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GORDON BROWN'S TENURE as Chancellor of the Exchequer was marked by several tax 'milestones'; the withdrawal of the ability to recover the tax credit on dividends (the 'raid' on pensions); the tax credits 'debacle'; the nil-rate corporation tax band (we all said there'd be problems, they didn't listen); the non-corporate distributions rate (we all said there'd be problems …); the online filing incentive (estimated cost for the
2004-05 returns £40 million; actual cost £225 million, we all said …); business asset taper relief (as many permutations as the National Lottery and we all …); and stamp duty land tax (I'm not the man to talk to about this, but I understand from those in the know that there may be one or two probs …).
But let's not gripe, like any rollercoaster ride it's been fun! OK, there have been some hair-raising moments; some screams of terror, laughs, white knuckles, but the ride's over now and we can all breathe a sigh of relief while we look around for the next attraction. Oh look, Alistair Darling is the new Chancellor, I wonder what he's got in store for us?
Before he pulls the lever and sets us all off on his ride around the tax system, we thought it might be a good idea for some of the CIOT's experts in various tax fields to help him design his own 'fairground attraction'.
The big wheel
Rob Ellerby, President of the Chartered Institute of Taxation, explained that the Institute would be sending a letter to the new Chancellor once he had 'settled in'. Without wishing to prejudge what will be in that letter, I understand that 'please carry on the simplification process' will be one overriding suggestion. Rob does not see that there is any reason to be proud that the UK now has the longest tax code in the world. The CIOT may set out some ways that this process could be progressed, although Rob did say that they are 'not expecting miracles overnight'; however, they will put down some pointers — some for the short term, some longer term suggestions.
Rob explained that the CIOT has three overriding principles for the tax system:
- Simplification.
- Certainty.
- Fairness.
As far as the first is concerned, the Institute does not like overcomplication; the legislation should be capable of being understood!
Certainty also seems to have suffered of late. The taxpayer must be able to know 'which side of the line' he is standing on. Clause 27 of this year's Finance Bill, dealing with capital losses, is a case in point. The relatively short section theoretically catches innocent transactions; consequently, the Government and HMRC have had to issue guidance notes, including 14 examples, to explain what is and is not caught. However, inconsistencies remain and as far as the Institute is concerned, 'this is not a situation that we like to see'. Legislation should be tightly drawn, with people being 'taxed by law, not untaxed by concession'.
Whilst acknowledging that there have been some improvements, Rob also believes that there is scope for the consultation process to be improved and that this should be 'standard practice'. Whilst they do not expect to be able to influence the broad principles behind any new tax, he believes that the experts should be able to look at the details and make suggestions as to how the legislation should operate in practice. For example, he believes that it is time to breathe some new life into the Corporate Tax Reform consultation process, which started a few years ago and was then abandoned. He considers that it raised some good points that are worthy of review.
At the other end of the scale, it must be possible to have a 'single point of contact' with HMRC for all registration purposes, such that the taxpayer only has to notify changes once.
Although there were some small steps to simplification in the Budget, the plethora of tax rates, 10%, 20%, 32.5% and 40% — before the impact of National Insurance contributions are brought into the equation — cannot aid the tax calculation process.
And for the older taxpayer, is it really necessary for there to be different levels of personal allowances for those aged 65 and over and those over 74? Would it make a lot of difference to rationalise this and, similarly, does it aid tax calculations — or the understanding thereof — for the elderly to have their personal allowances given as a deduction from income, whilst their married couple's allowance is given as a tax deduction?
Capital gains tax is also ripe for a tidy up according to Rob. The changes to the definition of a 'business asset' since the introduction of taper relief have helped, but would have been more helpful had they been backdated to the introduction of taper relief. Computations relating to assets that have been held since then can now be very complicated. Rob wonders if it may not also be time to consider rebasing to, say, 6 April 1998 thus eliminating indexation from personal capital gains tax computations.
Roundabout
John Cullinane — chair of the corporate tax sub-committee — believes that 'simplification' should be the main theme of the new Chancellor.
