Finance Bill Round Table

16 May 2007 / Mike Truman

Issue: 4108 / Categories: Comment & Analysis

In the second of our Round Tables, held in London on 19 April, MIKE TRUMAN chaired a discussion on the Budget and Finance Bill.

Participants

John Cassidy (JC), tax investigation services partner, PKF
Tina Riches (TR), technical director (cross-cutting), CIOT
David Nutt (DN), associate director, Lovell Consulting
Richard Mannion (RM), national tax director, Smith & Williamson
Maryanna Sharrock (MS), corporate tax partner, Stephenson Harwood
Kevin Phillips (KP), corporate tax partner, Baker Tilly
Mike Truman (MT), editor, Taxation

The last budget

MT - This was Gordon Brown’s last Budget and Finance Bill– do we think that he went out with a bang or a whimper?

RM - It was a disappointment. Where was the long term plan in this? The changes to the tax rates came across as massive tinkering which hit those on less than £16,000 a year or so.

MS - There is even less of a plan in the Finance Bill. I was depressed at how small and unimportant some of the measures are. Where alarm bells rang, they weren’t supposed to. The change to the rules for stock exchange recognition caused mass panic that AIM was going to be recognised. That would kill business property relief. But once challenged they backed off.

KP - Some things they did were right; reducing corporation tax was right. But the way it was paid for by small business was wrong – giving with one hand and taking with another. Playing around with the rates was pure politics, and the presentation was just theatre. The change to the CFC rules was the right thing to do, but again you don’t feel that they had a strategic vision, they were reacting to events because other countries have done. They are just doing the minimum they have to do to keep in the game.

TR - I have seen some estimates that before the budget the UK was 19th in the world for business competitiveness, and that after all changes, we were - 19th…

JC - Somebody asked me who was going to take over as Chancellor. What does it matter, he has already written the budget for next two or three year.

Capital allowances

DN - We were extremely surprised that the Government without warning has consigned Industrial Buildings Allowances to the dustbin, an allowance which has been in existence for 129 years, in some form or other. This is going to make a massive impact on capital intensive businesses such as property companies, transport, manufacturing, utilities and hotel companies. These types of companies will effectively be paying for the reduction in the corporation tax rate. The abolition of IBAs could potentially affect the viability of some of the Olympic projects such as the Olympic Airport Terminal; also Hotel companies who have been previously encouraged to build new hotels for 2012. Other capital allowances changes announced for plant and machinery allowances will also not help; these changes will add a further layer of complexity rather than simplifying it, particularly in respect of integral fixtures which have not yet been defined but could again have a huge impact. These complexities may be good news for advisers but they are not good news for business and are creating further uncertainty.

KP - Businesses have committed to building hotels on the basis that capital allowances were going to be available, and now the whole cash flow forecast has changed, the goalposts have moved. There have been other issues recently with allowances for hotels, like whether the restaurant needs to be in the building or just on the same site. Companies have negotiated on issues like that in good faith recently, investing a lot of time and effort, and now they find it was pointless.

DN - Interestingly, since the Budget announcements we have had a large number of enquiries from companies seeking to mitigate the affect of these changes by reviewing expenditure in open accounting periods and re-allocating IBA expenditure to plant and repairs. This is a key priority for companies and is a particularly attractive opportunity for industrial and utility companies who historically have not been particularly concerned about allocations. Without a re-allocation, the allowances will be lost from April 2011.

MT - It’s déjà vu, isn’t it, just like the negotiations about trusts blown out of the water by last year’s changes.

JC - It goes to the heart of what we said at the start; businesses in this sort of sector have 25-year business plans, but there is no evidence of a long-term strategy from Government.

DN - We’ve looked at what effects these changes will have upon the NPV of tax saving. For example, for a new hotel built for £20m we estimate the NPV of the tax saving to reduce from £4m to £1.6m, a 60% reduction. Clearly this additional cost to hotel companies will eventually need to be passed on to their customers. If we look just at the proposed changes to plant and machinery allowances in terms of integral plant, for a new office costing £50m the NPV of tax saving could reduce from £2.6m to £1.9m.

Small businesses

MT - What do we think the landscape is for small businesses now?

RM - We have had at least two consultation documents, but this response of increasing the rate has nothing to do with what was in them. It’s a short term fix which doesn’t really work because you are still better off operating through a company. The only way I can see that HMRC will solve that problem is by dealing with the income tax and NIC problem; we will not crack this issue by changing corporation tax.

