Article on the CIOT's representations on the Finance Bill by Adrian Rudd of PricewaterhouseCoopers, Tax Adviser's representative on the Technical Committee published in the June 2000 issue of Tax Adviser).Finance Bill representations
The Technical Committee’s biggest single undertaking each year is to make representations on behalf of the Institute about the draft legislation in the Finance Bill. This necessitates a clause by clause analysis of the provisions, and represents a substantial time commitment for the Institute’s technical officers and members of the Committee and the sub-committees.
The Institute’s representations on the Finance Bill 2000, which were recently sent to the Inland Revenue and Customs & Excise, highlighted some points which it felt should be addressed urgently. This article comments on those issues. References are to the clauses and Schedules of the Bill published on 27 March 2000.
The Institute re-emphasised its concern, which it has frequently raised in the past, about the increasing complexity of the taxation system, and the administrative burdens this places on taxpayers. The Finance Bill is a daunting 558 pages long and the Institute questioned whether the increased compliance costs could be justified in all cases.
The Institute remains convinced of the need for a Royal Commission into Taxation to be established.
Clauses 38 – 46: Giving to Charity
Whilst the Institute welcomes the improvements made by the Finance Bill, it remains concerned at the policy decision to continue to link the tax credit on charitable giving with the tax paid by individual donors.
In principle, individuals will need to keep a complete record of their charitable giving, to enable them to know whether enough tax has been paid to cover the tax credit. And those within self-assessment, whether higher rate taxpayers or not, will in any event need to be able to complete the tax return.
It is hard to believe that the amounts of tax involved for non-taxpayers justifies the regulatory burden that this imposes.
Clause 58 and Schedule 11: Cars available for private use and business travel by car
Schedule 11 introduces changes to the taxation of company cars, which will take effect for 2002-2003 and subsequent years. The cash equivalent of the benefit will continue to be an appropriate percentage of the list price of the car, rather than its actual cost.
The Institute is concerned that, following the recent report by the Department of Trade and Industry, which advocated the abolition of the recommended retail price of cars, the basis of the charge will have to be amended. This will invariably lead to uncertainty as to how the company car benefit is to be taxed.
The Institute urged the Government to amend the legislation, so that the basis of the calculation of the cash benefit is the price paid by the employer, as opposed to the list price. This would bring greater certainty to the determination of the assessable benefit, and would also be consistent with the treatment of other benefits.
Employers and company car users are currently reviewing their approach to company cars in anticipation of the changes due to take effect from 6 April 2002, bearing in mind the typical three or four year cycle for company car replacement.
However no announcement has been made as to the future basis for authorised mileage rates. The Institute believes that this leaves employers and employees ill-informed to make decisions on future company car policy. Any mileage rate changes will produce both winners and losers, depending on the type of car, and those affected need to know what the new mileage rate regime will mean.
Clause 59: Provision of services through intermediaries
The Institute is particularly concerned about the tax position of subcontractors in the construction industry who provide services through intermediaries. The lack of interaction between the tax regime for subcontractors and that for personal services, will place many subcontractors at a distinct disadvantage when compared to other taxpayers, and will suffer 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 by the contractors for whom they provide services. However if the service is within the provisions of Clause 59, the tax that has already been 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’s 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 agreed, but this may two years or even longer.
The Institute believes that this is extremely harsh, and that a simple, fair solution would be to allow the subcontractor to deduct the tax already paid under deduction from any PAYE liability.
Clauses 65 - 66: Taper relief for business assets
The changes proposed in the Finance Bill will result in many shareholdings becoming business assets on 6 April 2000. This change in status means such a shareholding acquired before 6 April 2000 and sold before 6 April 2010 will bear capital gains tax at a higher rate than if the same shareholding were acquired on 6 April 2000 and sold on or after 6 April 2004.
For example, assume such a shareholding is sold on 6 April 2004. If bought on 6 April 2000, only 25 per cent of the gain will be taxed. If bought before 17 March 1998, 41.67 per cent of the gain will be taxed.
The Institute cannot understand why assets held for a longer period should be more harshly taxed than those held for a shorter period.
Following the significant relaxation of the definition of qualifying shareholdings for business asset taper relief, the definition of ‘trading company’ is likely to cause far more difficulties for taxpayers. Many investments which might be expected to qualify for taper relief as a business asset will not in fact qualify; moreover the situation could change on a daily basis depending on the precise activities of the company.
The Institute suggested that the definition of ‘trading company’ should be widened and made more certain. Consideration should be given to introducing an additional definition of trading company to apply only for quoted companies. As the proposals stand, many employees will be unable to reach a conclusion when preparing their self-assessment returns – especially where the shares relate to an overseas resident employer.
The extension of the definition of business assets to include shares held by employees of a trading company or the holding company of a trading group could also prejudice an employee who decides to retain the shares following retirement, since the shares would no longer be qualifying business assets. If the purpose of taper relief is to encourage long-term investment in business assets, the proposed changes will have the opposite effect for retiring employees. Shares held at retirement should retain their status as business assets.
Clause 102 and Schedule 30: Double taxation relief – ‘Mixers’ and other changes
The Institute believes that it is wrong to make mixers ineffective without offering any substitute, particularly since this proposal was not on the table during the two year consultation period, and called for paragraph ten to be withdrawn to enable proper consultation to take place.
The Institute welcomed the Government’s subsequent announcement on 3 May 2000 that the implementation date for this proposal will be delayed until 31 March 2001.
The Schedule includes other measures, some of which are beneficial to taxpayers, and a number which enact existing Revenue practices. However, they give rise to numerous computational doubts and difficulties, and the Institute called for them to be withdrawn so that consultation may take place on the detail.
Clause 116 and Schedule 33: Stamp Duty
The Institute called for an exemption for the incorporation of a business as a going concern, which would bring stamp duty into line with capital gains tax and VAT. The case for a stamp duty exemption is particularly significant given the recent increases in rates, and because stamp duty is charged on the gross value of assets transferred, with no deduction for liabilities or the cost of the assets. In fact, clause 118 would impose a charge to duty on a gift of land to a company in pursuance of the incorporation of a business.
Clause 116 enables the Treasury to alter the description of documents concerning land, stock or marketable securities in respect of which an existing stamp duty, or an existing rate or amount of duty, is chargeable. The Institute believes that this delegation of power is unacceptable – any extension of the Stamp Duty base should be effected only by the inclusion of relevant provisions in a Finance Bill.
Clause 144 and Schedule 39: Orders for the delivery of documents
This proposal had been made available in draft issued in November 1999, and the Inland Revenue appear to have been reasonably responsive to comments made by the Institute and others.
Although the person against whom the order will be made will now be entitled to appear in the proceedings (unless the Judge decides otherwise), two remaining issues are:
- there is no appeal against the notice after issue, and
- the sanction for non-compliance remains the very weighty one of contempt of court.
Such a combination means that a third party who genuinely believes that the notice should not have been issued, and who may be advised by Counsel that the Judge was wrong in law to have issued it, has no avenue of appeal except perhaps that of judicial review.
In addition, if a third party fails to comply with such an order, perhaps following legal advice that it has been unlawfully issued, its officers (if it is a company) or partners (if it is a partnership) are at risk of imprisonment for contempt of court.
This seems a wholly inappropriate sanction for a power that is intended to be used against ‘friendly’ third parties who are not themselves suspected of any offence, and appears to be contrary to the majority of responses made to the Revenue.
The Institute called for an appeals procedure be inserted into the Schedule and suggested that the penalty for non-compliance, following exhaustion of the appeals procedure, should be financial in nature.
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