Treasury Select Committee - Evidence Session on Budget Autumn 2017

Ray McCann, Deputy President of the Chartered Institute of Taxation (CIOT) gave oral evidence to the committee along with Andrew Courts of the Association of Chartered Certified Accountants (ACCA) and Frank Haskew of the Institute of Chartered Accountants in England and Wales (ICAEW).

John Mann MP (Labour) oversaw proceedings in the absence of the chair, Nicky Morgan MP.

John Mann (Labour) began by asking whether the UK Government's decision to move to a single fiscal event had reduced the scope for frequent changes to tax policy. 

Frank Haskew noted the government's willingness to consult with professional bodies on policy development, a move he said was 'heading in the right direction'.  Despite this progress, he said that the government should consider consulting with professional bodies at an earlier stage of policy development.  Progress is being made, but earlier engagement would further strengthen the tax policy making process.

Ray McCann said that the CIOT welcomed the move to a single fiscal event.  The Institute welcomed consultation along with the other professional bodies represented around the table and others.  Getting tax policy right was in the interests of everyone, and therefore consultation and engagement was essential.

Andrew Courts  warned that there have been ocassions when the window for consultation had been limited or had varied in time and scope significantly.  There was not a one size fits all approach to consultation, which was dependent on the scale of the legislative changes proposed.

John Mann then asked whether there was more that could be done to improve engagement between MPs and tax professionals.  Mr Courts suggested pre-consultation would enable more effective input.  Citing 'Making Tax Digital', he said that this was a policy that required significant consultation, further emphasising the need to ensure that major policy changes would require more time for consultation and engagement.

Mr Mann asked whether the current budget 'measured up' to the Treasury Committee's 6 principles for policy making.  Mr Haskew said more needed to be done to support the 'certainty', 'stability' and 'practicality' of tax policy making.  This was a feature that has required attention over the last 20 years, adding that this had been particularly relevant over the last 5-10 years when significant changes have been proposed and enacted.

Ray McCann added that in terms of scale, the Finance Bill and Budget were much smaller than in the past and that this had made the government's proposals more manageable for tax professionals to digest.  He said that the CIOT believed that issues relating to compliance activity would remain an area for concern.  Looking at the specific issue of offshore tax changes, he noted that these were fraught with complexity, adding that 'rushing in changes' may fail to achieve the government's intended goals.  He then went on to provide further examples of tax measures contained within the Autumn budget where further investigation and analysis was required.

Wes Streeting (Labour) asked about proposed changes to IR-35 rules and their extension to the private sector.  Frank Haskew said that the government's intention to extend IR-35 rules represented a 'hugely complex' area of policy making, stressing that it must proceed with caution.  It will be important to take stock of how IR-35 has worked in the public sector and whether (and how) this would transfer to the private sector.

Ray McCann said there was a 'very long history' in the UK of individuals taking advantage of the differences between the taxation of employment and self-employment.  A 'structural inequality' such as this, he suggested, increases the attractiveness for those who are eligible to register as self-employed.  He suggested that this discrepancy required a much longer-term and strategic approach to the taxation of labour and questioned the need for such a discrepancy between employed and self-employed workers.  Andrew Courts agreed with Ray McCann's suggestion of a need to review the taxation of labour.

Alister Jack (Conservative) asked how significant a factor proposed changes to capital gains tax (CGT) would have on 'genuine overseas investors' in UK property.  Frank Haskew said it had been a long-standing position in the UK (contrary to international norms) that the capital gains of overseas investors hadn't been taxed.  The UK government had been moving in recent years to ensure that gains were taxed in an attempt to address this anomaly.  Mr Haskew acknowledged that the move could end up deterring some foreign investors, but that this was an important step to bring the UK into line with international practice.

Ray McCann said that it was important to recognise that CGT changes could result in changes in taxpayer behaviour, as exposure to tax could prompt behavioural changes (for example, holding on to assets rather than disposing them and exposing these to tax).  Because of this, it would be necessary to evaluate the likelihood of achieving the specific revenue yields outlined by the government in the budget red book.  Double-taxation treaty agreements between the UK and other countries, together with competing international rates on capital gains would also need to be considered to see whether they would have an impact on the revenue yields the government anticipates.

Mr McCann said there needed to be wider, more strategically-focussed discussion around the taxation of property in the UK.  The CGT changes as proposed by the government represented another 'piecemeal' approach to tax policy making that failed to consider the wider picture.

Mr Jack then turned to the recent Paradise Papers leak.  He asked whether (a) the public perception of the use of offshore tax arrangements was that these were for tax avoidance/evasion purposes (b) whether taxing gains on overseas investors would put a stop to these types of measures and (c) whether this had made tax practitioners more cautious about the types of advice that they provide to their clients.

