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KEY POINTS
- The principle of simplification is widely supported, but the practice provokes opposition.
- Abolition of taper relief will be outweighed by new entrepreneur's relief and residence rules.
- Short legislation on income shifting is massively outweighed by length of guidance.
- Targeting is the only way to make a genuine impact on legislative length.
The little local difficulty of accidentally mislaying two CDs with the entire child benefit database on it put everything else that was going on in HMRC and the Treasury after the Pre-Budget Report into the shade.
Which was a shame — because prior to that there had been some interesting mood music coming out about tax simplification.
Alistair Darling, we were told, was a simplifying Chancellor. One who had heard and understood the burden being placed on individuals and businesses in trying to obey a tax code which, allegedly, had just overtaken that of India to be the longest in the world, and who was determined to do something to stop it.
That principle, of course, attracts widespread support — as a principle. It's rather similar to support for green electricity generation; in general terms everyone is in favour, and can't understand why the Government doesn't get a move on and just do it.
However, when the plans for the wind turbines on the local coastline are published there is an immediate outcry, and an explanation that, whilst we are all of course fully supportive of the principle of green energy, we are supportive of its implementation only if it impinges on other people's skyline and not on ours.
It was therefore no surprise that the main attempt in the Budget to genuinely simplify an area of tax, taking CGT back to its roots, came under withering fire, which forced at least a partial retreat.
But what would the real impact on tax simplification have been, what will it be now, and how does this compare to the other legislation that we anticipate being introduced by FA 2008?
Abolition of taper relief
The main impact, in purely legislative terms, of abolishing taper relief will be the abolition of TCGA 1992, Sch A1, as well as s 2A.
That takes up about 16 pages of the Tolley's Yellow Tax Handbook, if you ignore the legislation which has already been superseded, which should mean that some 8,000 - 9,000 words will be removed.
But of course it is not quite that simple. To begin with, it doesn't go yet. Most tax advisers, when working out capital gains next year, will still be calculating taper relief, because most of the time they will be calculating them for submission on the tax return to 5 April 2008.
They will stay in the Yellow Book for some years to come, giving at least the illusion of a failure to simplify.
Then we also have to consider the effect of the climbdown on 'entrepreneur relief'. The details are not yet known, but we have been told that it will be modelled on retirement relief.
This in turn is a good illustration of the point I have just made — although no retirement relief has been due for the years 2003-04 onwards, the legislation is still there in the Yellow Book.
It takes up about eight pages, so unless the new relief is a significantly simplified version of it, close to half of the potential saving in legislative volume will have been lost.
Residence
It is when we turn to the other areas of legislation to be included in this year's Finance Act that the scale of the problem becomes apparent. Of course the full scope of it is unknown as yet, but we have a number of consultative documents which include draft legislation, and which can therefore give us some indication of what is to come.
Take, for example, the changes to residence and domicile for tax purposes. It would be easy to simply do a count of the total number of words in the proposed legislation, and say that the tax code would be increased by that amount.
The answer, if you are interested, is a further 9,500 or so words. However, that includes things like the sections which say 'for s 22(5) substitute the following words', which are not going to be in the legislation once it is consolidated, and the words inserted may often be similar in length to the ones they replace.
However, even after deleting these, it seems that the legislation as consolidated will still increase by about 5,000 words solely because of the changes on residence and domicile.
So if you combine the necessity of reintroducing retirement relief under a new name with the new rules on residence, they will more than outweigh the legislative reductions from the abolition of taper relief.
That is not to say that the legislation on residence and domicile is unnecessary. It is a good idea to specify when presence in the UK will count as being here for a day, although the decision to say that presence at any time during the day counts as a full day was the wrong one.
The real problem with the new residence rules is that they still do not provide a comprehensive code for deciding whether or not someone is resident.
In practice, IR20 (which surely must now be amended) will still have its status as quasi-legislation, albeit with the totally unworkable provision that an hour spent in the UK is now to be counted as a full day even for the 91-day test.
For practical purposes of complexity, IR20 has to be considered as legislation, which means that a longer but complete statute could have been offset by the abolition of the need to make effective law by issuing guidance; but the new rules do not achieve this.
Income shifting
Then we come to the income-shifting provisions, which provide the worst example of legislation by guidance. The legislation itself is just under 700 words long.
Unfortunately it is also vague and potentially excessively wide-reaching. It therefore has to be explained and cut down in its effect by guidance, which runs to a total of over 9,000 words in the current draft, and will no doubt only get longer as further issues are raised.
The guidance contains, at present, 17 separate examples as its final section, and there are four further examples in the rest of the text. Now, on the one hand it is useful to have the practical implications of legislation clearly shown by means of examples.
But on the other, how obscure and unworkable do 700 words of legislation have to be in order to need 21 examples to explain what they actually mean?
And, in the light of that, how did the person drafting the guidance manage to stop laughing long enough to type in the sentence that opens the guidance: 'The principle underpinning this legislation is straightforward'?
Target-setting
I have, of course, scarcely scratched the surface of what will actually be in the Finance Act this year. Capital allowances are going to figure prominently, and it is even harder to work out what the sum total in legislative words will be when the abolition of IBAs and ABAs is offset against the introduction of rules for integral assets and the annual investment allowance.
Even worse, a cursory glance through previous Finance Acts will show that the major causes of legislative bloat are rarely the most significant for the majority of taxpayers. Section 38 to 46 and Sch 7 to 12 FA 2007 concerned insurance companies; very important to the businesses concerned, but not to most tax practitioners.
Anti-avoidance provisions in particular are likely to play a very significant part in FA 2008, with a legislative length that is out of all proportion to their day to day importance .
Set targets
In short, the war against legislative complexity is not just being lost, it is a rout. The problem is that, although lip service is being paid to reducing the amount of legislation, there is no plan to do so, no-one has responsibility for devising one, and there are no consequences at a government level when nothing happens.
Meanwhile the length of the legislation continues to increase, which is good news for tax publishers who sell access to it, but bad news for the trees that are cut down to print it, and bad news for the practitioners who have to read it and try to make sense of it.
Until the straightforward issue of the volume of legislation is given the attention it deserves, this problem is just going to continue. Probably the only way to make a difference, as I suggested in last year's Hardman lecture, is to set a target to reduce the main consolidated Acts by a certain percentage within five years.
My suggestion was that this percentage should be 25%, but that this should mean that by August 2012 the consolidated Acts should be 75% of their length as at August 2007. At the moment it looks as if we are heading in the wrong direction.
