TC newsdesk by Adrian Rudd, Tax Adviser’s representative on the Technical Committee, published in the June 2002 issue of Tax Adviser.
This month’s article highlights some of the points made in the Institute’s representations on the 2002 Finance Bill.
Some general points are covered, followed by more detailed points relating to the Stamp Duty provisions. Next month’s article will highlight some of the Institute’s detailed points on other aspects of the Finance Bill. 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.
Primary v secondary legislation
The Institute expressed concern about the increasing trend towards taxation by regulation. The traditional distinction between primary and secondary legislation is that between the substantive charging provisions (primary) and the more detailed administrative provisions (secondary).
Clauses 88, 132 and 133 of the Finance Bill contain powers to implement or alter substantive legislation, and clause 134 introduces a new tax (lorry road-user charge) without any idea as to its shape or incidence. In all cases the primary tax rules will be brought in through Regulations. This is also true of much of the legislation in the Tax Credits Bill. The Institute believes that this trend must be halted and reversed.
A large proportion of the Bill has been the subject of full and proper consultation, covering areas such as:
- substantial shareholdings relief;
- intellectual property; and
- corporate debt, derivative instruments and foreign exchange together with good consultation on at least the structure of matters such as:
- value added tax (VAT) Flat Rate; and
- research and development (R&D) for large companies.
The Institute has fed in many detailed points during these consultations; many of the Institute’s comments have resulted in amendments, and the result is better legislation that will be easier to operate and is more clearly targeted. This is a better way of effecting tax law changes than trying to compress matters into the Finance Bill process. The Institute congratulated the government and the tax authorities for making this possible.
Clause 23: Flat-rate scheme for small businesses
The Institute welcomed the new flat-rate scheme as a means of reducing the compliance burdens of small businesses, but pointed out that it does nothing to ameliorate the ‘cliff-edge’ problem arising when small businesses cross the registration threshold.
Clause 43 and Schedule 8: Substantial shareholdings
The Institute welcomed this important relief, but suggested that the decision to limit relief to trading companies should be reconsidered. The Institute questioned whether the presumption that investment companies are bad things and trading companies are good things is still appropriate.
The anti-avoidance provision as drafted will result in less use of the relieving provisions than the government intends, but could be made workable with minimal amendment by referring to an interest-based investment return in the legislation instead of the existing wording.
Clause 88: Territorial exclusions from controlled foreign companies exemptions
This legislation will act as a disincentive for overseas multinationals setting up holding companies in the United Kingdom. It will leave the taxation of overseas profits at the discretion of the Treasury in that it gives discretion to the Treasury to veto certain regimes. The Institute questioned whether such extensive power is appropriate.
Clauses 132 and 133: Mandatory electronic filing
The Institute felt that the attempt to make an e-filing regime compulsory is the wrong approach. Moves towards e-filing should be by way of carrot, not stick. The costs savings from electronic communications need to be shared between taxpayers and the exchequer. It is not fair to impose further costs on taxpayers and businesses.
The Institute was concerned that general empowering clauses, with so little substance, have been placed in a Finance Bill. If compulsory e-filing in specified circumstances is deemed necessary, proposals of substance should be brought before Parliament for proper debate. Statutory Instruments should only be used to fill in or change minor details. They should not be used to contain the whole legislation.
The Institute was concerned that whilst benefits to government may arise from compulsory e-filing, there is little in these clauses to reduce burdens for taxpayers. Even the matter of incentives has been left to other regulation making powers – for instance that the new clauses require or impose:
- persons to prepare and keep records of information delivered electronically;
- persons to produce the contents of records kept in accordance with the regulations;
- conditions that must be complied with in connection with the use of electronic communications;
- information to be treated as not delivered where conditions as to delivery not satisfied;
- a process for authenticating electronic records and persons delivering electronic information;
- a penalty of £3,000 for failure to comply;
- quality standards to be set; and
- taxpayers having to appeal against a notice that they are ‘within a category of persons’ required to submit electronically.
These clauses impose a burden on all taxpayers, and there should be exclusions for taxpayers who either cannot afford or choose not to use electronic communication.