MT - It has been put in a drawer marked ‘too difficult’!

TR - If you take everything into account, the position is very similar if you are a limited company that is liable to small rate tax or a sole trader. At certain levels there isn’t a huge difference because as a company you have the administrative burden. Taxwise you may be better off being corporate, but overall the difference isn’t that great now, and the marginal rate on extracting further profits is not that different. We are now reactivating our papers from some time ago on disincorporation relief.

MS - We now find that we are looking more and more at LLPs rather than companies for many businesses.

Simplification

RM - I spoke to a senior Inspector on Budget day, shortly after the Chancellor had sat down, who asked me what I thought of the Budget. She said they were quite pleased with it because of the simplification of moving from three rates to two. It was only later in the day that I realised we actually still had three!

KP - It’s also deeply worrying that they think this is where simplification is important – it’s the tip of the iceberg. The main problem is in working out what income is liable to tax, not the little calculation at the end of what the liability actually is.

MT - If you are on tax credits, your marginal rate didn’t move – he made no announcements at all about the taper rate going to 39%, which means the total deduction of tax, NI and tax credits lost is still 70%.

KP - Going back to the issue of IBAs, if you look at changes in tax in recent years, the main change is to give relief for expenditure that didn’t get relief, such as the change to give relief to intangibles. The main thing left was commercial buildings, where it would have been logical to give relief based on the accounts. Abolishing IBAs increases the asmmetry of treatment for capital and revenue again.

RM - Again, it goes back to long term planning, and there seems to be no strategic thinking. In 1998 HMRC were giving real thought to aligning tax and accounting; a lot of time and effort went into that and that was only ten years ago.

KP - And the change to relief for intangibles was an example of that, and that only goes back to 2002. This change on capital allowances will probably distort market behaviour. If you buy you don’t get tax relief, if you rent you do.

MS - So you put the property into something like a REIT which is indifferent to tax relief and rent from it.

KP - Looking at the other allowances, because it’s not in the Finance Bill, we still have no detail on the £50,000 investment allowance.

TR - One of the problems we see with it is that they say they are putting the rate of corporation tax up for small businesses but will give it back with the investment allowance. The figures we have seen so far indicate that small businesses do not have this level of asset investment.

DN - Despite the introduction of the new annual investment allowance, small businesses will still be losing out as the other capital allowances benefits will be reduced or lost and they will have to pay an increased tax rate.

KP - It is so easy to selectively quote a number and paint a misleading picture. That is what has been done.

Managed service companies

MT - If we are talking about splitting business, what do we think of the rules on MSCs? Are all the providers suddenly going to become accountants?

TR - According to HMRC, no. They will be consulting on the definition of accountants.

JC - But it’s very difficult to come up with a definition of accountants. It’s not like lawyers, for example.

MT - Why didn’t they just use the Muscat case to treat all the workers provided by the MSCs as employees of the end-user?

RM - The original plan when IR35 was introduced was that the tax was going to be on the end-user and large businesses successfully fought against it. What Muscat would do is take it back to that.

TR - The debt transfer rules were a similar issue; the wording of the first version was very unclear as to who the debt will be transferred to. Was it the individual worker or the MSC provider, or could it be transferred to the client, which would obviously include large businesses? Again HMRC seem to have clarified that.

Individuals

MT - We haven’t talked about individuals yet; what are the implications for them?

TR - The relaxation on benefits in kind for pensioners - we have been campaigning for this for ages. HMRC have taken a long time to accept it but have now taken this on board. They are prepared to listen to the case for more changes as well.

RM - You can tell that they ended up with a prize they didn’t even expect to get; regarding taxing of pensioners’ benefits - they do not have a form as yet to report these things. If it was intentional, they would have devised a system.

TR - There are still issues that need to be looked at - council tax and various other peripheral benefits on tied properties, for example. But they do really seem to be listening and want to sort this out. However, a lot of employees don’t realise that they have a tax liability, because there has been so little publicity. The most common benefit being charged is medical insurance.

KP - This year as every year there was this stampede after rumours that this could be the last opportunity to get higher rate tax relief on pension contributions. Why don’t they announce that it is going to be retained for at least the next x number of years? Apparently HMRC is quite surprised that a lot of people are putting in large contributions, which does feed the speculation that higher rate relief might be withdrawn.

