TAXREP 36/07
THE FINANCE BILL 2007
Memorandum on the Finance Bill 2007 submitted on 4 May 2007 to Government by
the Tax Faculty of the Institute of Chartered Accountants in England and Wales
Contents
Paragraph(s)
Introduction
1–4
General comments
5 – 22
Detailed comments
23 - 151
Clause 2 – Charge and main rate for financial year 2008
23 - 24
Clause 25 and Schedule 3 – Managed service companies
25 - 43
Clause 26 and Schedule 4 – Restriction on loss relief available to
partners
44 - 51
Clause 27- Extension of restrictions on allowable capital losses
52 – 61
Clause 28 – Life policies etc: effect of rebated or reinvested
commissions
62 – 65
Clause 29 and Schedule 5 – Avoidance involving financial
arrangements
66 - 68
Clause 35 – Industrial and agricultural buildings allowances
69 – 76
Clause 47 and Schedule 15 – Controlled foreign companies
77 – 81
Clause 50 and Schedule 16 – Venture capital schemes etc
82 - 93
Clause 51 and Schedule 17 – Real Estate Investment Trusts
94 – 95
Clause 54 – Trust income
96
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Clause 55 – Trust gains on contracts for life assurance
97 - 98
Clause 67 and Schedule 18 – Abolition of contributions relief for life
assurance premium contributions
99 – 102
Clause 68 and Schedule 19 – Alternatively secured pensions
103 - 104
Clause 87 – Personal tax returns and Clause 88 – Trustee’s tax return
105 - 106
Clause 92 – Mandatory electronic filing of returns and Clause 93 –
Mandatory electronic payment
107- 115
Clause 96 and Schedule 24 – Penalties for errors
116 – 138
Clause 97 – VAT: joint and several liability of traders in supply chain
where tax unpaid
139 – 144
Clause 98 – VAT: non-business use etc of business goods
145 – 147
Clause 99 – VAT: transfers of going concerns
148
Clause 106 – Limitation period in old actions for mistake of law relating
to direct tax
149
Clause 108 – Meaning of “recognised stock exchange” etc
150
Clause 109 – Mergers Directive: regulations
151
Case studies on Clause 26 – Restrictions on trade loss relief for
partners
Appendix 1
Case studies on Clause 35 – Industrial and agricultural buildings
allowances
Appendix 2
Case studies on Clause 50 – venture capital schemes etc
Appendix 3
Who we are
Annex 1
The Tax Faculty’s Ten Tenets for a Better Tax System
Annex 2
ICAEW Tax Faculty, Chartered Accountants’ Hall,
PO Box 433, Moorgate Place, London EC2P 2BJ
www.icaew.com/taxfac
T
F
E
+44 (0)20 7920 8646
+44 (0)20 7920 8780
tdtf@icaew.com
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
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THE FINANCE BILL 2007
INTRODUCTION
1
We are writing to provide our comments on the provisions contained in the Finance
Bill 2007.
2
We have already issued a summary of key issues briefing paper for MPs. We will
continue to issue briefing papers on certain key clauses as the Finance Bill debate
progresses through Standing Committee. The purpose of this paper is to bring
together in one place our comments on the Finance Bill, including our general
comments on the overarching themes in the Bill. The comments in this paper are
consistent with our earlier briefing papers.
3
As in previous years, we have judged the Finance Bill 2007 by reference to our ‘ten
tenets for a better tax system’. These are the ten key principles that we believe
should underpin a good tax system and they are set out in Annex 1.
4
Details about the Institute of Chartered Accountants in England and Wales and the
Tax Faculty are set out in Annex 2.
GENERAL COMMENTS
5
Business tax measures
In respect of business tax, we welcome the reduction in the headline main rate of
corporation tax from 30% to 28%. We believe it was important to remove the UK from
an unattractively high mainstream corporation tax rate and have argued this point for
a number of years.
6
However, we are concerned about some of the other business measures. The
extensive changes to capital allowances are likely to have a far-reaching impact upon
business and there will be few winners and potentially some large losers. The main
difficulty will be for those who have made investment decisions based on the
availability of Industrial and Agricultural Buildings Allowances and who have now
found that the tax treatment of those assets has changed. Businesses need longterm stability in order to plan investment decisions.
7
We are also concerned that the increase in the corporation tax rate for smaller
companies and the extensive changes to capital allowances will have a
disproportionately severe financial impact on smaller companies. Smaller companies
faced an unexpected tax rise from 1 April 2007. This was not offset by the proposed
new Annual Investment Allowance as that does not appear until 2008 and may be
inapplicable to some smaller corporates.
8
We note the continued concern of the Government (see paragraph 5.114 of the
Budget Red Book) about 'tax-motivated' incorporation and would suggest that rather
than raise speculation and uncertainty for such entities, Government should reenergise its review of small businesses and seek more long term solutions to the ongoing issues that arise due to the differing tax treatment of entities in this area. The
detailed provisions in this Bill on Managed Service Companies (clause 25 and
Schedule 3) are just examples of 'sticking plaster' legislation that is papering over
major structural difficulties in the UK tax system that need to be addressed.
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9
10
We support the underlying principle of the legislation in relation to Managed Service
Companies but remain concerned that some of the definitions need to be properly
targeted.
The need for consultation on key changes
We welcome the Government’s commitment to consultation. We have also welcomed
the publication of Sir David Varney’s review ‘making a difference: review of links with
large business’. Sir David Varney’s report emphasises the crucial importance of
consultation and states on page 8 that ‘HMRC . . . announces a consultation
framework that commits HMRC to incorporating the business perspective in all
significant aspects of HMRC’s work that has a direct effect on business. . . ‘.
11
This is laudable, but the good intentions are completely undermined if Government
does not also consult on proposed crucial changes to business tax policy before they
are enacted. It is not enough to promise consultation on all significant aspects of
HMRC’s work, if little or no account is taken of the business perspective when HM
Treasury is formulating business tax policy.
12
If we take the changes proposed to the capital allowances rules (most of which have
been announced in the 2007 Budget but which are not included in the Finance Bill),
these changes are the most fundamental reform of capital allowances since Nigel
Lawson’s reforms in the 1980s. The overall effect of the changes is to reduce the
current level of allowances. Whilst we are aware that reform of the capital allowances
rules was considered at the time of the review of corporation tax, at no stage was
formal consultation undertaken on the proposals now put forward. These changes
will impact particularly severely on smaller businesses. We are concerned that the
absence of full consultation has merely aggravated the so-called ‘trust gap’ between
advisers and HM Treasury/HMRC.
13
Properly targeted legislation
A common theme running through out representations on the Finance Bill is that
legislation needs to be properly targeted. We remain concerned that many provisions
in this Bill do not achieve this objective. For example, we are not convinced it is
appropriate to extend without amendment the Targeted Anti-Avoidance Rules
(TAAR) (in clause 27) for capital losses from companies to individuals and trusts,
without consideration for the very different entities involved.
14
We made this point when the draft legislation was published in December 2006 but
are disappointed to see no amendments have been made in this Bill. It seems to us
that the result is that ordinary tax planning opportunities are caught even though
there is no intention to catch such transactions. The fall-back is that they will be (in
some cases only) excluded by way of HMRC guidance – in other words ‘taxed
according to the law but untaxed by concession’. In the light of the Wilkinson case
[2005 UKHL 30], we are concerned as to whether HMRC is acting outside of its
powers with such an approach.
15
This raises a more general concern that the considerable complexity of forcing all
legislative change into one annual Finance Bill simply leads to rushed primary
legislation that then needs to fall back on HMRC guidance, without any statutory
authority, in order for it to be understood and applied in practice. This goes against
the Tax Law Rewrite concept of making legislation understandable. It also means
that as HMRC officials move on, the intention of the original wording becomes lost
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and guidance can be changed, deleted or re-emphasised, providing little certainty for
the taxpayer. Guidance also provides no support to the taxpayer who has to fight
their position in court, where decisions will be based on the clear wording of the
legislation.
16
Potential breaches of EU rules
Once again, we are concerned that a number of clauses in the Finance Bill appear to
be directly in breach of the EU Treaty. We have made these comments before, most
recently in respect of draft legislation on controlled foreign companies published in
December 2006, but are disappointed to see that no changes have been made to the
legislation now included in the Finance Bill.