Stamp duty proposals
Clause 108: property in disadvantaged areas
The definition of ‘residential property’ in this clause is similar, but not identical, to the definition in the VAT legislation. There are also related definitions in the Capital Allowances Act 2001, s. 531(1). At a time when there has been consultation designed to simplify Inland Revenue and Customs & Excise definitions, the Institute was surprised that the Finance Bill should introduce a further example of the kind of differences that ought to be eliminated. The Institute called for a common definition for VAT, capital allowances and Stamp Duty purposes.
Clause 109: withdrawal of group relief
The Institute made several points on this clause, which withdraws group relief for property transfers when the transferee company leaves the group within two years of the transfer:
- The Institute thought that, if there is to be a de-grouping charge, then the need for Finance Act 1967 (FA 1967), s. 27disappears and the exemption under Finance Act 1930, s. 42 at the time of the intra-group transfer should be automatic.
- The two-year time limit is too long, as it is impossible in practice to plan two years ahead. The Institute understood that a similar provision was considered and rejected in 1967.
- The provisions are not focused on tax avoidance cases, but are all-embracing. As drafted, they will catch cases where, for example, the transferee company occupies premises for the purposes of its trade, having acquired its interest in the premises by way of an intra-group assignment in pursuance of a bona fide reorganisation of the group’s activities.
- The Institute thought that it is unfair and unreasonable to charge interest from 30 days after the date on which duty would have been payable had the intra-group transfer not been exempt. The only precedent for this was in the Capital Duty relief rules now since abolished. By contrast, the capital gains de-grouping charge under Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. 179crystallises in the accounting period in which the de-grouping event occurs.
The Institute thought that the mischief aimed at could be far better dealt with by a simple extension to the meaning of ‘arrangements’ in FA 1967 s. 27(3) – for instance by including words similar to that in cl. 110(6) which will include any scheme, agreement or understanding, whether or not legally enforceable within the meaning of ‘arrangements’. This would reduce the threshold of the ‘burden of proof’ that in practice Revenue Stamp Taxes have to cross in order to show that an intra-group transfer does not qualify for group relief.
Proposed abolition of fixed duties etc
There appears to be no reason why the proposed abolition of fixed duties, and the ad valorem duty on debts and other receivables, foreshadowed in the Consultative Document on Modernising Stamp Duty, cannot be implemented immediately.
Impact of Clause 113 on sub-sale relief
Sub-sale relief is a statutory relief introduced by Pitt in 1782 and is now contained in Stamp Act 1891 s. 58(4) and (5). It operates to limit the Stamp Duty payable where property is ‘on-sold’ either in whole or in part to a sub-purchaser so that (subject to anti-avoidance) Stamp Duty is paid only once according to the consideration paid by the sub-purchaser.
Clause 113 will in effect block sub-sale relief following Royal Assent where the consideration for a sale of property exceeds £10m, by imposing a Stamp Duty charge on the initial sale contract.
The Institute thought that this clause represents an over-reaction to the Revenue’s desire to block the ‘split legal and beneficial title’ avoidance scheme, which could have been blocked more efficiently by a clause denying the exemption from Stamp Duty for property sale agreements (in FA 1999, para. 7 Sch 13) where the legal title is held separately, and it appears that the purpose or one of the main purposes in so doing was to defer or avoid the payment of ad valorem Stamp Duty on a sale of the beneficial interest.
Sub-sale relief plays an important role in facilitating the efficient operation of the commercial and residential property market in the United Kingdom. Typical uses of sub-sale relief include the house-building business where land is acquired by developers and then sub-sold to customers with a completed building erected. Any denial of sub-sale relief will tend to lead to house price inflation, as developers seek to pass on the cost of their Stamp Duty hit in the price charged to customers (which will itself bear Stamp Duty). In addition, the commercial property sector (both private and public) is increasingly moving towards outsourcing, often involving sales and leasebacks. To achieve necessary rates of return and keen financing the purchaser/lessor may rest on contract and in due course parcel up surplus land for on-sale to investors and developers, using sub-sale relief to limit the total Stamp Duty charged to one hit on the price moving from the sub-purchaser. In the Institute’s view, some outsourcing/sale and leaseback proposals might not be economically viable if Stamp Duty charges arise on both the initial restructuring and on any intended on-sale.
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