The Technical Committee’s initial views about the Chancellor’s Pre-Budget Report on 8 November 2000 (article by Adrian Rudd of PricewaterhouseCoopers, Tax Adviser's representative on the Technical Committee, published in January 2001 issue of Tax Adviser) This article outlines the Technical Committee’s initial views about the Chancellor’s Pre-Budget Report on 8 November 2000. This contained a number of important tax announcements.
Many of the proposed changes arose from consultation exercises that had been held with professional bodies and other interested parties, including the Institute. In general the Government has been willing to take account of the views expressed during those consultations, and the Institute believes that the tax changes which were announced in the Pre-Budget report will operate better as a result.
The following comments are set out according to the Press Releases in which the proposals were detailed.
Inland Revenue 1 – Income Tax Allowances and National Insurance Contributions
The Institute welcomes the announcement of the personal allowances and NIC contribution rates for the 2001/02 tax year at this stage. This will allow tax codes to be finalised and to take effect from the beginning of the tax year. This is particularly important for pensioners, who have in the past found it difficult to understand why the amount of their pension changes during the tax year. The Low Incomes Tax Reform Group has consistently called for tax allowances to be announced some time before the beginning of the tax year so that tax codes will not usually require amendment during the tax year, and it is pleasing to note that their efforts have been rewarded.
Inland Revenue 2 – Tax Boost to Employee Share Ownership
Capital gains tax taper relief
Whilst the Institute welcomed the proposed extension of the definition of business assets for taper relief purposes, it is concerned that the announcement only set out the general theme of the proposals, rather than on specific details. Representations have been requested on this basis. In this respect the consultation exercise resembles that which preceded the changes introduced in FA 1998, which the Institute considered was unsatisfactory.
There are problems of interpretation in the definition of a trading company for taper relief purposes. Taxpayers and practitioners find it an imprecise definition to apply because it requires consideration of the purposes for which a company exists, and, if there is more than one purpose, of which purposes are capable of having a substantial effect on the extent of the company’s activities (TCGA 1992, Sch A1, para 22(1)).
Where employee shareholdings are concerned it may be especially difficult for the shareholder to apply this test, especially where an employee’s holding is a minority and/or where there is a group situation requiring the consideration of the activities of the group as a whole. Employees may simply be unable to obtain enough information to apply the test correctly.
At first sight, therefore, the suggestion that the trading company test might be dispensed with for employee holdings is an attractive one, which offers the prospect of simpler compliance. As a matter of principle, also, we see no reason why employees of non-trading companies, which may generate substantial shareholder value and provide significant employment, should not benefit from enhanced taper relief.
However, while recognising the need for revenue protection measures, the Institute has two objections to excluding the employees of non-trading close companies:
1. This may merely substitute one complex definition – that of a close company – for another, and therefore do little to simplify taxpayer compliance. Like trading status, close company status can change from day to day and employees with small shareholdings may find it difficult to monitor. Also, in some listed companies, the question whether they are close or not can be especially unclear, although it has ceased to be relevant for most other purposes.
2. The effects of adopting close status as the boundary may be capricious. From the viewpoint of junior employees who own shares in, say, a listed property group, it may seem particularly unfair that they cannot obtain business taper relief merely because their employer happens to be close, whereas comparable shareholders/employees in a competitor group obtain it merely because their group is “open”. Business taper relief is intended to act as an incentive to encourage employees to take a stake in their companies (to quote from the opening words of the Press Release), so it seems illogical to base the existence of this incentive on factors over which employees may have no control.
The Institute would prefer to see the revenue protection measures founded on a test which is simple to apply, objective and related directly to matters within an employee’s knowledge and control. One solution would be to base the test on the size of an employee’s shareholding (for this purpose associates’ holdings would also be counted). For holdings of 20% or below, business taper relief would be due to employees and officers whether or not the trading test was satisfied. Close status, or otherwise, would be irrelevant. Where a holding of more than 20% was disposed of, an apportionment could be made giving business taper to the extent that it had at any earlier stage been part of a less than 20% holding.
Enterprise Management Incentives
The abolition of the limit on the number of employees who may be granted options under the scheme and the increase in the monetary limit to £2.5 million per company is welcome.
