Article on the Institute's representations for the next Budget by Adrian Rudd of PricewaterhouseCoopers, Tax Adviser's representative on the Technical Committee (published in the November 2000 issue of Tax Adviser).Budget 2001 – the Institute’s representations
In recent years many major changes have been announced in the pre-Budget report, and the Institute decided that its submissions needed to be made well before that time.
The Institute’s policy is to focus its Budget representations on major issues, with a view to discussing with the Government and revenue departments the continuing development and administration of the tax system. Other anomalies and issues are discussed with the relevant specialists as they come to light, but are not included in the Budget representations.
The Institute has expressed concern over a number of years about the growing burdens placed on business by the taxation system. It believes the time is ripe for a thorough review of the whole system to ensure that burdens imposed on taxpayers and non-taxpayers alike are proportionate to the benefits obtained, and this theme underpinned this year’s representations.
Rates and allowances
Income tax is charged at a wide range of rates depending upon the nature of the income, and as a result taxpayers have difficulty in calculating their own tax liability. This complexity is highlighted by the fact that the Tax Calculation Guide for the year ended 5 April 2000 runs to 29 pages and contains a number of mistakes, such as not accurately calculating whether payments on account are due for the tax year 2000-01. In addition, there are numerous additional marginal rates for older taxpayers, as well as different rates applying to executors and trustees.
The introduction of, and annual changes made to, taper relief has increased the difficulty of calculating capital gains, particularly where many of the assets held qualify for indexation allowance, and where the nature of the asset changes from being non-business to business for the purposes of the relief.
Enquiries under self assessment
The fact that a formal enquiry must be opened before the Inland Revenue can ask questions about a tax return is both cumbersome and potentially distressing for taxpayers, who may perceive the opening of an enquiry as casting aspersions on their honesty. This requirement should be reviewed, and a more informal method should be developed to deal with routine requests, such as evidence of payments into a personal pension plan.
When individuals make donations to charities that qualify for tax relief, they are required to maintain records to show that the tax relief is covered by an equal amount of tax paid. If there is a shortfall, that sum must be paid to the Revenue. Moreover individuals must certify that they are taxpayers before charities can recover their tax credits. In reality this burden only applies to those with little or no taxable income, yields very little tax, and appears to be contrary to the Government’s wishes to increase charitable donations. It also penalises the poorest in society for being charitable out of what little they have. This burden falls on all charities, consuming valuable resources with very little benefit to anyone, and should be reviewed.
The burdens placed on employers have increased considerably in recent years. Changes include:
- Introduction of the new construction industry scheme
- Introduction of Working Families’ Tax Credit and Disabled Persons Tax Credit regimes
- NICs on benefits
- Introduction of student loan repayments.
These burdens fall heaviest on small businesses that are unlikely to have a separate payroll department, and will be further increased with the introduction of stakeholder pensions from 6 April 2001. These burdens are likely to act as a disincentive to business expansion, as the costs of taking on staff are excessive. Britain’s productivity would receive a huge boost if some of these burdens could be lifted.
Statutory Sick Pay is widely regarded as being difficult to administer. The Institute urged the Revenue to review this old but considerable burden.
Personal services and subcontractors
The Institute expressed particular concern about the tax position of subcontractors in the construction industry who provide services through intermediaries. As a result of the lack of interaction between the tax regime for subcontractors and that for personal services, many subcontractors will be placed at a distinct disadvantage compared with other taxpayers and suffer, at least initially, a marginal rate of tax of over 60 per cent.
This is because subcontractors who hold registration cards will have income tax deducted at source from the contractors for whom they provide services. However if this service is also caught within the provisions of the personal services regime, any tax deducted at source is not taken into account when calculating the PAYE payable on relevant engagements. Thus on a receipt of, say, £1,000, they receive a net £820. Then they pay, say, 40 per cent tax and 12.2 per cent employer NICs on the £1,000 giving a total tax and NIC cost of £621. Of their original receipt, they are left with only £379. The excess tax will be refunded eventually, when their corporation tax return has been filed, but this may take a considerable period of time.
