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Comments from ACCA
July 2004

Introduction

We consider that our comments to the Finance Bill do not lead to any significant changes in emphasis from year to year. The Bill this year is still in two volumes and runs to some 574 pages. Underlying which there is an even greater volume of secondary legislation.

While the Finance Bill is itself long and complex it is of serious concern that there is little or no time available for debate or discussion of the clauses in Parliament and externally. In rushing through the legislation in this way it invariably means having to revisit and change the law in future finance bills. The most recent example of such poor legislation was the change in the rules for Capital Gains Tax for Income Tax. Which following the changes in 1998 were then amended every year until 2003 in order to achieve the original intention of the changes.

We have commented on specific areas of major concern.

TAX AVOIDANCE

DISCLOSURE OF AVOIDANCE SCHEMES

1. VAT
   
   The VAT disclosure requirements put the burden on the taxpayer as opposed to the promoter, as in the case of direct taxes. To that extent the compliance requirements may cause greater reporting difficulties because the business is not aware of the requirements made of it.
   
   While there is effectively a de minimis reporting requirement for VAT, which does not exist for direct taxes, we consider the overall impact will potentially still be highly onerous for both direct taxes and VAT.
   
   In the case of VAT the biggest problems are:
• All VAT activities which reduce in any way a businesses tax liability is potentially caught and will have to be reported.
• There is little helpful guidance on what is and is not within the reporting regime.
• At the minimum there should be a �white list� and a tax related de minimis.
  
2. Direct Tax
   
   We have provided evidence on the regulations to the House of Lords Finance Bill Sub-Committee. Hence much of our comment re-iterates in summary form what we said there.The underlying philosophy of the draft legislation is to capture information about high value methods of tax planning quickly and economically both from the point of view of the tax payer and the Inland Revenue. Thus providing the Inland Revenue with information quickly and in a timely fashion and allow it to decide whether any action is required over the operation of a particular planning tool. At the same time the idea is that there should not be disruption to the usual functioning of business activities by a burdensome reporting requirement regime.
   
   
3. Clause 301
   
   We have been given assurances that the disclosure legislation is to apply only to Corporation Tax, Income Tax and Capital Gains Tax. Hence we do not understand why the clause should also encompass Petroleum Revenue Tax, Inheritance Tax, Stamp Duty Land Tax and Stamp Duty Reserve Tax.The clear intention seems to be that the legislation will be extended in due course to cover those other taxes.
   
   
4. Regulations
   
   As mentioned above we have already given evidence before the House of Lords Finance Bill 2004 Sub-Committee and will be making a separate submission to the regulations. However we highlight our main concerns here.
   
   
   1. We have some difficulty understanding why the consultation period has been set well below the guidelines of the Cabinet Office. If the Government had genuinely intended for some time to introduce legislation in this area then surely the regulations could have been issued for consultation at the time of the Budget.
      
   2. The reporting commencement date, of 1 August 2004 meaning that the first reports need to be submitted by 6 August, is wholly inadequate as it is not yet remotely clear what will need to be reported.
      
   3. It would make the whole of this unwieldy piece of legislation more practical to adhere to if the start date for reporting were put back to the end of this year. At the same time the reporting time limit of 5 days needs to be extended to mirror the 30 days which the Inland Revenue have for the issuing of a number for a scheme.
      
   4. There is no mechanism to stop time consuming and wasteful multiple reporting of the same scheme. While the Inland Revenue may consider it would be useful to have multiple reporting in some cases so that it can cross-check what is being said by each professional advisor in relation to the same tax planning idea. The reporting by a number of �promoters� about the same scheme will be at different stages of understanding hence will be potentially very different to each other. The definition of promoter needs to be clearly defined and the reporting deadline extended to 30 days as a way of reducing multiple reporting.
      
   5. Currently the regulations are drafted so that many �ordinary loans� may need to be reported. Along with others we have explained our specific concerns in this area and will be happy to participate in any further consultation.
      
   
   Zero Rate of Corporation Tax
   
5. Clause 27 and 285.
   
   The complexities of the non-corporate distribution rate is something we do not welcome. However when it is linked to the retrospective nature of the draft legislation, as reserves which are from past profits are brought within the new regime, we consider it would be more appropriate to dispense with the 0% rate band altogether. In our view there does not appear to be much benefit to having a zero rate band which is clawed back when a distribution is made.The current attack on small companies is most unwelcome. We are referring to IR35 and Section 660A as other areas of specific concern to small companies. Overall the present landscape to small companies is turning unfavourable very rapidly.
   
6. Trusts Clause 29
   
   We commented in some detail at the time of the consultation and do not repeat our concerns again. However we are disappointed that the rate increase from 34 per cent is to be increased to 40%.
   
7. Transfer Pricing and Thin Capitalisation Chapter 2
   
   We are not seeking to repeat our comments from those we made during the consultation process except to say that we are concerned how much else will be changed in UK tax law as a pre-emptive measure against challenge from the European Court of Justice. While Government and the Inland Revenue contend that UK tax law is compatible with European Union law the candid perception within Government and the tax profession is clearly different.
   
8. Clause 31 � Exemptions for dormant companies and small and medium-sized enterprises
   
   Confirmation is required that in relation to clause 31(4) �any such election is irrevocable' in new paragraph 5B(3) relates only to the chargeable period concerned and does not prevent paragraph 5B from applying in a later accounting period. The retrospective nature of the ability of the Board to give a notice under new paragraph 5C(1)(b). It is not until a notice is given, which can be up to three years after the transaction takes place, that a company will be told that the tax bill in respect of a particular transaction is greater than the company believed was going to be the case at the time it entered into the transaction. We are also concerned that the dormant company exemption only applies to �currently� dormant companies. In any dynamic business environment the status quo will never stay constant hence a general ongoing exemption is necessary.
   
9. Use of different accounting practices within a group of companies - Clause 51
   
   It would seem that where paragraph 9(2)(b) says that the gain is �brought into account in accordance with section 92(4) [of FA 1996]' this means that it is brought into account subject to section 92(7) and (8), and that in turn means that it is treated as falling within section 116 TCGA 1992 and can accordingly be held over under section 116(10) until an actual disposal of the security. It is however not clear that this is what is intended. The explanatory notes provide little comfort on the point, paragraph 34 being at best ambiguous as to whether the gain is brought into account on the deemed or on the subsequent actual disposal of the asset.   
   
10. Chapter 3 Construction Industry Scheme
    
    The proposed legislation is reliant on the correct identification of the employment status of an individual. This is a highly complex area and we are concerned that it imposes an unreasonable burden on a workforce which is largely unfamiliar with the intricacies of tax law.
    
    Where the status of engagement is misunderstood, there is a penalty of up to £3,000 per month. The correct determination of status in the early years is vital. Honest mistakes could be too harshly penalised and there could be a disincentive to put right earlier errors after several years of misunderstandings.
    
    There are suggestions that there could be a separate stratum of labour only workers who would always be considered to be employees. This could have far reaching consequences affecting self-employed workers in other areas. We would welcome reassurance on this point. The overuse of the �employed' label for those in the construction industry could mean that there will be excessive administrative PAYE burdens. For example, a labourer working on several short term assignments may receive several P45s.
    
11. Vans Chapter 4 Clause 80 and Schedule 14
    
    Under new section 116(2) �one man' companies will find it difficult to demonstrate that they were prevented from non-business use of the van. The words �made available� create a significant hurdle for such companies to show that they are not within the scope of benefits charge.

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