17
Similar comments apply in respect of the six-year limitation in clause 106 and the
VAT joint and several liability rules in clause 97. In respect of the former, it seems to
us that the provision in the Bill needs to include a proper transitional provision, as
clearly laid down by the European Court of Justice in the case of Marks & Spencer v
Customs & Excise (Case C-62/00).
18
We are concerned that the UK appears to be consistently introducing rules that are
clearly not compliant with EU rules. We do not think that the UK should be adopting
domestic legislation which appears to flout our international obligations. It will lead to
considerable uncertainty for business and is inevitably likely to lead to litigation at the
ECJ, as well as damaging respect for tax law.
19
20
21
22
Simplification
We welcome moves to simplify the income tax system and in principle a reduction in
the number of tax rates is a reasonable step. However, we believe that a systematic
attempt needs to be made to simplify the UK tax system, given that the volume of
primary legislation appears to have doubled in the past ten years, with the result that
the UK now has one of the longest tax codes in the world.
The interaction between the cut in the basic rate of income tax and the removal of the
10% starting band in most cases means that those on lower incomes (above the
personal allowance but below around £18,600) will find that they do not benefit from
the perceived tax cut. What this means is that they will become more reliant on tax
credits. We are concerned that many people who are eligible to claim tax credits do
not appear to do so – see HM Treasury evidence to the Treasury Committee enquiry
into the 2007 Budget that HM Treasury estimates are based on the fact that 75% of
potential tax credit claimants do not take them up - and would welcome clarification.
Drafting and the use of regulations
In spite of the fact that the Tax Law Rewrite (TLR) Project has been in place for over
ten years, the drafting used in the Finance Bill does not appear in all places to reflect
the principles that have been learned. Many of the provisions are difficult to follow
and do not appear to follow in a logical order that mirrors the various rewritten Acts.
As many of the provisions amend such Acts, the TLR approach will be undermined.
We think that more attention should be given to the drafting of Finance Bills so as to
ensure that their style and layout is in keeping with the approach adopted in the TLR.
There is an increasing trend to delegate provisions to Statutory Instruments (SIs).
This may be an acceptable procedure when the primary legislation sets out clearly
the principal law, leaving SIs to add minor detail. It is less so when the SI contains
major elements which should in our view be in the primary law. We are very
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concerned in particular with provisions which allow HM Treasury to in effect
completely rewrite provisions – see for example inserted section 688A(7) on page 96
in relation to the debt-transfer rules for managed service companies. Whilst we
appreciate that this particular provision is subject to some safeguards, we think that
the approach that has been adopted is wrong in principle.
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DETAILED COMMENTS
PART 1
CHARGES, RATES, THRESHOLDS ETC
Corporation tax
23
24
Clause 2 – Charge and main rate for financial year 2008
We welcome the reduction in the headline rate of corporation tax from 30 to 28 per
cent. We agree that the headline rate ‘is one of a range of factors that influence the
competitiveness of UK businesses’ (paragraph 3.17 2007 Budget Red Book) but, for
reasons set out in the general comments above, we believe that there are other
major issues that need to be addressed to create a compelling case for the UK to be
the destination of choice for new business investment and the expansion of existing
UK businesses. In this regard, we welcome the forthcoming publication of a
consultation paper on the taxation of foreign profits but believe that there is an urgent
need to reinvigorate the small business taxation review, which appears to be stalled.
We are concerned that the North Sea Oil industry has been excluded from the benefit
in the reduction of the headline rate of tax and the PRT changes in clauses 101 to
103 do not appear to offer a compensatory benefit. The PRT changes do not appear
to have any material impact on the public finances as there is no effect on the
Exchequer yield per Table 1.2 of the Budget 2007 Red Book. We would welcome
clarification as to why it was considered necessary for the existing corporation tax
rates to continue for oil companies.
PART 3
INCOME TAX, CORPORATION TAX AND CAPITAL GAINS TAX
Anti-avoidance
25
Clause 25 and Schedule 3 – Managed service companies
The draft clause and Schedule is designed to tackle the avoidance of income tax
(and, through associated legislation, national insurance contributions) through the
use of managed service companies (MSCs). Under the provisions, payments and
earnings of workers from the MSC which can reasonably be taken to be in respect of
services but which are not currently treated as earnings are treated as deemed
employment payments by the MSC. The result is that such payments will be liable to
PAYE in the same was as normal employment income.
26
Paragraph 4 of Schedule 3 inserts new section 61A to 61J into ITEPA 2003. New
section 61B defines a managed service company. Section 61B(1)(d) states that a
person carrying on a business of promoting of facilitating the use of companies to
provide the services of individuals is an MSC provider, but section 61B(3) then
excludes from this definition a person providing such services merely by virtue of
providing legal or accountancy services in a professional capacity.
27
In addition, where the MSC did not make the necessary PAYE deductions or
subsequent payments, these amounts may be recovered from certain persons
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connected to the MSC (the so-called ‘debt-transfer rules’). This provision is set out in
Paragraph 6 of Schedule 3, which inserts a new section 688A into ITEPA 2003.
28
29
We have a number of concerns about the effect of the proposed changes.
Definition of an MSC provider
We support the principle and purpose of the legislation. However, we think that the
legislation needs further amendment so as to ensure that it is properly targeted and
does not catch professional firms who provide similar services to MSCs. The
legislation is ambiguous as to whether firms of Chartered Accountants and tax and
business advisers who, as part of their other services, advise clients about the best
structure through which to trade and provide the necessary company secretarial
services to enable them to do so, are within the definition of ‘an MSC provider’. We
understand that HMRC do not consider that such firms are within the definition (on
the basis that their business extends beyond that defined in the legislation). We
therefore consider that the legislation should be clarified to make this clear and to
accommodate niche accountancy firms.
30
For example, many professional accountants will, on detailed consideration of the
circumstances, recommend a corporate structure to a client and then provide the
client with an off-the-shelf company for that purpose. It would appear to us that a
professional accountant who advises his client to incorporate in this way is
‘promoting’ the use of companies (to use the wording in new section 61B(1)(d)) and,
if he provides an off-the-shelf company for this purpose, he is ‘facilitating’ the use of
companies (also to use the wording in new section 61B(1)(d)). However, these
activities are an incidental part of a professional accountant’s business of providing
the best all-round service to his client.
31
Whilst HMRC has said in meetings that they will explain in guidance where they
intend to draw the line between firms of accountants and tax advisers referred to
above and others who carry on business of actively promoting and facilitating the use
of companies to provide the services of individuals, that is no substitute for having a
legal definition. This is because, if the definition is not incorporated into the law, the
courts cannot consider the point in cases of dispute and so taxpayers cannot be
certain of their rights and obligations.
32
We are concerned that without clarification the purpose of this legislation will be
misunderstood and many traditional accountants and advisers will inadvertently be
brought within the remit of this legislation, when we believe the aim of Government is
to have a very targeted measure.
33
The legislation does appear to give rise to the problem of 'tainting' so that if an
accountant’s involvement with one company makes him a MSC Provider then he or
she is also a MSC Provider for all personal service companies (PSCs) for which he
or she acts, even if those actions are only accountancy services. Being categorised
as an MSC Provider (ie, tainted) for one client, denies access to the accountancy and
legal services exemption to all other clients. We understand from discussions with
HMRC that they do not believe this to be the case and we would welcome
confirmation of that point and to see it included in any accompanying guidance.
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34
Suggested amendments
In order to clarify the legislation and provide certainty to taxpayers we recommend
the following two amendments in para 4 of Schedule 3 to new section 61B(d) ITEPA
2003:
in line 21

