TC Newsdesk by Adrian Rudd, published in the September 2002 issue of Tax Adviser. Adrian Rudd of PricewaterhouseCoopers is Tax Adviser’s representative on the Technical Committee.
Even before this year’s Finance Act received Royal Assent the Technical Committee was considering what changes it would be asking the government to make in next year’s Budget. The reason for doing this so early is that Ministers will be announcing their decisions in the pre-Budget Report, which is expected to be issued in November, and the Institute’s suggestions have to be made long before then if they are to be considered by the government.
This article highlights the key points raised by the Institute.
The procedure for dealing with technical changes
The Institute fully appreciates that an annual Budget is necessary for determining the various parameters of the tax system, but thinks that more flexibility and better scrutiny of legislation would arise from moving to, say, a two-year cycle for technical changes. Tax legislation tends to be complex, and changes in one part of the system affect other parts of the system. Complex legislation needs to be drafted carefully and needs to be exposed for comment to ensure that it is workable, does not have unintended consequences and does not contain drafting errors requiring early correction. Recent experience shows that where there is proper consultation, this results in better legislation.
In recent years the Institute has repeatedly highlighted the increasing use of Statutory Instrument (SI)s subject to the negative resolution procedure. This year, substantive provisions on tax credits, electronic filing and derivative rules are being introduced by way of SIs that are not subject to full parliamentary scrutiny. Publication of draft regulations for consultation can help, but the Institute strongly believes that all principal taxing provisions should be incorporated into Acts of Parliament.
Quarterly instalment payments of corporation tax (QIPs)
The Institute believes that, in general, companies are managing to calculate their QIPs with reasonable accuracy. However, this accuracy comes at the expense of a considerable compliance burden, as companies are doing far more than the bare minimum necessary to avoid penalties. The Institute called for a safe harbour, for penalty purposes only, which would apply when a company made QIPs based on its previous year’s results. This would reduce the compliance burden without exposing companies to the risk of penalties.
Abolition of withholding tax on interest, annual payments and royalties
The Institute welcomed the introduction in FA 2002 of a facility for payment of cross-border royalties without deduction of withholding tax, where the recipient is entitled to the benefit of a double taxation agreement. The Institute called for this to be extended to the payment of interest, annuities and other annual payments.
Reform of ICTA 1988 s. 765 (Treasury consent)
The Treasury consent provisions were designed to enforce exchange control legislation that was repealed many years ago. It appears that the Revenue wish to retain Income and Corporation Taxes Act 1988 (ICTA 1988), s. 765 because it gives them early information regarding certain transactions. The Institute regards the Revenue’s reasons for opposing the reform of s. 765 as invalid. If information is required, then a simple reporting requirement should suffice. The criminal sanction of s. 765 is anachronistic, particularly in an age of self-assessment.
Legal Professional Privilege
The Institute is very concerned about the effect of the Proceeds of Crime Bill on those Chartered Tax Adviser (CTA)s who work in the area of tax investigations and enquiries. They will find themselves in an anti-competitive market if professional privilege remains the exclusive right of those in the legal profession. Accordingly, the Institute called for legal professional privilege to be extended to CTAs so that they are not placed in an anti-competitive market as a result of the Proceeds of Crime Bill.
New Tax Credits
While appreciating that this new relief is still in its infancy the Institute is concerned about the complexity of the system.
The fact that assessment of income has to be on the joint income of a couple will put many claimants off obtaining their entitlement. The Institute appreciates that the government is committed to increasing take-up and to using this system to alleviate child poverty, and suggested that a simpler system and claim form could be made available to those who seek only to claim the family element of the child tax credit CTC). This could be a considerable proportion of the new tax credits population for whom the amount of joint income would not be critical and for whom the numbers of hours worked would not be relevant. They would be smaller families with no childcare costs whose income was between around £20,000 and £50,000. They could just complete a form certifying that these circumstances applied to them and that they only wished to claim the family element of CTC. No useful purpose is served by requiring them to make an accurate return of their joint income if it is below £50,000.
The Institute realised that it may not be possible to introduce such a claim form in time for August/September 2002, but urged the government to consider it as a possibility for the start of 2003/2004, or even during 2003/2004. It could do much to increase take-up, remove the stigma of joint means-testing and provide administrative gains for the Revenue.
Simplification for those on low income
The Low Incomes Tax Reform Group (LITRGY)has suggested that, as a matter of principle and procedure, space should be reserved in every Finance Bill for simplification measures. This would be to accommodate a limited number of changes to tax law specifically calculated to make simpler the tax lives of those on low incomes who are without the support of a tax adviser. The Institute supports LITRGY in this initiative.
The Institute pointed out that one of the conclusions of the House of Commons Treasury Committee in its Eighth Report, Inland Revenue: Self Assessment Systems (HC 681), was as follows:
‘We are disappointed that the Budget contained no measures specifically designed to simplify Income Tax Self Assessment. Given the existing level of complexity, we support the proposition that there should be annual changes to the tax system aimed solely at simplification.’
The Institute wholly supports this recommendation, simplification having been a strong theme of its Budget representations in recent years.
Basis of assessment of pension income
The Institute called for some rationalisation of the bases of assessment rules for pension income, as highlighted in the recent Exposure Draft 12 of the Tax Law Rewrite Project. Simplification in this area could lead to considerable easing of compliance burdens for individuals returning pension income for tax purposes.
Abolition of the schedular system of corporation tax
The Institute trusts that further progress will be made with the current review during the coming year. In particular, this would simplify the rules relating to the set-off of losses.
Compliance with EU law
The representative bodies have drawn attention to various instances where United Kingdom (UK) tax legislation is at variance with European Union (EU) law. It is accepted that not all of these can be dealt with immediately, but some can, in particular:
Employee shares: dependent subsidiary legislation
- Capital Allowances Act 2001, s. 109– foreign leasing – which discriminates against leasees in other member states;
- Finance Act 1986 (FA 1986), s. 75–77 – Stamp Duty – which discriminate against companies in other member states;
- ICTA 1988, s 213 and Taxes and Capital Gains Act 1992, s. 192– demergers – which discriminate against transferee companies in other member states.
Many members of the Institute have expressed serious concerns about the operation of FA 1988, s. 79, 86 Broadly, the legislation counters the potential for manipulation of the value of employee shares by artificially increasing the value of the subsidiary company in question (for example, by trading with it on a non-commercial basis). The legislation imposes income tax charges on the employee shareholders in question.
However, the legislation extends much more widely than the mischief that it seeks to counter. Moreover, even where all of the conditions for exclusion from the effects of the legislation are in principle satisfied, unlimited tax liabilities may nevertheless arise to employees purely by reason of a failure by the directors of the parent company to certify within two years of the end of the accounting period that this is so. In practice, many of those caught by this rule, and in particular those with foreign parent companies, are simply not aware of it until it is too late.
The effects of the legislation are therefore extremely harsh and represent a disincentive for business to operate in the UK. The removal of the penal effect on the unwary, while preserving the deterrent effect of the legislation, is likely to be straightforward and would create a simpler and fairer environment for business and encourage wider employee share ownership.
The ‘cliff-edge’ VAT registration problem
The Institute welcomed the introduction of the flat-rate scheme for small businesses introduced this year. It proposed that an attempt should now be made to deal with what has become known as the ‘cliff-edge’ problem. Taxpayers – particularly those providing services for private individuals – face difficult decisions when they cross the registration threshold: whether to increase prices (thereby risk losing customers) or to bear all or part of the value added tax chargeable themselves (thereby reducing profits).
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September 2002 by