The long and the short

MIKE TRUMAN looks at a short Budget speech from a long-serving Chancellor.

JOHN-JEFFREY COOK, a long-time friend of (and contributor to) Taxation over the years, pointed out to me recently that Gordon Brown is now the longest serving Chancellor of the Exchequer in almost two centuries — beaten only by Nicholas Vansittart, who was Chancellor from 1812-1823.
On the other hand, he gives short speeches. Most of his perorations have been an hour or less, and this one at 50 minutes was the shortest since Disraeli, who holds the record of 45 minutes for his 1867 offering.
You can't say a lot in 50 minutes, but typically the real meat of the Budget is in the Budget notes and press releases. This time, however, there seemed to be only three real 'surprises'.

Surprise, surprise

The first surprise was more a case of seeing how the magician managed to do the trick, and like all such disclosures it was a bit of a let-down — 'is that all?' Where did the Chancellor find the £800 million he needed to pay £200 towards the council tax bills of households with someone over 65 living there? The single biggest item in the table of tax changes and their effect on the nation's finances was 'Modernising North Sea corporation tax'. This appears to be a euphemism for 'making oil companies pay tax faster'. In fact, the modernisation took place in 2002, when the supplementary charge of 10% on ring-fence profits was introduced, collected as if it were corporation tax. The stated aim of the new proposals is to align the payment dates more closely with petroleum revenue tax, which seems odd since:

(a) the dates are not the same;
(b) PRT does not apply to fields licensed for exploration after March 1993; and
(c) of the 150 fields subject to PRT most are expected never to pay it because of allowances and reliefs brought forward.

Nevertheless, the result of the change is that tax will in future years be paid in three equal instalments rather than four, and for the transitional year, 2005-06, the payment which would have been made on 14 April 2006 will instead be made on 14 January — thus bringing it into the 2005-06 tax year. Try as I might, I can't get the expression 'teeming and lading' out of my mind. And, of course, the problem with teeming and lading is that you only generate a one-off cash payment, which is why there is no guarantee that the £200 payment for the over-65s will be repeated.

Disadvantaged areas

Surprise number two was that the SDLT exemption for commercial property in disadvantaged areas was abolished. There was no real need to do this; the change brings in an extra £340 million, and the Budget brings in £265 million more than is needed to finance expenditure. Since £400 million has been allocated to the special reserve to meet obligations in Iraq and elsewhere, it would only have needed a little bit of reorganisation to balance the Budget without abolishing this exemption.
It is even more of a surprise when you consider the history of the exemption. The first announcement was in the November 2001 pre-Budget report. This introduced the exemption for consideration up to £150,000, and said that stamp duty on more expensive non-residential property would be significantly reduced or abolished from 2002, as part of a programme of urban regeneration, which was a significant theme of the 2001 pre-Budget report. In fact it took until April 2003 to get the EC permission that was needed because the exemption constituted state aid. And yet two years later it is being abolished. Because eligibility for the relief is governed by wards, it is true that some surprising areas qualify; in many cities the difference between a prestige address and an area in need of regeneration can sometimes be no more than a few streets. But that does not seem to be a strong enough argument for abolishing what was originally a major plank of policy, and creating doubt in the minds of potential investors about the stability of the system in which they have to make long-term decisions.

Famous Belgians

Surprise number three was the subtle attack on the non-domiciled and non-resident without actually changing the residence and domicile rules. These will be examined further in a future article by John Tallon QC, but the most famous approach to avoiding the charge on temporary non-residents who return within five years has been the Belgian DTA 'trick'. Many double tax agreements (DTAs) currently in force between the UK and other countries have a clause in them which permits the 'other' state to tax gains made by temporary non-resident nationals. Even when this provision is not included, there is often no practical benefit to be had from the DTA, because the other country has just as high a charge to CGT, particularly when the UK's business asset taper relief is considered. However, there are a few countries which do not tax some capital gains (particularly gains on shares) and where the DTA does not reserve the right to tax temporary non-residents. Since the DTA has then generally given the taxing right only to the state in which the taxpayer is treaty-resident, the argument has always been that this overrides the temporary non-resident charge. The most popular destination (because it is nearest and has the Eurostar for fast transport connections) has been Belgium. For those leaving on or after Budget day this will no longer work.
There are a couple of other changes relating to CGT and non-residence, but the other major change relates to the situs of assets for non-domiciliaries. In the past it has been easy to move the situs of shares in what is essentially a UK company offshore by using bearer shares and physically depositing them offshore. This will no longer apply as from Budget day; all shares of a company incorporated in the UK will be treated as situated in the UK. Various other intangible assets are subject to the same rules.