Ray McCann said that it was the case that tax advisers today were much more conscious of falling foul of new tax rules.  He said that in revent years, professional bodies had adopted a much more proactive approach to issues of compliance and ethics.  He said he would be 'surprised and disappointed' if there were tax advisers engaging in activity contrary to the rules put in place by the UK Parliament.  On the Paradise Papers, he added that many of these structures had been in place for 'years' and would predate public dissaproval of the use of offshore tax structures.  

Frank Haskew added that the Finance (No 2) Act included provisions for penalties on enablers of tax avoidance which were now law.  He cited HMRC statistics which found that around 30% of tax advisers in the UK were not members of a professional tax body, an issue that would be returned to later in the morning's proceedings.

Stewart Hosie (SNP) asked if the freezing of Corporate Indexation Allowance was a welcome move and whether it was possible to understand how businesses would respond to this.

Mr Haskew said that the indexation allowance for individuals was removed in 1998.  At that time, it was expected that this would also be removed from companies so it was 'surprising' that it had taken until 2017 for this issue to be addressed by government.  He said the change was likely to increase fairness between companies and individuals but could come at the cost of increased complexity.  Ray McCann said that there was very little evidence of behavioural change among individuals when indexation allowance was frozen.

Stewart Hosie asked whether companies would be encouraged to sell assets in order to 'bank' their indexation allowance.  Mr McCann said that this was 'possible' (citing the example of transactions when taper relief was abolished).  But he also said that there were a wider variety of factors to consider.  In follow-up, Mr Hosie asked Ray McCann whether freezing the corporate allowance would be 'vulnerable' to tax planning (something that, in turn, could have a revenue impact).  Mr McCann said that it could be a risk but that it may be less of a risk than in the past.

Frank Haskew referred to the government's long-stated policy of reducing corporation tax.  He said that CGT had been introduced at a time when there were very high rates of corporation tax, rates that have since been reduced significantly.  He said there was a quid pro quo between encouraging low levels of corporation tax and indexation being perceived as being an inappropriate (and expensive) relief.

Rushanara Ali (Labour) asked whether the 30% of tax advisers operating without being a member of a professional body was 'problematic' and if so, what could be done to address this and encourage them to become members.  Frank Haskew said it was a 'worry' that 30% of people giving tax advice in the UK were not affiliated to a professional body.  He said that there was a low level of public understanding of this and voiced concerns at examples of individuals setting themselves up as 'advisers' with little or no experience or qualifications.  Ms Ali asked whether there was a need to consider legislative changes to address bad practices.

Mr Haskew said HMRC had concerns over the 'poor work or bad advice' being given in some circumstances.   Ultimately, the spotlight would turn on those people providing below-par advice and over the long-term, suggested there may be a need for increased oversight.  Andrew Courts said that if these advisers would be registered with HMRC if they were engaging with and providing returns to HMRC.  This would make HMRC aware of these advisers and provide some form of oversight.  Mr Haskew returned to this point and noted that this type of registration with HMRC was in order to comply with money-laundering rules.

Ray McCann stressed to the committee that the profession was working 'at a very high level' with HMRC to better manage the proportion of tax advisers who are not members of professional bodies.  All of those providing evidence agreed the need to recognise that not all advisers who have chosen not to register with a professional body were operating inappropriately.

Citing the Chancellor's claim that the government had collected an additional £160 billion in revenue through a crackdown on evasion, Rushanara Ali then asked whether this was a consequence of specific government policies, increased public focus on evasion/avoidance or a combination of both?  Frank Haskew expressed some concern at how the quoted figure had been calculated.  However, he pointed out that the overall trajectory of the government's response to avoidance was positive, citing recent tax gap figures and significant enforcement and anti-evasion activity over the course of the last 5 years. 

As to whether the government can achieve its aims of raising revenue from increased enforcement and anti-avoidance activity, Ray McCann said that any quoted figures needed to be treated with caution.  He added that HMRC had performed extremely well over the last 10 years in tackling issues of tax avoidance.

While the government's approach to tackling tax avoidance was absolutely the right thing to do, Mr Haskew said he retained a healthy skepticism over quoting specific figures/receipts that could be generated from this.

Charlie Elphike (Independent) asked what would be the best way to stop online VAT fraud.  Frank Haskew said it was difficult to see how this could be tackled in practice.  He said the proposals for joint and several liability were expected, given the £1 billion in VAT reported to be lost through online platforms.  Ray McCann said that finding a solution that doesn't create a bigger problem would be 'challenging'.

Mr Elphike then turned to the issue of online retailers such as Facebook, Amazon and Google and their tax liabilities in the UK.  Ray McCann said that the issue of calculating the tax liabilities of these companies was 'incredibly complicated'.  These companies have to be compliant and pay their fair share of tax but to be effective, this requires HMRC and the government to modernise the tax system to reflect the changing and increasingly global marketplace.  International cooperation, he said, was essential in getting this right.