after ‘business’ insert ‘wholly or mainly’
and

after ‘promoting’ substitute ‘and’ for ‘or’
so the sub-clause will read as follows
‘(d) a person who carries on a business wholly or mainly of promoting and
facilitating the use of companies to provide the services of individuals ('an
MSC provider') is involved with the company.’ (changes underlined).
35
Another possibility is to draw a distinction between the adviser who offers advice on
appropriate structures dependent on the facts (i.e. the bespoke business adviser)
and the promoter who has a packaged solution which is the only or main 'product'
which they are actively encouraging clients into.
36
In order that a ‘good business adviser’ will be protected by the exclusion for
accountancy services we propose the following amendment to Schedule 3 to new
section 61B ITEPA 2003. This amendment is a probing amendment and the
definition of accountancy services is the one that we are currently using for a
member consultation:
Insert new subsection (5)
 insert ‘for the purpose of subsection (3) above, accountancy services include
the preparation or provision of records, returns, financial statements, reports,
financial information or advice concerning accounting, auditing, insolvency or
taxation matters; or the representation of a client to/before third parties in
matters concerning accounting, auditing, insolvency or taxation’
37
In order to apply the exemption for accountancy and legal services to all personal
service companies, and avoid ‘tainting’, we recommend the following amendment in
para 4 of Schedule 3 to new section 61B(3) ITEPA 2003:
in line 35
 replace ‘subsection’ with ‘subsections’
and
 after ‘(1)(d)’ insert ‘or (2)’
so that the sub-clause will read as follows
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‘A person does not fall within subsections (1)(d) or (2) merely by virtue of
providing legal and accountancy services in a professional capacity,’
38
Debt transfer rules
We are concerned about how widely the debt transfer rules could be applied and
more clarity is needed as to who the debts could be transferred to if the MSC closes
down and tax is left outstanding. Third parties, like recruitment agencies, could be
potentially exposed to a liability whilst having limited ability to avoid such an
exposure. Recruitment companies are excluded from the provisions which categorise
companies as MSC Providers but do not have a similar exemption from the debt
transfer rules. It should be clear that the provisions are only targeted at those who
were involved with promoting the MSC.
39
Technically, non-shareholding ordinary employees of a MSC could be caught by the
third party liability rules. We understand this is not the intention of the legislation and
this may be included in guidance but this is an item that should be clarified in the
legislation.
40
Interest is due on the debt even if becomes payable by a third party. Interest is
perceived by HMRC as restitution for the loss of the use of the money but there is a
significant difference between transferred debt to other parties and the normal
circumstance of ordinary late payment. In the former case the third party may have
no previous knowledge that there was a debt outstanding. Hence, the interest charge
looks like a penalty in these circumstances.
41
Another possibility is to draw a distinction between the adviser who offers advice on
appropriate structures dependent on the facts (i.e. the bespoke business adviser)
and the promoter who has a packaged solution which is the only or main 'product'
which they are actively encouraging clients into.
42
A further confusion is that the exemption for accountancy and legal services used for
the definition of an MSC Provider differs from the exemption from the debt transfer
rules.
43
Suggested amendments
Seven amendments are required as follows:

That debts of the MSC can only be transferred to those who were involved in
promoting the MSC

To clarify that non-shareholding ordinary employees of a MSC are not caught
by the third party liability rules

That interest does not run on debts transferred to a third party unless that
person was involved in promoting the MSC and knew, or should have known,
that the debt had not been paid

In order to apply the exemption for employment businesses to the debt
transfer rules, we recommend the following amendment in para 6 of Schedule
3 to new section 688A ITEPA 2003:
 Insert new subclause 3A:
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‘(3A) A person does not fall within subsection (2)(c) merely by virtue
of carrying on a business consisting only of placing individuals with
persons who wish to obtain their services (including by contracting
with companies which provide their services); but this subsection
does not apply if the person, or an associate of the person, does
anything within any of paragraphs (c) to (e) of subsection (2) of
clause 61B(2).