National Insurance on Share Options
The proposal to limit the amount of NIC payable on options granted between 6 April 1999 and 19 May 2000 to the gain attributable to the growth in company share price up to 7 November 2000 is good news.
However the announcement seems unfair to those individuals who were granted options on or after 20 May 2000 since this limit will not apply.
In addition, where options have been granted in unquoted companies, the restriction of the amount liable to NIC will mean that such companies will have to have their shares valued at 7 November 2000 in order to calculate the liability. There will therefore be a compliance cost for this proposal.
Inland Revenue 3 – Encouraging Britain to Save
The proposal to allow 16 and 17 year olds to open a cash ISA is good news.
It is surprising that the settlement legislation will continue to apply for parental contributions into their children’s ISA, particularly given the small amount of tax at stake – even the maximum annual contribution of £3,000 would produce only interest of around £200 given current return rates, leading to a maximum tax liability on the parent of £80.
This is contrary to the policy on Children’s Bonus Bonds and Stakeholder Pensions, and it is difficult to see how the distinction can be justified.
In addition, the task of identifying parental contributions will almost be impossible and as a result unenforceable. Will the treatment differ if a parent gives a 16 and 17 year old £5 per week pocket money, and the child saves some of the money before depositing it in a cash ISA to a parent who makes a direct contribution into a child’s cash ISA in lieu of pocket money?
Inland Revenue 4 – Modernising Stamp Duty
The Institute welcomed the Revenue’s intention to set up a Technical Advisory Group (TAG) as part of the design process for the proposed legislation.
However, once again the opportunity of conducting a thorough review of the whole operation of Stamp Duty has been overlooked, and the current proposals are merely tinkering at the edges of the system. The Institute believes that the time is ripe for the whole of Stamp Duty to reviewed and modernised.
Inland Revenue 5 - A More Competitive Environment for Business
Withholding tax on interest and royalty payments
The proposal to allow the gross payment of interest and royalties is welcomed, but this will only apply where the recipient company is within the charge to UK corporation tax. In the case of the non-resident landlords scheme it is possible for landlords who have undertaken to comply with UK tax obligations to register to receive rental income gross. The Institute suggested that consideration should be given to the introduction of similar arrangements for those outside the charge to UK corporation tax to receive interest and royalty payments gross, provided they agreed to comply with UK tax obligations.
It will be necessary to provide adequate protection to payers who pay gross having taken reasonable care to satisfy themselves that the payee is within the charge to UK tax.
It is not clear whether the proposed relaxations will apply to partnerships with corporate partners.
Intellectual property, goodwill and other intangible assets
The outcome of the consultation on the Technical Note published on 23 June 2000 has been very positive, and the current proposals have been amended in the light of comments received.
A key issue is the proposed exclusion of goodwill from rollover relief. The Institute does not agree with the Revenue’s arguments on this point. In particular it is considered that, as a minimum, there should be rollover relief where a business is transferred as a going concern. Goodwill does not cease to be of a capital nature merely by being written off in the accounts.
In general, there should be neutrality of treatment as between a share sale/purchase and an asset sale/purchase.
Taxation of gains on disposal of substantial shareholdings
The Institute welcomes the fact that the Revenue have taken up many of the points raised in the consultations to date. The idea of an exemption should be pursued, but this needs to be considered in the context of a more general review of corporation tax, which should be the subject of full separate consultation. In particular, there is apprehension that some form of interest allocation restrictions will be introduced.
If the deferral route was taken, there might need to be an amendment of the CFC legislation, although no such amendment would be required with an exemption.
Double taxation relief
The material issued by the Revenue is helpful.
On the detail of the new changes, first it is clear from example 2 that the new legislation still penalises the use of non-resident intermediate holding companies, rather than simply counteracting the perceived mischief of dividend mixing. This is undesirable, as there might be bona fide commercial reasons for having such a company. The Institute also believes that where the intermediate holding company is resident in a Member State of the EU, this approach is contrary to European law.
