This month’s article highlights some more of the points made in the Institute’s representations on the 2002 Finance Bill.
Published in the July 2002 issue of Tax Adviser.
Each year the Technical Committee submits detailed representations about the provisions in the Finance Bill. Last month’s TC newsdesk highlighted several of the Institute’s Finance Bill representations for 2002, and this month more points are featured. References to clauses and Schedules are based on the numbering of the Bill published on 23 April 2002, which may well change before the Bill is enacted.
Clause 4 and Schedule 1
Reduced rates of excise duty on beer from small breweries
As a brewery can comprise premises situated anywhere in the world, it follows that beer produced by an overseas brewery is capable of being small brewery beer. Given that the expressed intention of the reduced rate of duty was to help independent United Kingdom (UK) brewers, the Institute questioned whether the benefit given to third country brewers was intended.
The question arises whether home and overseas breweries will face the same regulatory burdens. The new s. 49(1)(k) allows the Commissioners to make regulations requiring the production of certificates in relation to imported beer. It is interesting to speculate who the certifying authority will be and how the certificates will be policed. The Institute felt that it might be easier to obtain reduced rates of duty for imported beer than for home produced beer.
Clause 22: VAT
Disallowance of input tax where consideration not paid.
Clause 22(2) withdraws input tax credit claimed in respect of supplies received where all or part of the consideration is unpaid after six months.
The Institute has no objection to the principle that input tax should be adjusted if and to the extent that an invoice remains unpaid. However, it objects to the compliance burdens placed upon creditors who scrupulously comply with the legislation.
The six-month period runs from the later of the date of the supply and the date on which the sum became payable. Two practical difficulties arise identifying the expiration of the six-month period:
- The date normally recorded in accounting records is the invoice date, which may be later than the time of supply; and
- The time when the consideration becomes payable is not normally identified in accounting records.
There may therefore be some difficulty in identifying the end of the six-month period, and therefore the correct prescribed accounting period in which to make any adjustment, when invoices are provided close to the beginning or end of a prescribed accounting period.
A further difficulty is that taxpayers will need to examine every account in their bought ledgers (or computer equivalents) to locate first the creditors concerned and secondly the relevant invoices. This can be a time-consuming exercise where there are a large number of credit accounts, a large number of invoices in an individual creditor’s account, or where payments on account have been made. It is likely that the number of creditors involved will be small and the number of relevant invoices even smaller. However, it is necessary to spend time in order to identify them.
The Institute acknowledged that some unpaid bills can be substantial and that the delay in payment can be lengthy, particularly if litigation results from the supply. However, these circumstances are likely to be the exception rather than the rule and most adjustments are likely to be quite trivial. It follows that the general rules for adjustment should be framed with the majority of transactions in mind – for which a broad brush approach is appropriate – and special provision made for the minority of transactions in which a material amount of input tax is at issue.
To alleviate these difficulties the Institute proposed:
- As a general rule, the six-month period should run from the invoice date;
- Small and medium sized businesses should be permitted to make an adjustment once a year by reference to the situation extant on the last day of the financial year (this being the time when creditors will necessarily be reviewed in some detail for accounting purposes, i.e. to write off unclaimed credit balances and make provisions for anticipated liabilities); and
- Large businesses (which may be expected to have sophisticated computer systems capable of identifying old unpaid invoices) should be required to make adjustments for each prescribed accounting period in respect of unpaid invoices above a de minimis limit and an annual adjustment as above in respect of other invoices.
Clause 23: VAT
The Institute welcomed the flat-rate scheme in principle as a means of simplifying the compliance problems of small businesses, but commented that it does nothing to alleviate the most pressing problem affecting small businesses – the ‘cliff-edge problem’. This arises when a taxpayer selling mainly to the public crosses the registration threshold. Prices must be increased by 17.5 per cent if taxpayers are to recoup the value added tax (VAT) for which they must account to Customs & Excise. A price increase of this level is often impractical as prices would be out of line with those of unregistered competitors, and taxpayers would lose custom if they did so. Thus, a smaller price increase (or even no increase) is made with the result that the taxpayer pays all or part of the VAT out of his or her own pocket. The ability to recover input tax is largely illusory as service traders such as hairdressers incur very little input tax.