In order to maintain consistency between the exemption for accountancy and
legal services for the definition of an MSC Provider and the exemption from
the debt transfer rules, we recommend the following amendment in para 6 of
Schedule 3 to new section 688A ITEPA 2003:
in line 22
 replace ‘advice’ with ‘services’
so that the sub-clause will read as follows
‘A person does not fall within subsections (2)(c) merely by virtue of providing
legal and accountancy services in a professional capacity,’

In order to ensure that the debt transfer rules do not apply to those who might
otherwise be loosely connected with a managed service company, we
recommend the following amendment in para 6 of Schedule 3 to new section
688A ITEPA 2003:
in line 17

after ‘encouraged,’ insert ‘actively’
so that the sub-clause will read as follows
‘a person who (directly or indirectly) has encouraged, actively facilitated or
otherwise been actively involved in the provision by the MSC of the services
of the individual, and’

New section 688A(7) gives the Treasury the power to amend by way of
regulations section 688A (1) to (6), subject to the need to lay the regulations
and have them approved by Parliament (as set out in section 688A(8). This
gives Treasury is a very wide-ranging power to, in affect, completely rewrite
section 688A. We do not think Treasury should be given such an unfettered
power. We think that this power should be amended and made more targeted.
We propose that the power of Treasury should be limited only to adding to the
list of persons under section 688A(2).
in line 35

delete ‘this section’ and insert ‘the list of persons set out in subsection (2)
above’
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
delete the words in brackets at the end of section 688A(7)
so that subclause 7 will read as follows:
‘The Treasury may by order amend the list of persons set out in sub-section
(2).
44
45
Clause 26 and Schedule 4 – Restriction on loss relief available to partners
The clause and schedule restricts tax relief for losses arising to non-active or limited
partners. Tax relief is limited in the following two circumstances:

where capital contributions are made by a non-active partner where the main
purpose, or one of the main purposes, is for the partner to obtain a tax
deduction by way of sideways loss relief; and, additionally

the amount of trading losses sustained as a non-active partner that can be
claimed as sideways loss relief or capital gains tax relief is limited to a
maximum limit of £25,000 a tax year (referred to as a ‘cap’).
Our concerns about the effect of the proposed changes
The measure is being introduced in respect of concerns over certain marketed tax
avoidance schemes. The Treasury is rightly concerned about such schemes and the
first of the above two measures (set out in paragraph 2 of Schedule 4) is a suitably
targeted measure that appears to address the issue.
46
However, the second of the two measures, namely the overall £25,000 limit on
sideways loss relief and capital gains tax relief for non-active partners (set out in
paragraph 1 of Schedule 4), is a cause for concern. The limit applies regardless of
whether the sole or main purpose of the investment was to generate a tax loss. The
key condition is that the investment was made by a non-active partner. The measure
is not targeted solely at tax avoidance schemes and is therefore much more widely
targeted. The result is that the measure will impact upon many small businesses
being set up with substantial investment in the early years.
47
It is very usual for new businesses starting up to source finance from family and
friends which can be injected either by way of loan or by the person putting in the
money becoming a sleeping partner. If the sleeping partner has other taxable income
and the business suffers a loss, then loss relief against this other income is available
immediately. In many cases, any tax repayment will be reinvested into the business.
However, if the sleeping partner’s investment is by way of a loan, relief is only
available if the loan itself eventually proves irrecoverable. We attach as Appendix 1
some case studies showing possible scenarios of how this measure will apply in
practice and the problems that might result.
48
We have not seen a justification for the general imposition of a £25,000 limit on nonactive partners, but the proposed limit looks too low. Investment in growing
businesses is inevitably risky, and this measure increases further the potential risk.
The result of this measure and the increased risk profile will be an increased
reluctance of potential investors to provide finance as sleeping partners. They may
be unwilling to now provide finance, even if it could be provided by way of loan
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capital. The measure is likely to make it much more difficult for growing businesses to
obtain finance in a flexible and cost-effective way.
49
50
Suggested amendments
As the first of the two measures mentioned above appears to achieve the primary
objective in tackling tax avoidance schemes, we think that the second measure
should be dropped from the Bill. Accordingly, we propose that paragraph 1 of
Schedule 4 should be deleted from the Bill, with consequential renumbering of the
following sections.
If this amendment is not accepted, then the cap should be raised to a more
reasonable level. We suggest a cap of £100,000. Accordingly, our suggested
amendment is:

51
52
53
If either of these amendments is not accepted, we would welcome clarification as to
why the cap is considered necessary given the introduction of a targeted antiavoidance provision.
Clause 27- Extension of restrictions on allowable capital losses
This clause extends an anti-avoidance measure introduced in the FA 2006 (section
69 FA 2006) in relation to capital losses realised by companies where the loss
accrued in connection with any arrangements and one of the main purposes was to
secure a tax advantage. Clause 27 replaces section 69 FA 2006 and is written in
similar terms but extends the FA 2006 provision to cover any loss accruing to a
person if certain conditions are met. The effect is therefore to extend the existing
provision to cover disposals by all taxpayers. The provision applies to losses
accruing on disposals on or after 6 December 2006, the date of the 2006 Pre Budget
report.
Our concerns about the effect of the proposed changes
Whilst we had no objection to the announcement on 6 December 2006 of an
extension to all taxpayers (whether individuals, trustees, personal representatives or
corporates) of the FA 2006 corporate loss rules and the intended principle behind this
of disallowing capital losses arising as the result of contrived or artificial transactions,
we do not think that clause 27 as drafted works as intended. It is not properly
targeted because it does not:
(i)
(ii)
54
In line 11 on page 99, substitute ‘£25,000 for ‘£100,000’
take sufficient account of the differences between corporates and individuals/
trustees/ personal representatives, or
distinguish properly between contrived or artificial transactions and tax
mitigation strategies that are considered acceptable.
The result is that, in relation to non-corporate taxpayers, the clause is drafted too
widely and will catch many transactions which we understand are not intended to be
caught. We appreciate that the intention is that HMRC’s guidance will make it clear
that certain transactions will not be caught. However, taxpayers should be taxed on
the basis of clear legislation. In the absence of a clearance procedure, it is not right
to produce deficient legislation that appears to catch many more transactions than
intended, on the basis that such transactions can then be taken out by way of HMRC
guidance. HMRC guidance has no statutory authority and cannot be taken into
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consideration in court. Further, following the Wilkinson case, it is arguable that
HMRC would be acting ultra vires if it produced guidance that purported to exclude
certain transactions (in effect extra statutory concessions) which are clearly directly
within the legislation passed by Parliament.
55
56
Detailed comments and examples of issues raised
If, as stated in the Explanatory Notes and BN30 the legislation is aimed only at
contrived schemes or arrangements, we question why the term ‘tax advantage’ as
defined in new section 16A(2)(a)-(d), has been used rather than ‘tax avoidance’, the
meaning of which has been the subject of a body of case law.
The drafting catches many straightforward and accepted transactions, as can be
seen from the following examples:

an individual who wishes to dispose of a property standing at a large gain has
a holding of shares standing at a sizeable loss. He may well decide to sell
the property and the shareholding in the same year to offset the loss against
the gain and thereby reduce or extinguish the capital gains tax liability. Such
tax planning is not seen as contrived or artificial, but analysing the new
section TCGA 1992 s 16A which Parliament is being asked to approve:
a.
There is a ‘transaction’ (which comes within the definition of
‘arrangements’ set down in new s 16A(2)), and
b. The sole reason for the sale of the shares is to obtain a ‘tax
advantage’ (which under new s.16A(2)(a) includes ‘relief or increased
relief from tax’)
so looking to the wording of the proposed legislation the loss generated on
the shares will not be allowable.