Frank Haskew said that international tax systems were struggling to adapt to the digital age but that the UK had been at the vanguard of these efforts.  He cited the diverted profits tax and witholding tax on royalities as examples of the UK 'dipping its toe in the water' in a bid to address issues associated with the challenge of taxing digital companies.  He said that while this was difficult, there were signs of progress.  Over the longer-term, there may be a need for a new approach to the way in which digital transactions are taxed.

Charlie Elphike then asked whether the UK would have increased flexibility to control its tax base and tax digital companies once it leaves the European Union.  Mr Haskew said that the jury was still out on the extent to which this would be possible, citing the UK's double tax treaties, membership of the OECD and the knock-on effects of tax reforms in other parts of the world (such as the ongoing US tax reform, the largest since 1986) as signs of the UK's continued interdependence with other tax regimes .  He added that in these circumstances, the UK will still be bound by international norms and also with transitional arrangements with the continuing EU.  In the short-term, he said it was likely that existing rules - even if created by the European Union -  would remain in place ('grandfathered' into legislation).  There was unlikely to be a short-term fix.  Ray McCann cited practical examples which pointed towards the need for international cooperation.  He questioned whether leaving the EU would have a profound effect.

In his final question, Mr Elphike asked whether it was a priority to ensure a level playing field between UK based companies and overseas enterprises.  All participants agreed of the need for this.

Alison McGovern (Labour) focused on the chancellor's stamp duty changes and asked participants for their thoughts on the move.  Frank Haskew said the measure reflected the fact that, since its intorduction, stamp duty land tax had increased significantly (from an initial 1% flat-rate on all transactions).  This had resulted in relatively high rates and in some cases had acted as a barrier to home ownership. But he added that the jury was out on whether the proposed reforms would work in practice, citing HMRC's 2011 study of the impact of a stamp duty holiday introduced at the turn of the decade by the last Labour-led government.  He added that Scotland and Wales now had their own property taxes so these reforms would be focussed on England.  Overall, he said that a much more complicated system of stamp duty land tax (from that originally introduced) had resulted in increased barriers to transactions.

Kit Malthouse (Conservative) asked whether the introduction of PCRT would undermine the status of professional bodies, suggesting that this meant the primary responsibility of professionals was to HMRC rather than their clients.   Frank Haskew offered reassurances that this was not the case.  Professional conduct had always recognised the need to consider the wider impact on society of the actions and advice given by advisers.

Ray McCann added that the PCRT rules attempted to make clear to advisers that they would be helpd accountable for advice given that undermined the spirit of tax legislation and the intention of Parliament.  It ensures members pay greater attention to the decisions of Parliamnent and do not seek to undermine these.

On the issue of the review of Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs), Mr Malthouse questioned whether these proposals would increase the complexity of the system for entrepreneurs seeking funding through these schemes.

Mr Haskew said that it would take time to fully digest the proposals for EIS and VCT, as they had only been published on Friday (1 December).  He acknowledged the possible complexities, citing a wider concern over the accessibility of tax legislation.  Both Mr Haskew and Ray McCann voiced a general acknowledgement that these changes could result in greater complexity for those seeking to access support, result in increased costs and may further reduce certainty in an area of investment that is, by definition, already a high-risk activity.

Catherine McKinnell (Labour) asked Ray McCann to outline the CIOT's concerns over offshore trusts.  Mr McCann said that offshore trusts had been subject to repeated changes over a long period of time.  He said that the Institute was concerned that offshore trust taxation was frought with difficulty in any event and that changes - which some might consider 'knee-jerk' - would add to complexity.  He added that the speed by which changes were proposed, together with a lack of understanding of the issues being addressed, hampered effective policy making.

On the issue of VAT thresholds, Ms McKinnell cited a recent Federation of Small Businesses (FSB) survey of small businesses, their VAT obligations and the administrative burdens that they face.  Frank Haskew said that VAT legislation had increased in its complexity and impacted on small businesses.  He said that it was a sensible move to take small businesses out of VAT, adding that there needed to be consultation in light of further changes to the tax system for SMEs, such as Making Tax Digital.  Ray McCann stated the CIOT's support for the decision by the Chancellor to freeze the VAT threshold.

Ms McKinnell concluded her questions by asking the witnesses to comment on concerns raised by the chief executive of HMRC, Jon Thompson, over a lack of resources needed to manage the Brexit transition and HMRC's wider reform programme.  Mr Haskew noted that HMRC was already undergoing the largest change and modernisation programme of any comparable organisation in Europe.  It was his view that if HMRC was concerned that Brexit would strain HMRC's resources to the limit, then ICAEW and others would have reason to be concerned by this.

Ray McCann noted that Mr Thompson had committed in recent evidence to Parliament that he would take forward the digitalisation of HMRC within existing resources if required.  But he said that professional bodies and politicians should be very aware of the dangers of under-resourcing HMRC.  If they chose to do ignore this, they would do so 'at their peril'.

The meeting closed at 11.39am with a note of thanks from the chair to the witnesses for their time and evidence.

By Chris Young