After many years of going round and round on an increasingly complicated tax system, John thinks that the first signs of simplification appeared in the last Budget, but things need to move further and faster. This is especially true in the corporate area where he would like to see tax liability based on accounts. Clearly there will be some differences, but those differences should be clarified; at the moment things are rather muddled. And accounts should be the real accounts for the particular business; smaller companies should not have to follow the accounting standards of larger companies.
Tinkering with the machine
Institute Vice President Andrew Hubbard's first advice to the new Chancellor is to 'take a deep breath'. Politicians, he feels, can have a natural instinct to 'want to do something'; sometimes this can be more to make their mark than to solve a particular problem and 'tinkering with the tax system' can cause more problems than it purports to solve.
In his role as spokesman for smaller businesses, Andrew would like to see a renewed commitment to consultation. He has no doubt that 'good consultation can make a real difference' and that the present Government has an inconsistent record. Andrew suggests that the new Chancellor should adopt, as his mantra, the line that 'it is far better to consult up front, if only to avoid the political embarrassment of having to climb down afterwards'.
Andrew reiterated the CIOT's emphasis on simplicity, although he acknowledged that this can be difficult in a complex world; perhaps this should be expanded to 'simplicity unless the complexity of the underlying transaction makes this impossible'.
Again, using the example of pensioners, he felt that there was something wrong when the calculations required to calculate the tax liabilities of, say, an elderly couple with three or four different sources of income could be 'as complex as calculating group corporate tax liabilities, albeit that there might not be as many noughts on the end of the numbers!'
'Small businesses live and die by their cashflow' was Andrew's other advice for the Chancellor. Certainty is critical and they cannot operate effectively with liabilities hanging over them for years at a time. The Arctic Systems case is a prime example here and Andrew's concern is not just over who will win, but how the decision will then be applied. He also mentioned the current difficulties of those who had invested in films. How were they supposed to find out whether any of their co-investors might have companies that would then be associated with their own businesses? The current legislation was not designed for such a scenario.
In summary, compliant businesses should not have uncertain liabilities hanging over their heads.
Andrew was also interested in the 'hints' on arbitration in the latest consultation on HMRC powers and the reform of tribunals. The resolution of disputes seems to take a very long time at present, and while he acknowledged that litigation might sometimes be the only avenue where either the HMRC or the taxpayer were entrenched, any opportunity to get the two sides into a room (if necessary to 'knock heads together') and thus achieve a settlement had to be welcomed. And on the same subject, a 'properly funded HMRC' would be another of Andrew's pleas; ensuring that HMRC officers had sufficient expertise and experience was essential. He acknowledged that this might mean more difficult questions being asked, but at least this might be conducive to moving an enquiry to a conclusion.
So, no tinkering and any aid to dispute resolution would help entrepreneurs to achieve the certainty they require to enable them to pay the correct tax liability and get on with running their businesses.
See-saw
Lakshmi Narain, in his capacity as chair of the Stamp Taxes Practitioners Group and the Property Taxes Sub-committee at the CIOT says that, as regards stamp taxes (and SDLT in particular), the issues of concern are both practical and technical.
At a practical level, it is essential that the system works (there have been failings in the IT system) and can be dealt with by non-tax lawyers and conveyancers. This leads on to technical issues and Lakshmi laments the fact that, despite years of discussion, there is still no formal guidance on the partnership rules — meaning that, in effect, practitioners must deal with the SDLT consequences on the basis of a broad understanding and some specific 'opinions' from Stamp Taxes. Furthermore, he believes that the introduction of anti-avoidance rules that do not necessarily mean what they say, but rather are intended to mean what Stamp Taxes say they mean, is entirely unacceptable. Although the Stamp Taxes Practitioners Group came up with some balanced practical suggestions to assist in preventing 'abusive' tax planning, these were all dismissed, seemingly on the grounds that decisions had already been made. Lakshmi's plea is for HMRC and the Government to be prepared to de-politicise much of the process and to take consultation seriously.