within the field of personal tax it is considered good practice for taxpayers
(particularly those who have active portfolios) to take reasonable steps to
mitigate their annual capital gains tax liability by making appropriate use of
their annual capital gains exemption and, where the taxpayer has realised
gains in the year that are in excess of the annual exemption, to crystallise
losses to set against the gains. Individuals, trustees, personal
representatives and even investment managers, frequently undertake
transactions, such as year end tax planning, without checking their
understanding of the law with tax professionals.

the legislation catches techniques that have traditionally been considered
appropriate ways of crystallising a capital loss, for example waiting over 31
days to buy back the shares, ‘bed and spousing’, ‘bed and trusting’ and ‘bed
and ISAing’.

taxpayers may not even be aware of particular tax planning transactions. For
example, when the tax year end is approaching it is common for investment
manager and brokers to look to realise losses where the client has significant
gains: their motivation is purely to reduce their client’s tax liability. So, any
year end tax planning for 2006/07 will have been undertaken by brokers on
the same basis as prior years and they may well currently be generating year
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end tax packs for clients showing the losses generated as a result of these
tax planning transactions as offsetting the chargeable gains. As it currently
stands the Finance Bill legislation will mean that these losses are not
allowable.
57
We understand from conversations with HMRC that the legislation is not aimed at
and will not generally be applied in these circumstances. However, whilst we
welcome this clarification, given that the legislation is to apply from 6 December
2006, many individuals, trustees and personal representatives will have entered into
such tax mitigation strategies not knowing that on the face of it they are caught by the
new law. Parliament should not approve legislation that is wider than intended and,
as noted above, we are not convinced that HMRC has the power to cut down the
scope of the legislation in this way.
58
The following example demonstrates that the application of the TAAR on share
transactions between spouses.
Husband sells at loss, wife buys back same amount. Wife sells when price
improves.
Husband
Buy
Sell
Gain/(Loss)
(1,000)
Wife
Combined
(200)
(1,000)
200
500
500
(800)
300
(500)
Overall gain after TAAR applied
300
Result: combined loss 500 – but taxable gain 300
The husband's loss has gone for good so that not only are husband and wife
worse off overall than if there had been no transfer of shares but the wife
cannot redeem the situation by routing her sale via her husband. The
outcome is worse than the treatment of losses realised on disposals to
(otherwise) connected persons.
59
Without the improvements to the clause recommended below, there will inevitably be
uncertainty as to whether transactions are ‘arrangements’ and give rise to a ‘tax
advantage’.
60
Given that clause 27 as it stands is a GAAR rather than a TAAR, this regime will
work properly only with a clearance procedure to enable taxpayers to comply, run
preferably from HMRC head office to ensure consistency of treatment across all
taxpayers. If this is rejected in favour of non-bespoke guidance being provided by
HMRC, as is presently proposed, then we would welcome a Ministerial Statement as
to how taxpayers will be expected to obtain certainty within the terms of the
legislation and how HMRC will achieve consistent treatment between taxpayers.
Changes required to the clause
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61
This clause should be redrafted. In view of our concerns about extending the existing
provision that applies for corporation tax (currently in section 69 FA 2006), we think
that the current provision should be retained as it stands for corporation tax and
clause 27 amended and its scope cut down so that it only applies to individuals,
trustees and personal representatives. We set out below the key changes that need
to be made in order to achieve the stated purpose of producing properly-targeted
anti-avoidance legislation. We acknowledge that the changes will lead to longer,
more detailed, legislation but we think it is vital that they are made so as to ensure
that the legislation works as intended and recognises the significant differences
between corporate and non-corporate CGT rules.
(1)
Existing section 69 FA 2006 should be retained. The necessary amendments in
the 2007 Finance Bill are:

In Schedule 27, page 284, delete line 35.

In clause 27, page 17 line 21, delete sub-section (2)
(2)
In line with the approach adopted by the Tax Law Rewrite project, we suggest
that an introduction to the provisions be inserted. This introductory clause
would explain the principle behind the TAAR and that the legislation should be
interpreted purposively.
The term ‘tax avoidance’ should be substituted for ‘tax advantage’. The TAAR
is targeted at tax avoidance and it is right that the legislation should use this
term rather than the far wider term ‘tax advantage’.
The clause should be amended to set down circumstances in which the
provisions will not apply. It should provide for a list of safe harbours with
provision made for a statutory instrument to provide the detail. To aid
understanding, the statutory instrument should provide examples of situations
coming within and falling outside of each safe harbour.
The legislation should include a proper advance clearance mechanism.
(3)
(4)
(5)
The proposed amendments to clause 27 set out in (2) to (5) above are as follows:
On page 17, clause 27, line 27,

