investment income. In 1988, the rates of capital gains tax were aligned with the rates of income tax, and the top rate of income tax had been reduced to 40%.
Bearing in mind the tax credit on UK company dividends, it could actually be beneficial to take dividends rather than capital gains, subject to the availability of retirement relief. Now that retirement relief is being phased out, the emphasis is on taper relief, which can reduce the effective rate of capital gains tax to 10%, but only after two years of ownership of the relevant asset.
The present purpose of s703 needs to be clarified generally. In particular, it should be made clear that the section does not apply for the purposes of capital gains tax. At a minimum we need to remove the need for many routine s703 clearance applications which occupy too much Revenue and tax advisers’ time.
LONGER TERM ISSUES
Simplify the plant leasing legislation
This legislation has become extremely complex. There is a perception that the Revenue regard all forms of plant leasing as a form of tax avoidance. Legislation which purports to be anti-avoidance legislation in fact has the effect of undermining the policy of giving effective tax relief under the capital allowances system where plant or machinery is provided for the purposes of a business. Where the capital cost is incurred by a lessor, the benefits of the capital allowances are almost always passed on to the lessee. Thus the effect of some of this legislation is to increase the effective cost of providing machinery and plant. Some effort to see the wood for the trees is required.
Restrict the imposition of stamp duty to land and securities
In practice, virtually all of the tax take from Stamp Duty comes from interests in land and transfers of securities. However, there can be isolated cases where, for example duty can be levied on transfers of goodwill where a business is transferred as a going concern. In our view, this is inappropriate. Stamp Duty could be simplified considerably at little cost to the exchequer by eliminating all items other than land and securities. The case for abolishing the charge on securities is a separate policy issue.
Shadow ACT
The rules for carrying forward surplus ACT beyond 5 April 1999 are horrendously complicated. The Revenue should consider making a one-off tax refund or set off based on utilisation in the two year period up to 5 April 2001 and projected forward a further four years. The basis of such a refund would require consultation, but the shadow ACT legislation and Regulations could then be repealed and the further carry forward of surplus ACT ended.
Abolish the schedular system of corporation tax
This is the subject of a detailed CIOT paper. Suffice it to say here that we believe that the schedular system is no longer relevant and that the whole of a company’s commercial activities should be regarded as a single source of income or gains for corporation tax purposes. This would mean that it would not be necessary to have separate loss relief provisions for each type of income.
Technical Department
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