RM - It’s good that they tackled the issue of benefits in kind on offshore property, which was a growing problem. Some parts of HMRC weren’t taking the point while other parts were. I have seen four SCO cases where they were seeking a settlement. But there has not been a robust consultation on this, it has all been behind closed doors. What are we going to do about people who can’t ‘tick all four boxes’, like people coming into the UK because it is specific to properties offshore? But the positive message, for me, was that you can with a lot of effort get something out of the ‘too difficult’ drawer.

Anti-avoidance

MT - What is your reaction to the targeted anti-avoidance rule - is this the way for legislation to go to tackle avoidance?

TR - We welcomed some of the changes that have been made, because one of our concerns was that, although described as targeted, it is relatively general. It is so all-embracing it could catch very ordinary transactions, where there is no intention to avoid tax as such. The draft guidance notes contradict each other. Transfers between spouses, which we had understood at the outset to be acceptable – it is now not clear whether they are excluded from the rules. The other concern is that it comes in the category of taxing by legislation and untaxing by guidance, which can be changed at a whim.

MT - And the guidance can’t be appealed. We are totally losing any appeals, because the statutory provision is so wide.

RM - In 1998 we got very close to having a GAAR, but the problem was that it needed a very robust clearance procedure, and the Revenue were not prepared to meet the cost of that. Ten years later it seems that we have a GAAR for SDLT and for CGT, but without the clearance procedure that makes it work.

MS - It’s not just SDLT and CGT, you’ve got them in loan relationships and other areas as well. It now seems that we’ve now got drafting with deliberate lack of clarity – to keep us in the middle of the road because we are not quite sure where the boundaries are.

KP - There was an announcement in the Pre-Budget Report that in future foreign businesses coming to the UK could get clearance about their future tax liabilities, but when you looked behind it the number of businesses it covered was tiny – 150 or so a year, because they were not prepared to resource it further. And it discriminates against domestic business, which also needs to know its liabilities.

TR - Another key issue is the tax on personal dividends, although that is not in the Finance Bill. They need to bring in the change because the current legislation is in conflict with the EC treaty, although they haven’t admitted it. They want to bring it into next year’s Finance Bill, effective from 2008, but why not bring it in now and backdate it?

MS - Because it costs more money!

TR – That’s right; so it will be announced again next year. The other point is that they are proposing a £5,000 or 10% threshold over which you won’t get relief, but under European rules there is no maximum amount. Again there is a fear of huge avoidance.

Good relationships?

MT- What does the Finance Bill tell us about the relationship between the Revenue and the profession? There was a lot of talk earlier this year about HMRC wanting to improve relations and to talk more.

MS - You have to distinguish between Government, Treasury and Revenue. The mood in Government is ‘let’s bring in money if we possibly can, and tinker with everything else’. I can’t really read the Treasury, but the mood in the Revenue is that they will tidy up bits around the edges, but the only real moves are to punish tax avoidance.

JC - At the Latimer House conference between CIOT members and HMRC the senior people clearly wanted to show that things were changing, but the message given back to them was that there is a huge gap between what senior management say, and what is actually happening down at the coalface.

KP - As long as I remember the senior people always want to say that they are looking for a better relationship. A lot of this is just paying lip service to the idea. HMRC want to look consultative when it is easy to do so, or when they are forced to. There is a lack of conviction there. They still approach enquiries in a confrontational way and are getting slightly more aggressive year on year.

TR - My impression is that they are caught between the Government’s demands to raise money and HMRC’s desire for a better relationship. And they need to work with agents, as they push more work on to them. They do need to work with us. What happened with the interventions pilot is a prime example. It relied on the support of agents to make it work, and because it had not been properly thought through, the agents weren’t happy to toe the line. The senior staff were trying to work with us, yet were having other restraints imposed on them by the Government.

RM - The problem is that a lot of the structure for consultation, like Working Together, was based on the regional system of district organisation. Reorganisation threw that up in the air, and no-one knew what was going on. I just thought it was total mayhem. We hit rock bottom last year and the work that has been done over the last few years was forgotten. The damage done by the merger will take years to sort itself out. It’s not helped by the rationalisation of staff – people are disappearing at a rate of knots.

TR - We’re left with call centres, whose staff do not understand the query because they don’t have adequate training, or else they pass you from pillar to post.

RM - If you are a large business, or small but with a specialist return, you get a specialised service. If you are not, you get a call centre.

MS - All you can do is ring the call centre, the same as your client, and get the same awful service.

TR - There has been a pilot scheme in Manchester where one group of the agents who have signed up for it can ring a special number if they have a technical query and get through to someone with technical training. They are gauging what the reaction to that change in service is. But if I was still an agent I would consider everything technical! It is unusual to get through at the call centre to someone who can help.

