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KEY POINTS
- The conflict of simplification, fairness and change.
- Are taxpayers, advisers and HMRC all losers?
- Is it time to slow down and think?
- CGT, residence, domicile and income shifting: well thought out?
- Short-term politics versus a better tax system.
- Is the concept of legitimate expectation being met?
As an ideal, there is something very attractive about simplification.
Henry Thoreau, who went on to inspire such people as Mahatma Gandhi, Martin Luther King and John F Kennedy, wrote extensively on the simple life and once said 'Our life is frittered away by detail ... simplify, simplify'.
Therefore, it is with a little trepidation that I find myself writing about how the current tax 'simplification' agenda may be heading off the rails and how the rush to change the UK tax system is not necessarily leading to better law.
The first question to ask is whether we really have a tax simplification agenda at all.
When Alistair Darling took over as the new Chancellor in June 2007, he appeared to want to set out his stall as being very different from his predecessor.
He included 20 measures in the Pre-Budget Report (PBR) 2007 which were badged as 'delivering tax simplification'.
In addition, the move to the 18% flat rate of capital gains tax (CGT) was also termed 'straightforward for taxpayers' (PBR Press Notice 01).
A huge amount of work is going on informally and in consultations to review these areas and we would expect the Budget on 12 March to include an update on progress.
Simplification or change
Clearly there is an intention to push forward on a wide range of issues. Whether these are all going to be successful is hard to tell.
Concerns are already being raised about various ideas; for example, see Robert Maas's devastating criticism of the move to payrolling benefits in his article Disaster in the making.
Nevertheless, there are strong arguments for exploring simplification options.
My main concern is that the simplification agenda is set amidst a raft of other tax changes. For example, there is what I will call the 'fair tax agenda'.
This is the range of ideas that are being proposed under the banner of getting taxpayers to pay the perhaps mythical 'right amount of tax'. This would cover the proposals on residence and domicile and income shifting — in themselves two huge alterations to the existing rules.
Sadly, what we are seeing, therefore, is not so much a steady push towards simplification, but a headlong (and at times almost 'headless') rush towards change. Much of the change is scheduled to take effect this April.
Who loses out?
The main loser here is the taxpayer. Caught in the shifting sands of possible tax changes they are becoming less and less clear about what they should or should not be doing.
Pity the person I chatted to the other day: a non-domiciled UK resident, owning a business in the UK with significant assets and whose wife is an equal shareholder in the company and possibly caught by the income-shifting rules.
After describing his current position he looked at me and said: 'I must have been very bad in another life!'
Another loser is the good tax adviser who is left unable to advise clients properly as to what to do and is probably looking with concern at his or her professional indemnity insurance cover in case some client takes them to task in the future.
Maybe they will not have had time to contact all clients affected by the changes due before April. Maybe they will have given advice that looked OK at the time, but seems less clever as new announcements come out from HMRC and other sources.
But the losses are shared. Those in HMRC must feel under siege as they try to cope with changing tactics — presumably driven from Government — which need to be implemented and some Labour MPs must be shifting uncomfortably in their marginal seats wondering if the raft of measures thrust upon their constituents has affected their chances of being re-elected.
The next steps
So how do we get from this messy state of affairs to a better place that still retains the good intentions of tax simplification?
One option is to slow down. Why not concentrate on a few measures and get them right?
However, politics can be a short-term game and perhaps it is unrealistic to expect any political party to look at an agenda that stretches over many years rather than a Parliamentary term.
Nevertheless, making sure that the rules are right saves much time in the future correcting and amending poor legislation.
Badly thought through changes are likely to lead to a backlash that can be epitomised by the type of widespread criticism leveled at the CGT proposals, which in themselves offered some very positive simplification ideas.
Capital gains tax
When the Chancellor announced his intention to move to a flat rate of CGT last October in the PBR, he immediately followed it up with comments to the Confederation of British Industry conference that he was 'listening' to complaints from the business community and would set out comments in a few weeks' time.
This meant that no one was keen to make any business decisions until they were sure what the ground rules were going to be.
It was not until 24 January 2008 that details were announced of the entrepreneurs' relief. This provides a continuing effective rate of 10% for those who meet the qualifying conditions.
However, it is capped at a lifetime cumulative allowance of £1 million (thus making it less attractive for those with large gains or a serial entrepreneurial nature).
Worse still, the crucial draft legislation setting out how one could deal with such interesting issues as qualifying corporate bonds (QCBs) and earn-outs had still not arrived in the first weeks of February.
This put on hold many business decisions for yet more weeks leaving roughly a six-week window for action before 6 April 2008.
It is unlikely that we will see much more movement in relation to the proposed CGT rules.
However, there will be strong representations for just that if the final rules and guidance still fail to meet taxpayers' 'reasonable expectation'; for example, if the final QCB rules land taxpayers with an 18% rather than 10% tax charge.
Income shifting
Another fundamental policy proposal is the new income-shifting rules, also scheduled to start from 6 April.
Personally, I struggle with the principle behind the policy and the fact that no one seems to be able to publicly articulate exactly what the new rules are targeted at.