Missing, presumed …?

These comparatively small surprises that are included in the Budget only serve to highlight what is not there. To take the last first, the real surprise is that these CGT changes were not made years ago, particularly since the Belgian DTA trick has been around for so long. But these comparatively minor changes to domicile and residence rules only highlight the complete absence of developments in the consultation for a new set of residence and domicile rules. As we have mentioned before in Taxation, this was first announced in 2002 and the consultation document was issued in 2003, since when there has been silence. So what are we to make of the decision to tackle some smaller specific issues as highlighted above? Is this an indication that the idea of a full-scale overhaul has been abandoned, or has it just been held over until a new Parliament? If the latter, then an announcement will be needed reasonably swiftly. Detailed work on 'Bill 4' in the Tax Law Rewrite series has been underway for over a year, and in February the provisions on residence which are to be included in it were shown as 'draft in progress'. It would be very unhelpful for the draft rewrite provisions to be prepared and go out to consultation only to be overtaken by new legislation.
Turning back to surprise number two, the abolition of SDLT relief on commercial property in disadvantaged areas, this sits uneasily with another provision — the 100% capital allowances for regeneration of properties in the same areas. Again, it is hard to know whether to describe this as missing or omnipresent. It was announced in the pre-Budget report for 2003, but the consultation document did not appear until a year later. The introduction of the relief has now been confirmed, but not the starting date — state aid approval has to be obtained from the EU.
Whilst it is true that consultation over complex issues is helpful, the need for regeneration was seen as urgent in 2003, and perhaps a little more 'hurry-up' would have been helpful. This is particularly true given that the consultation paper foresaw a possible perverse incentive with the scheme. It requires a building to have been empty for a year in order to qualify, and one of the questions for consideration was whether this would act as a perverse incentive, encouraging people to deliberately leave buildings vacant. If that danger was in any way real, it will have led to an even greater level of degeneration over the past 18 months, with no date yet available for the new relief to start.

Modernisation

Finally to return to the first surprise, advancing the date of payment of the supplementary charge to corporation tax for oil companies in order to 'modernise' it. 'Modernisation' is a favourite word in Budgets and pre-Budgets over recent years, but the level of activity seems sometimes to be as stop-start as a dodgy firm of builders. The proposals to 'modernise' trusts have been the subject of a great deal of consultation, which was conducted in an admirably effective way, but so far very little has resulted from it. Admittedly, this is a reform which has been led by practitioner demand, but there have now been two rounds of consultation, and surely it is time for decisions in principle to be taken? The timescale set out in the Budget documents is to 'continue to work with the industry to secure consensus on the best way to simplify trusts taxation further', with the prospect of draft legislation later this year. That might allow a change in FA 2006, but it is more likely to be FA 2007.
This finally brings us to the 'modernisation' of corporation tax. Forget about changing the payment dates of supplementary charges, what about the radical reforms that were discussed in 2002 following the first consultation paper in August of that year? Budget 2003 promised a further consultation paper in the summer, which duly appeared in August 2003. Some truly radical proposals were being considered, centring on the simplification or abolition of the schedular system, and the possibility of using the accounting profit as the main determinant of taxable profits, with only limited adjustments. Some changes were made in Finance Act 2004, based on a reduced consultation period in order to get them ready in time. Since then, there has been no obvious progress. It is now 16 months since the deadline for responses to the August 2003 consultation, yet the issue does not even feature in this year's Red Book section on modernising the tax system.

Conclusion

So it was a short speech from a long-serving Chancellor — but it was a speech that was absent on comment on several long-standing issues that need to be taken forward. Obviously, an imminently expected election may have a lot to do with that, in which case we can hope that it will be full speed ahead after it has taken place.
More worryingly, the change to the division of responsibility for policy between the Treasury and the new HM Revenue and Customs could also be affecting the progress of these initiatives. If it is, that would be very unfortunate.

Issue: 4001 / Categories: Comment & Analysis