Delete (3) and substitute (2)
On page 17, clause 27, line 28

Delete sub-sections (1) to (6) that follow ‘16A Restrictions on allowable
losses’ and insert
(1)
This section disallows a capital loss where it accrues to an individual directly
or indirectly as a result of a contrived or artificial tax avoidance scheme where
there is no genuine economic loss suffered or deemed to arise.
(2)
This section should be construed purposively in such manner as best secures
consistency between:
(a) Sub-section 1, above; and
(b) The HMRC Statement on tax avoidance through the creation and use of
capital losses issued on 6 December 2006; and
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(c) Statements by Government Ministers during the 2007 Finance Bill and
Committee debates as reported in Hansard.
(3)
For the purposes of this Act, "allowable loss" does not include a loss accruing
to an individual if
(a) it accrues to the individual directly or indirectly in consequence of, or
otherwise in connection with, any arrangements, and
(b) it would be reasonable to draw the conclusion, from all the circumstances
of the case, that tax avoidance was the main purpose or one of the main
purposes of the arrangements.
(4)
For the purposes of subsection (1) above
“individual” includes trustees and personal representatives; and
"arrangements" includes any agreement, understanding, scheme, transaction
or series of transactions (whether or not legally enforceable), and
for the purposes of this definition "tax" means capital gains tax and income
tax.
(5)
For the purposes of subsection (1) it does not matter
(a) whether the loss accrues at a time when there are no chargeable gains
from which it could otherwise have been deducted, or
(b) whether the tax avoidance advantage is secured for the individual to
whom the loss accrues or for any other person."
(6)
Her Majesty’s Revenue and Customs shall by regulations set down situations
in which this section shall not apply notwithstanding that the conditions in
subsection (3) above are met. These shall be known as safe harbours and
will include all situations where the main purpose or one of the main purposes
of the arrangements was to obtain a tax reduction whether directly or
indirectly but the capital loss claimed is a genuine economic loss or deemed
loss which has arisen as the result of the arrangements.
(7)
In section 288(1) (interpretation), in the definition of "allowable loss", after "16"
insert ", 16A".
(8)
The amendments made by this section have effect in relation to losses
accruing on disposals made on or after 6th December 2006.
16B Restrictions on allowable losses: clearance procedure
(1)
Section 16 A shall not apply to a loss accruing to a person where, before
the loss accrues, the Board have on the application of the individual notified
the individual that the Board are satisfied that the loss arising as a result of
the arrangement is a genuine economic loss and will not form part of an
artificial or contrived arrangements as mentioned in section 16A.
(2)
Any application under subsection (1) above shall be in writing and shall
contain particulars of the operations that are to be effected and the Board
may, within 30 days of the receipt of the application or of any further
particulars previously required under this subsection, by notice require the
applicant to furnish further particulars for the purpose of enabling the Board
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to make their decision; and if any such notice is not complied with within 30
days or such longer period as the Board may allow, the Board need not
proceed further on the application.
62
63
(3)
The Board shall notify their decision to the applicant within 30 days of
receiving the application or, if they give a notice under subsection (2) above,
within 30 days of the notice being complied with.
(4)
If the Board notify the applicant that they are not satisfied as mentioned in
subsection (1) above or do not notify their decision to the applicant within
the time required by subsection (3) above, the applicant may within 30 days
of the notification or of that time require the Board to transmit the
application, together with any notice given and further particulars furnished
under subsection (2) above, to the Special Commissioners; and in that
event any notification by the Special Commissioners shall have effect for
the purposes of subsection (1) above as if it were a notification by the
Board.
(5)
If any particulars furnished under this section do not fully and accurately
disclose all facts and considerations material for the decision of the Board
or the Special Commissioners, any resulting notification that the Board or
Commissioners are satisfied as mentioned in subsection (1) above shall be
void.
Clause 28 – Life policies etc: effect of rebated or reinvested commissions
We are concerned that this provision will catch innocent commission waivers by
intermediaries, for example firms of accountants, so that policy-holders may be
taxable even when they have made a loss. It is common practice for, say, a firm of
Chartered Accountants arranging an insurance bond for a client to waive any
commission due to it in return for an enhanced value of the policy compared to what
it would be if the commission were taken. That simple act appears to fall within new
sections 548B(3) ICTA 1988 and 541B(3) ITTOIA 2005.
The effect is that the extra sum which has gone into the policy as a result of the
waived commission is reduced from the premium in calculating the chargeable event.
The effect of this is the client pays tax on a profit he has never realised, and where
there is no tax-avoidance involved, as set out in the example below.
Example
Suppose for example a client of a firm of accountants invests £100,000 (this
is used for illustration – it would need to exceed £100,000) in a life policy. If
nothing else happens, assume that the initial surrender value of the policy is
£95,000. The taxpayer will pay no tax until he gets back more than the
£100,000 invested which is surely correct.
If the accountancy firm reinvests, say, £3,000 of commission into the policy,
then the point at which the policy will exceed £100,000 and become taxable is
£3,000 nearer but this does not seem unreasonable.
In contrast, if commission of £3,000 is waived and reinvested in the policy
then the new legislation seems to treat this as equivalent to a rebate of that
sum. The allowable premium under the new legislation becomes £97,000.
Thus, if the client cashes the policy for £98,000 he has made a £2,000 loss
but the new rules will tax him on a profit of £1,000.
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64
65
66
Change required to the clause
The clause should be amended and restricted to rebated commission only. The
words ‘or reinvested’ should be deleted wherever they occur.
If this amendment is not accepted, please provide an explanation of the policy
purpose for including reinvested commission.
Clause 29 and Schedule 5 – Avoidance involving financial arrangements
Whilst we understand and support measures to counter tax avoidance, we are
concerned that these provisions make extensive changes to the legislation
introduced in Finance Act 2006 (section 76 and Schedule 6, FA 2006). The FA 2006
provisions were highly complicated in their own right and with these latest
amendments the legislation appears almost incomprehensible. While we appreciate
that this is a complicated area and taxpayers likely to be affected will normally seek
expert advice, there remains the danger that innocent transactions will nevertheless
be caught because taxpayers did not understand and appreciate that these
provisions might apply.
67
The clarity of the legislation in this area needs to be improved. It would have been
more comprehensible to have made a fresh start and for the existing legislation to be
replaced by a better targeted alternative preferably in Tax Law Rewrite style.
68
We would welcome a commitment that these provisions are reworked at an earlier
stage to make them more comprehensible.
Capital allowances
69
70
Clause 35 – Industrial and agricultural buildings allowances
The legislation withdraws with effect from 21 March 2007 balancing adjustments on
sale in respect of both industrial buildings allowances and agricultural buildings
allowances.
This measure is the first part of proposals announced in the budget to abolish these
allowances, as part of a wider reform of the capital allowances system. However,
none of the other proposals are included in this Bill. We understand that the timetable
for withdrawal is as follows:
2007/08
elimination of balancing adjustments, but existing writing down
allowances will continue;
2008/09
(legislation to be introduced in Finance Bill 2008) - rate of
allowance cut to 75%;
71
2009/10
rate of allowance cut to 50%;
2010/11
rate of allowance 25%; and
2011/12
rate of allowances cut to 0%
Our concerns about the effect of the proposed changes
We recognise that the changes to the capital allowances rules are part of a balanced
package that has also seen the headline rate of corporation tax reduced from 30% to
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28%. Nevertheless, we have many concerns about the proposed changes and the
underlying policy, particularly given that smaller businesses (and in particular
unincorporated businesses) will not benefit from the 2% cut in the main rate of
corporation tax.
72
73
74
Particular concerns are as follows:

Such a major change to the capital allowances rules should have been
exposed beforehand for detailed consultation. We appreciate that reform of
the capital allowances rules was mooted as part of the wider package of
corporation tax reforms but no firm proposals were discussed and we think
that most respondents thought it was a bad idea.

Current tax policy appears to be aimed broadly at aligning the tax treatment of
transactions with the commercial accounting treatment, in this case tax
allowances with commercial deprecation. We agree with that approach.
However, in respect of IBAs and ABAs, this proposal will mean that tax
allowances and depreciation will diverge and Government will lose the benefit
of a mechanism that allows them to encourage capital investment in
buildings.

Investment in, for example, industrial buildings is a long-term capital
investment decision and the tax system needs to provide certainty. Past
investment decisions will have been based on the availability of allowances
and these changes will impact retroactively on the investment decisions that
were made.

The withdrawal of allowances is likely to impact upon a number of the UK’s
business sectors, including manufacturing base, farming and capital intensive
sectors such as the hotel trade, which is currently anticipating the need for
capital investment prior to the forthcoming Olympics. The changes will impact
upon the profitability of those businesses (particularly if they do not pay
corporation tax at the full rate) and may cause problems with existing loan
covenants.