We have been told that this is not just a reversal of the Jones v Garnett decision ([2007] STC 1536), but the huge breadth of the rules means that it is quite hard to see exactly what mischief they are intended to stop.
This means it is likely to concern many more people than perhaps it should and lead to many administrative burdens it does not need to create.
It appears that the underlying income-shifting policy is not up for discussion by Government, so we are left with the significant operational issues of how these rules are ever going to be sensibly implemented.
As I set out in my article Arctic chill, unless changed, the current proposals for taxpayers will lead to great uncertainty as to whether they have done enough to justify their tax position.
There is also a very large risk for Government that — as drafted — they will simply fail to raise the sums that have been forecast.
So what options are available here? Given the timescales, one option would be to at least take out those at the lower end of profits and turnover so that they do not have to struggle with new, difficult, and burdensome rules.
As the new proposals are effectively a form of transfer pricing, there is a precedent for excluding smaller businesses.
Residence and domicile
This has been perhaps the most complex of all the proposed changes that have been set down to be enacted by April 2008 and arguably they are the least well-handled.
It was not until January that we had sight of the detailed changes that were alluded to in the PBR and the enormity of the changes proposed go much further than the annual £30,000 levy that the national press has concentrated upon.
I have always been sceptical of claims that tax changes will lead to vast hordes of taxpayers rushing to leave the UK and avoid being left switching off the lights, but for once a large number of clients were seriously wondering about whether the UK was a competitive place to be based.
Many commentators have noted already how harsh the January proposals were, the elements of retrospective legislation and the complex implications for those on relatively low incomes with having to comply.
No one can doubt that the residence and domicile rules needed an overhaul. They were based on an era of steam trains and slow boats. In fact, since the review of this area was re-opened by HMRC back in 2002, quite a large number of proposals have been put forward as to how things can be improved.
The problem is that this area is part of a complex patchwork quilt of interlocking rules. Any attempt to unpick the regime can result in it all just disintegrating — which is pretty much how it felt when the January rules were released.
Expectations
The difficulty here is again reasonable expectation. Those who have been based in the UK for many years and who in many cases have made a significant contribution to the UK economy, were used to a rather benign regime.
However, they could have been left with, again, just a few weeks to put their affairs in order for a very different world.
Clearly there has been some movement in this area and someone has been listening to the pleas from taxpayers, advisers and representative bodies about just how harsh the January proposals were.
In February, a letter was issued by the acting chairman of HMRC, Dave Hartnett. It listed four areas where action was to be taken to improve the draft proposals.
First, those using the remittance basis will not be required to make any additional disclosures about their income and gains arising abroad. So long as they declare their remittances to the UK and pay UK tax on them, they will not be required to disclose information on the source of the remittances.
Nor will there be retrospection in the treatment of trusts and the tax changes will not apply to gains accrued or realised prior to the changes coming into effect.
Money brought into the UK to pay the £30,000 charge will not itself be taxable and it will continue to be possible to bring art works into the UK for public display without incurring a charge to tax.
Well thought out?
Arguably, one of these points was already well known and the last issue, concerning works of art, was probably not at the top of most people's worries but it was a start.
The fact that the acting HMRC chairman felt that he had to come riding in on the proverbial white horse to sort this area out suggests that some of the policy as originally announced was less than well thought through.
The remaining issue is what the letter did not cover. Informal meetings are suggesting there is much more (and much needed) re-thinking.
Given the looming 6 April deadline scheduled for these changes one wonders how anyone will be able to redraft legislation, consider the new policy and reach a workable solution in the few weeks left.
Surely this is one area where a sensible de-coupling is needed, with the new £30,000 annual charge put in place but many of the more complex issues deferred until they can be properly thought through.
Learning the lessons of history
Just a short time ago many tax representative bodies, specialists, HMRC and the Treasury were wrestling with the changes to trusts proposed by the Budget 2006.
A huge amount of time and effort was put in by many to turn the original unworkable proposals into something that could operate, albeit with some remaining problems.
Those actively involved in that process — on all sides — noted that such a mess should never be allowed to happen again. Everyone should learn the lessons of history and not get into a position to repeat the shambolic process.
But here we are in early 2008 and we seem faced with at least one, if not two, very similar situations.
European Community law includes a concept of 'legitimate expectation' and the idea of a reasonable transitional period before significant change.
There is something worrying about some of the recent tax proposals that so markedly change the tax landscape, within a very short period of time, and leave taxpayers bemused as to why sensible business decisions made relatively recently can be overhauled so completely and with such little warning.
The rush to change appears to have taken over from drafting sensible legislation. The urge to produce something for a Finance Bill has replaced the need to consult thoroughly on proposed changes well in advance.
The pressures of short-term politics have overtaken the value of learning from experience and getting a better tax system rather than just a different one.
There is a better way; it takes longer, but it is worth it. Let us hope that those who drive policy and those who advise upon it can see that sometimes less haste means more speed.
Francesca Lagerberg is a partner and head of the national tax office at Grant Thornton UK LLP. The views expressed above are her own and do not necessarily reflect those of the firm.
