This month’s article outlines some of the matters raised in the Institute’s written representations about the Finance Act 2001(FA 2001). These points were first sent to the Inland Revenue before the act was finalised, and this article includes both the Institute’s comments and the Revenue’s responses. Article by Adrian Rudd of PricewaterhouseCoopers and Tax Adviser’s representative on the Technical Committee. Published in the February 2002 issue of Tax Adviser. Income tax rates (s. 50)
The Institute pointed out that one effect of increasing the ten per cent band was to increase the number of low-income taxpayers suffering the wrong rate of taxation on their non-dividend savings income. It thereby increases administration, both for the taxpayer and for the Revenue. Taking more people out of the tax system by increasing the personal allowance, or reducing the tax burden by aligning tax rates would, by contrast, reduce administration and make the tax system more efficient.
The Revenue replied that the government increased the size of the ten pence rate as part of its policy of making work pay and tackling poverty. It does not believe that it should instead increase the personal allowance on its own as this will have the greatest benefit to those on higher rates. Reducing the basic rate of tax to 20p (to align it with the savings rate) would cost over £5.5 billion. The alternative of increasing the savings rate to 22p would impact harshly on savers.
The Revenue pointed out that those taxpayers who now are in the ten pence rate band but have had savings income deducted at 20 per cent can apply for a repayment of tax. Repayment arrangements have been simplified in that savers resident in the United Kingdom (UK) do not now need to send in certificates or bank statements with their completed repayment claim form.
Energy-saving plant and machinery (s. 65 and Sch. 17)
Under the new Capital Allowance Act 2001 (CAA 2001), s. 45A(1)(c), companies which lease assets will not be entitled to enhanced allowances. The Institute commented that this appears to be unnecessary. As long as energy-saving plant or machinery is being provided, and allowances are given only once, it should not matter whether they go to the user or to a lessor.
The Revenue advised that this legislation aims to provide a cash-flow boost to encourage businesses to invest in energy-saving investments for use in their business. It is targeted on those businesses that invest in equipment out of their profits after tax. The Revenue said that businesses that lease equipment do not suffer the same cash flow disadvantages faced by those making outright investments, because their lease payments are fully deductible over the period of the lease. These issues were debated at some length during the passage of the Finance Bill through Parliament.
The Institute commented that under the new CAA 2001, s. 45C, an apportionment must be made between qualifying and non-qualifying expenditure. However, CAA 2001, s. 45C disapplies the just and reasonable basis of CAA 2001 s. 562, without specifying how the apportionment is actually to be made.
The Revenue replied that CAA 2001, s. 45C provides a simple means to identify the qualifying spending where the energy-saving machinery or plant forms a component of some larger equipment. The rules focus on that item of larger equipment. If that larger piece of equipment is purchased with other assets as part of a single transaction, the normal apportionment rules in CAA 2001, s. 562 are first applied. A ‘just and reasonable’ apportionment is made to determine the proportion of the total expenditure that relates to the particular equipment. The rules in the new CAA 2001, s. 45C are then used to determine the part of the cost of the equipment that qualifies for the enhanced capital allowances. The balance of the expenditure is not first-year qualifying expenditure, and so qualifies for plant and machinery allowances at the normal rate.
Conversion of parts of business premises into flats (s. 67 and Sch. 19)
Schedule 19 introduces 23 new sections into CAA 2001, including extensive definitions. They are drafted in the new clear rewrite style. However, they add considerably to the overall complexity of the legislation, and there is much overlap with the provisions relating to enterprise zones. The Institute thought that the new relief should have been made less complex. Particular examples of complexity are:
- restricting the flat to only four rooms, and excluding ‘high value flats’. Why should it matter if a more luxurious flat is brought into use? Surely that would have the effect of upgrading a residential area even more than a number of bedsits. A ‘high-value’ rule will necessarily mean setting arbitrary and subjective limits on rents which will only cause boundary arguments and a need to update regularly;
- putting an area restriction on the size of the hallway is another complexity. What if such a restriction is not possible in some conversions?; and
- why does it matter and how can it be proved in the case of say 150-year old buildings that ‘when the building was constructed the storeys above the ground floor were for use primarily as one or more dwellings’?