Step up customers
Penny Hamilton, Chair of the CIOT Environmental Taxes Working Group, thinks that there is one thing our new Chancellor could do which requires no legislative change and would cost nothing, but which would result in an immediate improvement in relations between our revenue authority and those with whom it has to work. This would be to persuade HMRC to abandon the use of the term 'customers' when referring to those who pay or claim tax. Penny says 'we are not customers, customers can choose with whom to do business, customers can refuse to pay, customers can even influence the behaviour of those who wish to serve them'. She understands the attraction of a term which can apply to taxpayers and claimants, but why do we need a collective noun? What is wrong with 'taxpayers and claimants'?
She appreciates that, on merger, the concept of 'customers' was introduced as part of the attempt by the new department to instil a different culture into its people, but what HMRC have failed to grasp is that, in persisting in its use of the 'c' word, in spite of the generally adverse reaction, it is, in effect, saying 'we are doing this because it suits us, whether or not it's appropriate and whether you like it or not'. This exemplifies the very attitude which it is seeking to discourage in its staff.
Penny firmly believes that HMRC is making real efforts to reach out to, and forge better relations with, businesses and individuals. What more powerful indication could there be of a real change in approach than a public acknowledgement that 'customer' is not always (and, in these circumstances, is never) right.
At the back of the queue
Looking at things from the point of view of those on lower incomes, Robin Williamson of the Low Incomes Tax Reform Group felt that there were two areas in need of attention. A very specific point was his suggestion that the tax credits appeal process (for recovery of overpayments due to official error) should be brought more into line with the way that other benefits are administered. Tax credits are the only benefit where it is entirely up to the administering department to decide whether to recover an overpayment. Robin explained that 'for all other benefits, the recipient can ask a tribunal to decide whether the overpayment is recoverable, but with tax credits, HMRC are the judge and jury'. In his experience, some of the most vulnerable members of society can then be the subject of some very bad decisions. Their only recourse is then by way of judicial review via the High Court; realistically, this is not a valid option for these people to take.
From a more general point of view, Robin felt that the tax and tax credit systems are now so complex that they cannot even be fully understood by the people who are administering them; as a consequence, the experience of the LITRG is that the department makes errors, but blames the recipient: 'you should have spotted our mistake'. This seems to be because HMRC do not have the resources to do a proper job, thus requiring the taxpayer to do the work for them. Robin's suggested solution is that 'if the Government do not want to spend more money to enable the department to give a proper service, the least they could do is make funds available to the voluntary sector to help it to step in with advice and assistance'.
Finally, as LITRG shows in its recently published report Older people on low incomes: the case for tax reform, HMRC seem unwilling to spend significant resources on customer groups that they perceive as low risk. Yet it is usually those very customer groups that are in most need of an excellent service from HMRC, lacking as they do access to professional advice and representation. Shortly before LITRG first reported on the plight of older people in the tax system in 1998, the then Prime Minister said: 'we must make sure that excellent services are there for those who need them, especially the very old or frail'. Yet the quality of service the revenue authority offers to pensioners on low incomes has not improved since then, but deteriorated. A major reallocation of resources is needed so that unrepresented taxpayers get the service they need and deserve.
The new ride
So congratulations to Mr Darling on his appointment to one of the great offices of state. He comes to the Exchequer following periods as Secretary of State for Transport, Scotland and most recently Trade and Industry and is reported as having 'a proven track record in some of the most difficult and complex policy areas'. He has the prestige of having served continuously in the Cabinet since Labour came to power in 1997, but conversely, he also has the dubious distinction of having been voted the most boring MP for two years in a row.
Are there any pointers to his tax policies? Gordon Brown was famously 'prudent'; will Mr Darling — the man that The Times describes as having 'the worst job in Government' — be the same? We will have to wait and see, although I note that in reply to the question in last month's Independent 'why did you shave off your beard?', he replied that he would have shaved it off before the 1997 election, but had already paid for his election photographs and 'was too mean to have them taken again!'. He has apparently said that if he is remembered, he would like it to be 'as the minister who began to eradicate poverty'; given the increasing divide between rich and poor and recent reports that social mobility is declining, he may have his work cut out.
Time, I think, to take our seats for the next rollercoaster. I wonder how long this one will last?