Contaminated land

DN - One area that is encouraging is the consultation on contaminated land relief, where they appear to finally be listening to property developers and investors, particularly regarding issues such as Japanese knotweed, the removal costs of which can be huge. Also when you are looking at long-term derelict land, many companies inherit a contaminated site as part of a corporate acquisition, but because they are still technically considered to be the polluter have been unable to claim the enhanced relief. It will be interesting to see if they can sort this out because it would unlock a huge number of sites in the UK and encourage such land owners to redevelop their existing contaminated sites. A less encouraging sign is the significant reduction in the number of assisted areas qualifying for the new Business Premises Renovation Allowance.

MS - We have had lots of companies who have been bought in by a group which then hit this problem. The Revenue has a concept of restricting a group when claiming loss relief, so that only those who are in the group at the time the losses are made should benefit. They don’t do the same to exclude responsibility for the pollution in contaminated land relief when the pollution happened before the company came into the new group.

Penalties

MT - Looking forward to the new regime for penalties, what do we think it is going to be like dealing with HMRC ?

JC - There is a lot to be happy with, it is the end of a long consultation both in public and behind closed doors. I like the idea of suspended penalties, though I question how often it will be used, and I think it is right that the penalty is attached to specific actions of the taxpayer rather than to the return. On the other hand, one of the main drivers for change is to get people coming forward to make voluntary disclosures but the penalty for that is too high. The Revenue say themselves that penalties are going to generally be higher than now, and levied in more cases. We will also have a lot of arguments about what constitutes reasonable care – effectively inviting a ‘reasonable excuse argument’. And we have this dreadful phrase ‘HMRC thinks’.

MS - It’s a creeping spread, they brought this in for what used to be section 739 last year, and they tried to bring it in for leasing –‘if it would be reasonable to think’ – it’s such a low threshold.

JC - The new rules don’t come in until 2009 because it is a percentage penalty, so for human rights reasons they have to give enough notice before the returns it applies to are submitted. So 2008 is too early and they chose 2009. But over the last two or three years we have seen far more challenges to accounts: has this figure been written down too much and so on, even on material figures where we have signed an audit report. The penalty regime covers certain documents and one of them is accounts. So if we have a technical argument going on based on the accounts, such as stock valuation, where do we go with that?

MS - This chimes with changes to the loan relationships situation last year. You have to compute your credit and debits so that they provide a proper view of losses and gains; then in the next section it says you can look at the accounts for these purposes – but only if they provide a proper view of profits and losses.

JC - We may end up with lots of different issues on the same return. You can compartmentalise these into different areas with different penalties. At the moment the return is either negligent or not.

RM - John, do you see any connection with the offshore disclosure facility announcement?

JC - The offshore amnesty, which is neither an amnesty nor offshore …? No, I think they are entirely separate.

RM - There was apparently a human rights issue with it, because if you are going to offer this to richer people with money offshore it had to be given to people like the window cleaner who has under-declared his takings as well.

JC - But they have hidden it by saying it is an ‘offshore disclosure facility’, and that if you don’t have an offshore account you don’t qualify, but if you make a disclosure to your local office you can expect to get the same treatment.

Other changes

MT - What else was there of interest in the Finance Bill?

TR - Pre owned assets. We welcomed the possibility of making late elections; we have been speaking to HMRC about that since it started. But there is still the problem that we don’t have the regulations, which may mean that the elections are technically invalid!

RM - I wonder how much tax in ten years time will actually have been paid under the pre-owned asset legislation? So many people don’t understand the rules.

TR - One of the problems here is unrepresented taxpayers who just don’t realise that they have a liability, and where there is no avoidance of inheritance tax. But HMRC don’t seem to be concerned to exclude them from the rules.

RM - Another issue that only gets one line in the Red Book, and which still seems to be in the ‘too difficult’ drawer, is residence, which now seems to have got into a real mess. I don’t think they can solve it until they look at residence and domicile separately. People have far more complicated lives now, coming and going very frequently.

KP - Another issue is R&D Tax credits. That was one of the positive things, to increase the relief to 175%. But the main benefit is to surrender the relief for cash repayment, but they have recalculated that so the amount you get by surrendering is unchanged. So again the headline is great, but the biggest users get no benefit from it. The change for bigger businesses isn’t enough to change anyone’s plans, so why are they bothering to tinker with it?

MT – Which seems to be back to where we came in...