Comments from ACCA to HM Revenue and Customs (HMRC), February 2012.
ACCA welcomes the early publication of the draft legislation for the 2012 Finance Bill. The availability of the draft clauses for discussion and comment is in line with the principles of transparency and accountability which ACCA holds to be fundamental to the good administration of tax.
A theme which is highlighted by many of the measures presented, but not directly addressed, is the avoidance of tax. There is a clear division between tax avoidance (or planning, or mitigation), which is legal, and tax evasion which is not. The tendency to try to blur the distinction between the two by using phrases such as ‘unacceptable tax avoidance’ is not helpful to taxpayers or their advisers. Tax law must be clear and certain and it should be remembered that businesses and tax payers will look to minimise tax impact as a part of their normal commercial and domestic activity.
Nevertheless, while it is not unethical to minimise ones taxes, there have been many cases of convoluted tax planning schemes which are designed not for any proper business purpose but to exploit loopholes in the law and avoid its spirit. ACCA does not support this artificial activity. Such actions, which may generate short-term financial advantage at the cost of long-term value, cannot be supported. With this in mind, ACCA would extend a cautious welcome to proposals for s tightly drawn general anti-avoidance rules, of the type set out in the proposals put forward by the committee led by Graeme Aaronson QC.
Income tax rates and thresholds (including personal allowance)
ACCA supports HMRC in its attempts to ensure a level playing field for all businesses and tax payers within a fair and efficient tax system. As a part of this, ACCA welcome the moves to increase PA to the point where a larger number of taxpayers fall outside the income tax net. However such measures do need to be implemented within a structured framework and integrated with changes to the National Insurance and Benefits regimes to ensure maximum impact and genuine simplification.
For example, the reduction of the threshold for the 40% tax rate will have the effect of requiring more taxpayers to make a return where they receive bank interest on which tax has been deducted at basic rate only. This imposes a pure administrative cost on both HMRC and the taxpayer, as the total tax collected will actually be less than would have been the case had both the allowance and the threshold remained the same. The taxpayer will however have the burden of preparing a tax return, and HMRC of processing it.
The Seed Enterprise Investment Scheme
ACCA welcomes the commitment of government to prompt investment into new business startups. The levels of available relief are likely to attract the interest of private investors. The qualifying conditions have apparently been designed to ensure that the relief is targeted on incentivising unconnected third parties, rather than simply sweetening the deal for related investors who would have invested anyway. Investors themselves will of course need to be aware as ever that no amount of tax relief can guarantee a return.
The proposals are (by the standards of such schemes) relatively clear and brief. There are a few aspects which might cause difficulties for some investors, particularly around the interaction between the tax code and UK company law, and which may require professional advice to be successfully overcome. Even so, there is a risk that this further targeted relief is introducing extra complexity to the system which may not necessarily outweigh the benefits that it brings.
Nevertheless, there are elements of the proposals which may need further refinement if the incentive is to operate effectively. ACCA remains concerned that the issues which are generally felt to adversely affect investment into small business, such as information asymmetry, are not being directly addressed, and that simply encouraging investment into any small business is less economically efficient than encouraging investment specifically into those which can demonstrate effective and efficient management.
257BE The no tax avoidance requirement: The language of this clause is disappointing. The avoidance of tax is perfectly legal, and on some definitions the decision to invest via SEIS rather than through loans or other injections of equity could be seen to be ‘avoidance’. From the perspective of a lender given three separate investment possibilities into which funds can be placed with a view to maximising the return to the investor, that which maximises the final (post tax) return
S257BF: The language of this section may cause problems for small companies operating under the standard Companies House Model Articles - s550 of Companies Act 2006 confers upon directors the power to allot shares in the company unless specifically dis-applied in the company’s articles. The interaction of this power with the definition of “substantial interest”, in particular the “entitled to acquire such rights” condition, would disqualify a sole director from benefitting under the legislation.
S257CC: There is no clear definition of “spent” in the legislation. While ongoing consultations on other aspects of small company record keeping may lead to revisions in the standards of documentation or forms of accounting required, the lack of clarity may lead to further uncertainty for some small businesses when preparing claims for the relief.
The proposed arrangements appear broadly sensible and proportionate. ACCA welcomes the proposed revisions to the rules for taxation of individuals non-domiciled in the UK.
The proposals are broadly in line with those put forward during the consultation exercise during 2011, of which ACCA’s activities formed a part.
ACCA welcomes in particular the proposals to introduce relief from the normal remittance basis of taxation for funds introduced into the UK for the purposes of business investment. As with the SEIS also put forward as part of this draft Finance bill, the measures are aimed at promoting behaviours which are otherwise currently not necessarily attractive to the target audience.
ACCA is disappointed that the government felt unable to offer the relaxations to foreign currency bank accounts and nominated income rules to taxpayers on a discretionary backdated basis. While there may be cases where mandatory backdating would cause hardship, there are likely to be far more cases where the opposite would hold true.
Indexation of the inheritance tax nil rate band
ACCA supports HMRC in its attempts to ensure a level playing field for all businesses and tax payers within a fair and efficient tax system. As a part of this, one amendment to the IHT regime which ACCA thinks would make a genuine and useful difference to the inheritance tax regime is the removal of the principle family residence from the IHT charge. The constant upwards growth in property values, and disparity in property values between different parts of the UK, mean that while the heir to a three bedroom semi detached house in London can expect an inheritance tax bill, which may force them to sell the family home just to pay what is owed, individuals residing in similar properties elsewhere in the UK might be able to retain the property and enjoy a significant cash inheritance without disturbing the NRB.
Ministry of Defence continuation of education allowance
ACCA supports this practical simplification of the tax system.