We have not seen a regulatory impact assessment but believe that the
measure will cause considerable upheaval for businesses in the relevant
sectors at considerable cost and note that the revenue increase as per the
2007 Budget ‘Red Book’ is relatively modest at £75m for 2008/09 and £225m
for 2009/10 (although we recognise that it will continue to increase until
2011/12).
We have set out in Appendix 2 some case studies of businesses that will be affected
adversely by these changes.
What amendments should be made to the clause?
The effect of this change would be alleviated by grandfathering existing assets.
There are precedents for such an approach. For example, full grandfathering was
introduced with the reform of intangibles, loan relationships and also with previous
reforms to IBAs - even when the writing down period was cut from 50 years to 25
years, the 50 year period was continued for expenditure previously incurred.
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75
However, there is a problem in that only this part of the measure has been included
in the Finance Bill, with the rest of the provisions to follow in a future Finance Bill. It is
not easy to see how a grandfathering provision can be included given that this clause
seeks to make changes to the tax rules for that very same expenditure.
76
Given this, we think that the clause should be withdrawn from the Finance Bill so as
to allow time for proper consultation and consideration with amended proposals to be
introduced that provide for grandfathering of existing expenditure.
CFCs
77
Clause 47 and Schedule 15 – Controlled foreign companies
This clause and Schedule seek to change the UK rules on controlled foreign
companies to ensure that they are compliant with the EC treaty in the light of the ECJ
decision in the Cadbury Schweppes case (C-196-04).
78
However, we are concerned that the provisions in Schedule 15 are defective and
contrary to the EC treaty. They are identical to the draft Schedule published at the
time of the 2006 Pre-Budget Report on 6 December 2006 upon which we made
similar comments.
79
We submitted our detailed concerns on the PBR Schedule in our representation
submitted in February 2007, TAXREP 8/07 where we concluded that the measures
were contrary to the EC treaty. The Executive Summary from TAXREP 8/07 is
reproduced below; the full document is available on our website at
http://www.icaew.com/index.cfm?route=145503 .
‘We do not believe that the current proposals will make the UK CFC legislation
compatible with the EC Treaty. We also believe the proposals are contrary to
the transfer pricing principles of OECD to which the UK fully subscribes.
‘We are concerned that if the draft clauses are enacted without change this will
merely lead to further litigation.
‘We can see no reason why taxpayers should have to apply for the new relief
as the CFC rules are otherwise self-assessment provisions.
‘We do not see the need for amending the ‘effectively managed’ condition in the
exempt activities test for EU/EEA CFCs.
‘The public quotation condition is a long established and important exemption
and its abolition will cause considerable additional work for a number of our
members for no good effect. If there is avoidance in this area then appropriately
targeted anti-avoidance provisions should be introduced.’
80
Other representative bodies expressed similar comments and concerns. We are
therefore disappointed that our concerns set out above have been ignored. We
appreciate that the current proposals are intended as a stop gap measure before a
more robust CFC and taxation of foreign profits regime is put in place in respect of
which there is to be a Consultation Document published in the next few weeks.
However, we do not believe it is appropriate to attempt to introduce UK domestic
legislation, even for a short period, which is contrary to the EC Treaty as determined
by the Judgment in the Cadbury Schweppes case. Aside from the uncertainty and
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litigation that will inevitably follow, the approach brings UK tax policy formulation into
disrespect internationally, undermining efforts to ensure that the UK remains an
internationally competitive location to do business.
81
The provisions should be amended to take account of the concerns expressed
previously so as to ensure that the rules are compliant with the EC treaty.
Venture capital schemes etc
82
83
Clause 50 and Schedule 16 – Venture capital schemes etc
This clause and Schedule make a number of changes to the corporate venturing
scheme, the enterprise investment scheme and to venture capital trusts. The stated
purpose is to ensure that the schemes continue to meet EU State Aid rules, following
the publication of guidelines on this by the European Commission in August 2006.
Our concerns with this clause and Schedule
Like the Government we are concerned that these changes will have an adverse
impact upon the UK Venture Capital Industry. The two measures that cause us
particular concern are:

