Numerically Challenged

Numerically Challenged

RICHARD WILLIAMS highlights practical problems with so-called 'joined-up' government.

A PERFECT REVENUE law, if improperly administered, will soon become a practical monstrosity. This quote by Aubrey R Marrs came into my mind when I was considering how many areas in 'joined-up government' feature 50 or 250 employees ostensibly as 'small', 'medium', and 'large' barriers or thresholds.

In tax, I can immediately think of small/medium-sized enterprises for capital allowances purposes; research and development tax credits; transfer pricing; and now 'Do it Online' (for pay-as-you-earn). No doubt others will come to mind.

Different divisions

Only when recently considering the pay-as-you-earn 'online' early registration tax-free incentive for 'small' employers did the thought occur that the use of 50 and 250 was not consistently applied by the legislation or regulations. This could be a recipe for confusion, and a trap for Institute of Taxation students!

If a firm has precisely 50 employees, it is 'small' for the purposes of the new 50 per cent first year allowances on computer equipment bought since the demise of information and computer technology 100 per cent first year allowances (31 March 2004 for companies). This is because the 50-employee barrier for small/medium-sized enterprises is 'not more than 50'; i.e. 1 to 50 employees. The Inland Revenue confirmed that this comes from the Companies Act 1985.

However, it is 'medium' for 'Do it Online', registering now and early and thus getting (or not) the full £825 tax-free over the next few years ('enough to buy a computer' as the pay-as-you-earn leaflet, MP2, the 'Online filing and electronic payment handbook', says). 'Small' for this purpose is 'fewer than 50' — i.e. 1 to 49 employees. The Inland Revenue has reminded me that this comes from the recommendations of the Carter Report .

Therefore, assuming other limits (such as turnover) are not in point, our 50-employee firm:

• had the help of information and computer technology 100 per cent first year allowances;

• gets 50 per cent first year allowances up to 31 March 2005 on a new computer (for pay-as-you-earn online, perhaps?); but

• gets no further help ( i.e. does not qualify for any of the £825) for pay-as-you-earn online P35/P14 filing — the one area which, by 2010, will be mandatory, i.e. unavoidable!

Worse still, being 'medium' for pay-as-you-earn online means our firm is forced to be 'online' earlier, i.e. by 2005-06, when the end of year procedures deadline is 19 May 2006. Failure to do so may mean a penalty of up to £3,000 (limited by the number of forms P14). Admittedly, it is somewhat contrived to have an employer with precisely 50 employees — but there may be a few.

I approached the Inland Revenue's Working Together team and was pleased to receive a rapid reply, which unfortunately confirmed the above. The inconsistency was not raised during the Carter Report consultations and the subsequent draft regulations and therefore the point was 'not considered'. (Of course, it was not until the 17 March 2004 Budget when 'small' was divorced from 'medium' for first year capital allowances, that the online filing limit really became an issue.) The Inland Revenue's responses go on to say that technical specialists engaged in work to align definitions in preparation for the Customs and Revenue merger have now been 'made aware'. Furthermore, this issue is on a 'must do' list (presumably 'must do action' and not 'must do consideration'), rather than just simply having been noted for 'further consideration'.

Diverging definitions

The current Finance Bill has another example of the 'joined-up' problem; i.e . 'offshore installations'.

It will be recalled that for 17 March 1998 onwards, section 192A(3) (a) , Taxes Act 1988 , as it then was, (now section 385, Income Tax (Earnings and Pensions) Act 2003 ) says that a ship, for foreign earnings deduction purposes, does not include 'any offshore installation within the meaning of the Mineral Workings (Offshore Installations) Act 1971'. This is Health and Safety Executive legislation.

In 2002, co-incidentally whilst the Tax Law Rewrite was in the last throes of looking at this area of the Income Tax (Earnings and Pensions) Act 2003 , I needed to see the precise definition. The Inland Revenue experts in this area kindly pointed me to the Offshore Installations and Pipeline Works (Management & Administration) Regulations SI 1995 No 738 (as now mentioned in the updated Inland Revenue's Employment Income Manual at paragraph EIM33102). These are one of the many regulations applying to the 1971 Act mentioned in section 385. Under 'Interpretations' in SI 1995 No 738, Regulation 3 is headed 'meaning of "offshore installation"'. To get a fuller understanding I had to refer to a Health and Safety Executive book on the subject, unsurprisingly titled A Guide to the Offshore Installations and Pipeline Works (Management & Administration) Regulations 1995 .

I wondered how the layman (if he was really interested) would readily find what an 'offshore installation' was for foreign earnings deduction purposes. I commented to the Inland Revenue that it was a pity that the full definition (or even the 1995 Regulations) was not mentioned in section 385 itself (or in a footnote thereto), even if that would mean regular updating of that section.

The Inland Revenue's Budget press release BN14 , dated 17 March 2004, now says that changes to the Health and Safety Executive regulations 'can inadvertently' affect entitlement to foreign earnings deduction. Therefore 'to ensure that foreign earnings deduction remains available only to the parts of the shipping sector only for whom it was intended' (the two 'onlys' are as shown in the press release) a 'free-standing' 'offshore installations' definition will be incorporated into the Taxes Act — hence clause 136 of, and Schedule 27 to, the 2004 Finance Bill introducing new section 837C, Taxes Act 1988 entitled 'Meaning of "offshore installation'".

Clarity and consistency

So 'joined-up' does not makes things easier, but most of us could, and probably have, told the Government that! Invariably, there is a knock-on, and 'commonality' may become a major issue.

When it comes to numerical limits, for the sake of simplicity (and common sense), I think we all agree that, if 'joined-up' is to be used, common interpretations should be applied consistently across all legislation (tax or otherwise). If necessary, those definitions, or at least the message of 'consistency', should be 'exported back', even to the European Union. I was reminded that the research and development tax credit uses 'fewer than 250 employees' and derives from European Union law. If nothing else, not using common definitions precisely in new legislation is elementary bad drafting as shown by the 'online' regulations.

One to fifty

And what of our 50 employee firm? It seems there should be no impediment to the Inland Revenue rapidly changing the pay-as-you-earn online rules (by further regulation?) to the small/medium sized enterprises definition of 1 to 50, even though there may, and should, be a few red faces. (Since the regulations have only just been amended, the campaign for Online has started and, inter alia , literature has been recently issued on a 1 to 49 employee basis — including the latest Tax Bulletin (issue 71) and Working Together (issue 17)). The encouraging aspect is the willingness of the Inland Revenue to accept the obvious need to correct inconsistencies.

If you act for such a 50-employee firm, and pay-as-you-earn online is an issue, no doubt your Inland Revenue Inspector will apply the regulation sensibly in the meantime — although if the Revenue acts quickly the problem will be avoided (the first P35 affected by early registration is 2004-05 — the end of year filing date of 19 May 2005).

Richard Williams is a tax manager with Ritson Smith, CA (a member of MRI, Moores Rowland International). The views expressed in this article are his own and do not necessarily reflect those of that firm.

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