The Institute also felt that the publicity given to the flat-rate scheme overstates the benefits of the scheme:
- The scheme works on averages for particular trade sectors. However, most individual taxpayers will diverge from the norm, with the result that some will save tax by using the scheme while others will pay more. Taxpayers should be informed that the downside of simplification might be that they pay more tax.
- The benefit of the scheme is that, once the accounting records have been written up, a VAT return can be prepared in a couple of minutes. However, many taxpayers take only a few minutes to prepare VAT returns under the normal method of accounting. Moreover, all taxpayers need to keep proper accounting records. The fact that some records are not needed to operate the scheme does not mean that taxpayers can stop keeping them. Thus, in practice, some taxpayers will find that the time saved is less that they may have expected.
- The publicity makes great play of a supposed ‘£1,000 saving’ in administration. However for the most part, this saving represents the notional cost of the taxpayer’s own time. The cash saving is likely to be quite small.
- The Institute therefore fears that take-up will be far less than the scheme deserves.
Taper relief: holding period for business assets
The Institute welcomed the enactment of this previously announced reduction in the effective rate of capital gains tax (CGT). The Institute pointed out, however, that this change, without any equivalent change to the rate for non-business assets, accentuates the problems arising when assets have changed status. For example:
A former employee sells shares in his employing company following redundancy. The shares were acquired in September 2001 when the individual was a full-time employee. The redundancy occurred in April 2002. The sale occurs in September 2002. The shares have been held for the requisite two years, but because for some of that period they were non-business assets, the gain must be apportioned. Say the gain was £10,000. For the period when the employee was redundant (half a year) the shares do not qualify for any taper relief so £2,500 of the gain is charged at 40 per cent tax, £1,000 tax is payable. For the period of ownership when the individual was in employment (one and half years) full business asset taper relief is due so only 25 per cent of the gain for that period (£7,500) is chargeable, £1,875 at 40 per cent, £750 tax is payable. The total tax bill on disposal of the shares is £1,750. This is an effective rate of 17.5 per cent instead of ten per cent merely because the employee was made redundant six months before the sale.
Likewise, anomalies still arise for those who have actually held their shares for a longer time, but because their period of ownership spans a change in the qualifying business asset rules find their rate of tax is higher. Example:
Fred and Jim both work for Successful plc and both realise a profit of £100,000 on the disposal of their shares in the company in April 2002. Fred has held his shares since April 1996 and Jim since April 2000. Jim's rate of tax is ten per cent under cl. 45 whereas Fred's is 22 per cent (£50k x 10%; £50k x 85% x 40% = 34%). This anomaly arises because Fred's shares only qualify as business assets for the period April 2000 to April 2002. For the two years April 1998 to April 2000 they were non-business assets so the gain must be time apportioned. Fred will only qualify for a ten per cent rate of tax if he sells the shares after April 2010.
The Institute called for the government to look again at the apportionment problem and the regime for non-business assets.
Clause 83 and Schedule 29
Intangible fixed assets
These new provisions are generally welcome, having been the subject of detailed consultation.
The new provisions are, however, very complex. Much of the complexity arises from the decision to ‘grandfather’ existing assets and from the development of different tax regimes for different classes of assets. Given that assets such as trademarks have an indefinite life, the two regimes for intangibles will co-exist for the indefinite future even within the corporation tax regime. Further, the inclusion of goodwill within the intangible assets regime has made it necessary to duplicate much of the CGT legislation relating to groups. All of this makes for a very long and complex Schedule.
The measures will bring the taxation of intangible assets more in line with other countries’ tax regimes, but they will create tensions between a vendor and purchaser, particularly in the light of the new substantial shareholdings exemption, with the vendor no doubt seeking a share disposal and the purchaser desiring an asset acquisition.
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