This is extremely harsh. A simple, fair solution would be to allow the subcontractor to deduct the tax already paid under deduction from any PAYE liability as a result of the introduction of the personal service regime.
Harmonisation of PAYE and NICs
This has been a constant theme of the Institute’s recent Budget representations and it is recognised that the distinction between PAYE and NICs is being gradually eroded.
However, the Institute called for the Inland Revenue to work together with the professions and industry to look at the perceived obstacles to a merger of the two systems and how they can be overcome. Perhaps more than any single change, a commitment to change in this area would signal the Government’s serious intention of concentrating Britain’s productive resources on building businesses, rather than merely complying with bureaucracy.
Cushioning the impact of VAT registration
The Institute called for a special scheme to cushion the ‘cliff-edge’ impact of VAT registration. For many businesses the immediate consequence of registration is to increase costs which, in practice, cannot be recouped by increasing prices without losing custom to non-VAT registered competitors. This shackles enterprise (because many micro traders decline to expand their businesses).
Corporation tax payments on account
The Institute believes that the payment on account rules are unworkable, for reasons which have been well aired by professional and other bodies. The Institute called for a move to a preceding year basis, such as applies for income tax purposes.
The schedular system
The Institute believes that so far as corporation tax is concerned, the schedular system is outmoded. It believes that the commercial activities of a company should be regarded as a single source for tax purposes. In particular, this would eliminate the need for different loss set-off rules for different types of income.
Review of stamp duty
Recent changes and increases in rates have highlighted the need for a thorough review of how stamp duty operates. The Institute called for differential rates for business and non-business transactions, and suggested that reliefs should be aligned as far as possible with those that are available in other taxes.
Double Taxation Relief
The Institute felt that insufficient consideration has been given to the changes to the Double Taxation provisions in FA 2000, and called for dialogue with the Revenue to continue over the coming months. Any necessary refinements should be given an early announcement – say by Christmas – so that companies are aware of the changes well before they come into effect on 31 March 2001.
During the course of the debates a number of clarifications were promised, and the detailed wording in the Inland Revenue manuals will be of importance to taxpayers, both in relation to Double Taxation Relief and the Controlled Foreign Companies legislation. In particular, the working of the motive test in the CFC legislation becomes ever more critical. We hope that drafts will be available of all this supporting material at an early stage, and that companies will have an opportunity to comment before the final versions are issued.
The Institute is concerned at the validity of the CFC regime in so far as it applies within the EU, and early clarification of the understanding of the Inland Revenue of the influence of the Treaty of Amsterdam on this legislation would be appreciated.
The Institute welcomed the change introduced in FA 2000 s.74, whereby inexpensive cars do not have to form a separate pool for capital allowances purposes. It called for further measures to tackle the expensive car regime, which would greatly reduce the paperwork required to work out the capital allowances on a fleet of cars. ‘Expensive’ cars costing more than £12,000 are subject to restrictions relating to capital allowances and the deduction for rental payments (CAA 1990 ss.34 and 35). The limit of £12,000 has remained unchanged since 1992. As a result, most standard fleet cars have become subject to the restrictions. The Institute believes that there is no valid reason for restricting the capital allowances and rental deductions for such cars, and proposed that the limit should be increased to £24,000 from 1 April 2001.
Implementation of EU legislation
The Institute has previously highlighted both the need for, and the desirability of, complying with EU directives. The continuing flow of references to the Court of Justice during the past year suggests that domestic legislation fails to comply with the common system of VAT. Resolution of these cases takes time, and meanwhile commerce is disrupted when traders are left in doubt as to their true legal obligations. The Institute called for greater priority to be given to ensuring that UK legislation fully implements both EU directives and judgments of the Court of Justice.
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