If there is a particular mischief to be prevented here it may be better to define that mischief and specifically block it rather than introduce a myriad of qualifying rules.
The Revenue replied that flat conversion allowances are focused on properties in traditional shopping streets, to encourage recycling of empty space back into residential use. They are necessarily detailed to ensure the 100 per cent allowances are properly targeted and to minimise the scope for leakage.
Although some of the provisions for flat conversion allowances overlap with similar rules for industrial buildings allowances, there are significant differences in some of the elements of the scheme. A clear, free-standing set of rules was thus preferred to the complexities that would have been necessary had the flat conversion allowances been incorporated into the existing scheme for industrial buildings.
Creative artists (s. 71 and Sch. 24)
The Institute was pleased that the legislation was drafted using the new rewrite style. Although the new schedule is longer than Income and Corporation Taxes Act 1988 (ICTA 1988), s. 96, the provisions are set out more clearly and comprehensively.
The Institute suggested that the opportunity should have been taken to bring farmers’ averaging within this new schedule and to repeal ICTA 1988, s. 96. There seems little point in retaining s. 96 in its present form, as this effectively duplicates the legislation and contains a redundant reference to stock relief (ICTA 1988, s. 96(7)(c)).
The Revenue replied that ICTA 1988, s. 71 was needed to introduce a new scheme for creative artists and the opportunity was taken to draft it in Tax Law Rewrite style. The rewritten rules on farmers’ averaging were exposed for comment in Ch. 3.13 of the Tax Law Rewrite Exposure Draft No. 10, published in May 2000.
The Institute also proposed that a mechanism should be introduced to allow provisional claims to be made for the averaging of farmers’ profits in cases where it is likely that the results of the second year will show a loss, before the return for the second year is submitted. Further, the tax treatment of the averaging of farmers’ profits should be reconsidered if regard is to be had to the original intention of the legislation. This means that the self-assessment (SA) for the first of the two years should be amended retrospectively.
The Revenue replied that it is an important principle of SA that taxpayers should have certainty when making their returns. Averaging is in effect a composite claim affecting two tax years, and taxpayers cannot be certain that all the conditions are met until the end of the second year. The suggested changes would breach the principle of certainty because the tax liability would be contingent on subsequent events. They would also permit claims to be made solely for cash flow purposes where the total tax payable is unchanged over the two years and give creative artists an unfair advantage over other taxpayers.
Finally, the Institute proposed that the rules should be simplified by applying the simple arithmetic mean in all cases where para. 3 applies, and abolishing the tapering relief under para. 6(3), which is unnecessarily complicated.
The Revenue replied that without tapering there would be a cliff-edge that would create inequities between those who were entitled to average and those who were not. The same tapering rule is already in use for farmers averaging without apparent difficulties.
Attribution of gains of non-resident companies (s. 80)
The Institute welcomed the extension of relief, but felt that one area had been excluded. It would be possible for a non-resident company to hold assets (e.g. intellectual property) outside the United Kingdom (UK) (and thus not chargeable under Taxes of Chargeable Gains Act 1992 (TCGA 1992), s. 10), which are nevertheless used for the purposes of a trade carried on wholly or partly in the UK. These remain chargeable on participators under the revised wording of TCGA 1992 s. 13 and this seems anomalous.
The Revenue did not agree that this was anomalous. The purpose of the changes is to ensure that genuine overseas trading activities by UK residents are not discouraged. It does this by exempting any assets used, and used only, in a trade carried on by the non-resident company provided that the trade (or part of the trade) in which the assets are used is carried on outside the UK. The Revenue did not think it appropriate that assets used in a trade carried on in the UK, but which fall outside the charging provisions of TCGA 1992, s. 10, should similarly fall outside the charging provisions of TCGA 1992, s. 13.
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February 2002 by