Champions League Final 2013: tax relief
The granting of relief from UK income tax for all foreign players who may take part in the FIFA champions league final, due to be played at Wembley in 2013, is a condition of hosting the event. As such, this addition to the tax code cannot be avoided, but ACCA hopes that it will be repealed promptly once no longer relevant, in line with the policy underpinning the work of the Office of Tax Simplification. ACCA’s thinks that there should be a positive prompt justifying the existence of any piece of tax legislation, and outdated laws should be removed. In the case of this exemption, the fact that it is needed in the first place serves only to highlight the complexity and uncertainty which surrounds UK taxation for foreign residents who derive income from sporting events in the UK. ACCA would welcome a review of the whole field of taxation of non-resident entertainers and sports persons.
Gifts of pre-eminent objects
The objective of retaining culturally significant items in the UK is in itself worthy, and it is important to recognise that taxation can have impacts well beyond the direct economic effects. None the less, the draft legislation is lengthy and complex, and will clearly have taken considerable time and effort to develop.
Inheritance tax: Reduced rate for estates leaving ten percent or more to charity
As with the gifts of pre-eminent objects legislation, the underlying principle is welcomed. The draft clauses are considerably less complex than elements of the consultation process had indicated might be the case, which is very welcome. Even so, there will still be a considerable amount of calculation required in the administration of affected estates, and there are concerns that the prospect of this relatively generous relief for transfers upon death may have the effect of discouraging some lifetime transfers.
In year repayments of tax to charities
ACCA welcomes this codification of existing pragmatic practice.
Self assessment (SA) Donate
The annual burden on HMRC and software developers of maintaining this feature within self-assessment software must be justifiable for it to continue. If the facility is not being used to any appreciable extent, then it makes sense for the energies currently diverted into this functionality to be expended elsewhere.
Controlled foreign companies reform
Although the proposals as a whole remain complex, and some of the proposed new “relaxations” for intra-group financing structures in particular will be cumbersome to operate, ACCA is encouraged by the overall tenor of the draft legislation. The revisions to the gateway test are particularly welcomed as they will significantly reduce the potential administrative burden on companies with large and complex group structures.
Capital allowances: Enterprise zones
The requirement for this to be an "investment" relief, rather than simply a relief on capital expenditure in general, results in a range of qualifications which will make it potentially problematic to administer. For many of the smallest companies which might have found it useful and relatively easy to confirm their eligibility they get AIA anyway, so while this is a welcome incentive,the extent to which it will be genuinely useful to large numbers of businesses remains unclear.
Capital allowances: Feed in tariffs and the renewable heat incentive
ACCA supports the aim of ensuring that only one relief may be claimed in respect of any particular expenditure. However, the framing of the legislation, and its interaction with other aspects of the tax code, inevitably introduce complications which many of the smallest businesses (those most likely to be affected by the provisions) will be ill equipped to deal with. The result of these provisions is likely to be significant compliance problems for this crucial sector of the economy, which already bears a disproportionate share of the burden of tax administration.
Capital allowances: Fixtures
The proposals look set to impose further administrative burdens on property owners involved in any sales or purchases of business premises. While there is no limit on retrospective claims for current owners, or any attempt to restrict the value set by agreement, there will from April 2014 be an extra burden on eg local authorities etc to claim capital allowances, or else subsequent purchasers will not be able to claim them.
Changes to the Real Estate Investment Trust legislation
ACCA welcomes these revisions to the current structure. REITS have the potential to be a more important part of the investment landscape than they currently are, and potentially represent an important and useful channel for long term investment with beneficial external impacts. However, care should be taken to ensure that the impact is not to introduce mechanisms which simply reduce REITs to the same status of short term investment (with the attendant pressures on managers and impacts on long term investors and society more widely) as equities.
Changes to Generally Accepted Accounting Practice
ACCA welcomes the clarification brought by this amendment to the legislation in the light of impending revisions to UK GAAP which might otherwise fall outside the charge to corporation tax.
Oil and gas: Supplementary charge
The need for this legislation is indicative of just how complex the UK system has become and just how important it is to get amendments right. While the language of the accompanying explanatory notes indicates a possible interaction with the GAAR debate, although it seems likely that cases of uncertainty such as this would be outside the scope of a “double reasonableness” GAAR and would still need to be legislated in this way.
VAT: Non-established persons
While the requirement for all non-established traders to register for VAT in the UK is in line with the relevant European laws, it nevertheless, highlights the difficulties faced by business in trying to comply with the current complexities of EU VAT legislation. ACCA is committed to the cause of simplification of VAT in the EU.
VAT: Treatment of public bodies
As with the legislation relating to non-established persons, these measures serve to highlight the difficulties brought about by the operation in the EU of a relatively selective and narrow based VAT, modified on a country by country basis to accord with pre-existing national laws and customs.
Tax administration – the UK/Switzerland agreement
ACCA is encouraged by the recognition that there are significant issues around the use of offshore jurisdictions by those who seek to evade the taxes properly due in the UK.
Dishonest tax agents
ACCA was critical of the previous drafts of this legislation, and many of the difficulties which the previous proposals would have caused have been recognised and addressed. The new legislation is not perfect, but has gone a long way towards addressing ACCA’s concerns.
However there are still many who remain unconvinced that these new powers are required at all. ACCA would encourage HMRC to communicate clearly its evidence and message around the weaknesses in existing powers, and the desirability of consistent and comprehensive mechanisms to protect both taxpayers and the Exchequer from the tiny minority of tax agents who are prepared to act dishonestly in the conduct of their business.
Although ACCA does believe that the new model represents a potentially workable model incorporating a range of valuable safeguards, we nonetheless share the concerns that the process of creating this legislation has been slow and inefficient, and that other solutions building more closely on existing powers might have offered a quicker and cheaper way of dealing equally effectively with the perceived weaknesses.