In general, the Institute believes that this attempt to introduce changes into a complex area of taxation without proper consultation in advance has caused major difficulties. The Institute hopes that the Government has learned from this, as the experience is one which should not be repeated
Limited Liability Partnerships (LLPs)
Whilst welcoming the introduction of the LLPs legislation, the Institute is concerned by the statement that the Revenue is about to consider “whether further tax legislation is required to provide certainty of tax treatment, given the intention that the creation of LLPs should not give rise to a significant tax loss.” It is hoped that this proposed anti-avoidance legislation will not mean that genuine opportunities to adopt LLPs status will be thwarted.
Corporate debt, financial instruments and foreign exchange gains and losses
In its 1998 Budget Representations, the Institute called for the integration of the FOREX, financial instruments and loan relationship legislation as part of a tax simplification theme. Such an amalgamation is a complex undertaking and should be subject to a thorough consultation exercise if the teething problems experienced when the legislation was introduced individually is to be avoided.
The Institute suspects that the anti-avoidance rules will be extended, but that a clearance procedure will be required.
Generally, companies are only just getting to grips with the existing rules. Any changes would require changes in their systems.
Groups of companies: group leaving charges and value shifting for inheritance tax (IHT)
The proposal to amend the Finance Act 2000 legislation in respect of assets transferred within a group before 1 April 2000 is welcomed, although there remain anomalies which apply when the transfer was made on or after that date.
Inland Revenue 6 – Construction Industry Scheme – Cutting Costs Through E-Business
The further reduction on the CIS5 limit to £1 million is welcomed, but the Institute believes that the fundamental shift to electronic date exchange will only benefit the largest contractors and does nothing to reduce the administrative burdens imposed on smaller contractors.
Customs & Excise 1 – Easing the Impact on SMEs
The Institute welcomes the Chancellor’s announcement of a consultation on the introduction of a “flat rate scheme” for taxpayers having a turnover below £100,000 per annum. The purpose of a flat-rate scheme is to help taxpayers, and should be designed with the following underlying principles in mind:
- The scheme should be voluntary;
· It should mitigate the “cliff-edge” effect inherent in the present registration provisions;
· It should be simple to use;
· It should be available to all taxpayers meeting the turnover limit requirements whatever the nature of their businesses. It must therefore be sufficiently flexible to meet the differences in trading conditions between different trade sectors and the fact that individual businesses may encompass activities within two or more sectors;
· It should be targeted by reference to the average trading profile of taxpayers within each trade sector. Thus, while it is unlikely that every taxpayer carrying on business wholly or partly within a particular trade sector will benefit, the expectation should be that the average trader would do so;
· Any flat-rate computation of tax liabilities should take account of both input tax and output tax;
· Record-keeping requirements should be kept to a minimum;
· Any notices or publicity given to the eventual scheme should emphasise that there is a trade-off between simplicity and accuracy and that entering the scheme will not necessarily result in a tax saving;
Although the Chancellor’s speech suggested that the consultation document was to be released immediately, it is, in fact, likely to be launched following the 2001 Budget. Given the extensive soundings which have already taken place, this five-month delay is disappointing.
HM Treasury/DETR 1 - A Fair Deal for Transport and the Environment
Modernising motor taxation
The Institute will ask for consultation of the reform of authorised mileage rates to start as soon as possible, since decisions are being taken now by employees regarding company cars which will have an effect beyond 6 April 2002. In order that they can make informed decisions they need to know how motoring will be taxed.
HM Treasury/DETR 2 –£1 Billion Package to Regenerate Britain’s Towns and Cities
The effective introduction of EIS for inner city regeneration appears to be a tax-driven scheme and we are concerned that the final legislation may be subject to severe anti- avoidance provisions which could make the scheme less effective.
VAT on the conversion and renovation of residential properties
The Institute welcomes the intention to introduce a reduced rate of tax on services used in the conversion of residential properties and an extension of the zero rate to include renovated residential properties.
The purpose of these reliefs is to help the regeneration of cities. If this aim is to be achieved the proposed legislation should avoid legal technicalities and conditions which are difficult to meet in practice. The legislation should not, therefore, be drawn in terms which are so restrictive that, in practice, they achieve less than was originally intended.
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January 2001 by