the new annual investment limit of £2 million per target company; and

the restriction on the number of employees per target company to less
than 50.
84
We understand that the revised investment limits have been put forward by the
Government as a consequence of the introduction in August 2006, of updated EU
guidelines ‘Community guidelines on state aid to promote risk capital investments in
small and medium-sized enterprises’ (see Official Journal C-194/2),
85
It is clear from the 2006 guidelines that the criteria laid down are not rigid and that it
is up to each Member State to negotiate appropriate schemes to ‘address the equity
gap’ which continues to be the rationale for allowing such schemes to continue to
benefit from State Aid. At the present time, there would appear to be no detailed
explanation from the Government as to why the investment limits have had to be so
significantly amended and generally much more restricted than the existing limits,
which were themselves significantly reduced in last year’s Finance Act.
86
We believe that the new investment limit of £2million is likely to be a problem in terms
of the size of the finance gap. Although the research in 2003 published alongside the
HM Treasury paper ‘Small Businesses – Bridging the Finance Gap’ identified the gap
as being between £250,000 and £1million, we consider that this is on the low side
and believe that it extends up to £4-5million. This is because small businesses can
raise start up funding from family members, equity release on mortgages and other
bank finance. Larger businesses can float on AIM or the main market and prior to
this can access OFEX. The point about a flotation is that the costs are much the
same regardless of the sum being raised, making multiple fund-raising issues to suit
working capital demands as they arise less efficient than a smaller number of larger
issues to meet anticipated needs for a number of years.
87
We attach in Appendix 3 some cases studies illustrating examples of where the new
rules will now deny tax relief.
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88
Statistics available from the AIM market for new share issues for companies being
admitted to trading on AIM within the last month are available on
www.londonstockexchange.com/engb/about/statistics/factsheets/aimmarketstats.htm. From the information extracted on
17 April 2007, this shows 31 companies being admitted to AIM in the previous month.
The amounts raised on new issues were as follows:
Amount Raised
£millions
2
2-5
5-10
10+
Not Known
Listing Only
No of Companies
3
7
4
10
6
1
-------31
=====
As can be seen, this fund-raising limit will prevent new issues on AIM qualifying for
tax reliefs.
89
In addition, Baker Tilly’s London office have reviewed the EIS applications made in
the last 12 months. Of the 11 applications made, only 3 will qualify under the
proposed criteria (see table below). The number of applications had already been
reduced as a result of the reduced net assets levels included in the FA 2006. The
cumulative impact across both years is therefore likely to be even more significant
than the table suggests.
EIS Applications – Baker Tilly London Office
Amounts Raised
Employee Number
Total
<£2m
>£2m
<50
7
3*
4
>50
3
2
1
1
------11
====
1
------6
====
------5
====
Not Known
* Only these companies will now qualify for EIS relief.
90
Finally the research undertaken for HMRC in June 2006 by Ipsos MORI ‘Evaluation
of the Changes to Capital Gains Tax since 1998’ indicates that nearly 4 in 5 EIS
investors would not have made their investment if EIS tax relief had not been
available (see page 66).
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91
Of equal concern is the 50 full time employees limit. We understand that this has
been used as it is the employee numbers limit used to define a small company by EU
legislation. We do not understand why the medium sized limit of 250 cannot be
used. The limit of 250 has been used for the R&D tax credit and indeed, a proposal
is contained in Clause 49 of the Finance Bill to increase the R&D employee threshold
from 250 to 500 (subject to State Aid approval being granted). The policy rationale
for reducing the employee limit in this specific case while extending it in others
appears contradictory, but we recognise that applying the EU state aid rules is not
straightforward. Initial research undertaken by the ICAEW also suggests that the
R&D tax credit is not as effective at stimulating the appropriate business investment
as the EIS and VCT schemes.
92
We would also point out that we believe that the impact of this policy change will not
be uniform across the country. The government has appreciated the difficulties of
raising funds for growing businesses away from London and the South East and so
introduced regional venture capital funds which are backed by VCT funds. If the
venture capital funding market contracts then it is likely to be growing businesses in
the regions that will suffer most because of the difficulty in attracting funding.
93
It is not clear to us how the 2006 EU State Aid guidelines have been translated into
the provisions set out in Schedule 16 and we would welcome a detailed explanation.
Subject to that, we share the Government’s concerns about the effects of these
changes on the UK’s venture capital industry and we would like to work with the
Government to ensure that the EU’s State Aid guidelines on risk capital do not stifle
the effectiveness of these schemes in raising risk capital.
REITs
94
95
Clause 51 and Schedule 17 – Real Estate Investment Trusts
We should be grateful for confirmation that the combined effect of Schedule 17,
clause 6(a) which removes financing costs from the numerator, is negated by clause
6(b) which indicates that profits will now mean profits before the offset of finance
costs as defined in section 120(3) Finance Act 2006.
We should also be grateful for confirmation that this change reflects the
government’s original intention for this part of the REITs legislation.
Trusts
96
97
98
Clause 54 – Trust income
We welcome this amendment, which corrects a problem with the rules that were
introduced in Schedule 13 FA 2006 as a result of the trust modernisation package.
and the backdating to 6 April 2006.
Clause 55 – Trust gains on contracts for life assurance
Again, we welcome this amendment.
However, we would have thought that the clause should be amended so that the
commencement date would be 6 April 2006 as in clause 54 above. If this is not
accepted, we would welcome clarification as to why a start date of 6 April 2006 was
not chosen.
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PART 4
PENSIONS
99
Clause 67 and Schedule 18 – Abolition of contributions relief for life assurance
premium contributions
This clause denies tax relief for pension contributions that fund personal term
assurance policies. However, it does not affect the relief available for contributions
paid by employers.
100
This clause discriminates against the self employed and others who do not have
available to them the opportunity to join a favoured occupational pension scheme.
101
This is because the clause allows life assurance cover to continue to be provided
only by certain occupational schemes (such as are provided by, in the main, very big
employers) but denies tax relief for the same cover if the scheme is a group personal
pension scheme or if the scheme is not sponsored by an employer but simply
entered into by the individual, whether employed or self employed.
102
Schedule 18, paras 4 and 6
We would welcome clarification of why there are later time limits for occupational
pension schemes than for other schemes; for example 1 August 2007 for
occupational pension schemes and an earlier limit of 6 April 2007 for other schemes,
subject to the HMRC announcement dated 12 April 2007 (see
http://www.hmrc.gov.uk/pensionschemes/hmt-statement.htm) which anticipates
government amendments to the clause.
Clause 68 and Schedule 19 – Alternatively secured pensions
103
104
Schedule 19, para 14
New sections 181A(1) and (2) inserted by paragraph 14 into Finance Act 2004
provide that the alternatively secured pension payable will be 55% of the ‘basis
amount’. Ascertaining the amount of the alternatively secured pension in new
section 181A will require the scheme trustees annually to ascertain the value of the
pension scheme in accordance with section 278 FA 2004. Where the assets of the
scheme include real property, chattels or unquoted securities, ascertaining and
agreeing the values with HMRC is likely to be a time-consuming and uncertain
process that could prove costly for the trustees. The only remedy to avoid the
imposition of a ‘scheme sanction’ where a valuation mistake is made to apply to
HMRC for relief under section 268(6) FA 2004 as extended by para 17 of Schedule
29.
In order to enable the amount of the alternatively secured pension to be agreed
sooner after the date on which it is payable, the Schedule should be amended. The
scheme trustees should be able to elect that the valuation date that can be used is
the ‘nominated date’ one year before that presently provided for in the legislation, ie
for the year immediately preceding the payment of the alternatively secured pension
(ASP). Valuing the assets on such an earlier date would enable finalisation of the
valuation and hence the amount of ASP payable, thus providing increased certainty.
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PART 6
INVESTIGATION, ADMINISTRATION ETC
Filing dates
Clause 87 – Personal tax returns
and
Clause 88 – Trustee’s tax return
105
We welcome the adopting of Lord Carter’s recommendation to align the inquiry
window to the date of submission of tax returns. However, this predicates that the
date of filing the return is not in doubt. From this year, HMRC no longer provides
receipts when a tax return is delivered by hand or by post and the issuing of penalty
notices has led to disputes about the date on which returns were delivered which
have not been able easily to be resolved simply by producing an HMRC receipt.
106
In order to provide certainty to both taxpayer and HMRC about the date of delivery of
the tax return and therefore the closing of the inquiry window, and thereby obviate
disputes the resolution of which is time-consuming for taxpayers, agents and HMRC,
the legislation should be amended and provide that HMRC must, on request, provide
a receipt when a tax return is delivered by hand or by post.
Other administration
Clause 92 – Mandatory electronic filing of returns
and
Clause 93 – Mandatory electronic payment
107
These clauses make further provision for the mandatory filing of returns and
electronic payment. Clause 92 extends the existing provision in section 135 FA 2002
to include all taxes and duties for which HMRC are responsible. In other words the
power to specify mandatory electronic filing of returns is extended to VAT and Duties
formerly handled by HM Customs & Excise. Clause 93 extends a similar power for
mandatory electronic payment from large employers to cover all taxes under the care
of HMRC.
108
We remain very concerned about provisions that impose mandatory obligations on
taxpayers to either file tax returns or make payments electronically. We support the
encouragement of e-business generally and we support measures to encourage
electronic filing and payment, but our support is based on the belief that electronic
business should in the long run be more efficient for taxpayers and thus result in
lower costs and improve productivity. Business has moved to electronic solutions for
reasons of reduced costs and greater flexibility, not because they were told to on
pain of financial penalties. We do not support mandatory electronic filing and
payment merely because it is more convenient for HMRC.
109
In previous submissions, we have referred to the need to adhere to the ‘Carter
principle’, namely the principles set out by Lord Carter that electronic services should
only be launched when they have been fully tested and are fit for purpose. In this
respect, we welcome the delay in implementation of various services so as to help
ensure that the systems are sufficiently robust.
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110
We remain concerned for the future that certain groups of taxpayers, particularly the
elderly and those who have no IT literacy, are unlikely to be able to file electronically.
We think it is unrealistic to expect them for example, to queue up to file their tax
return at a public library.
111
Further, according to the regulatory impact assessment published at the time of the
Budget, HMRC estimates that up to 250,000 businesses will be required to obtain
access to the internet, as follows:
5.66 Those who do not currently have internet access will be required to
obtain it, but there are various ways of doing that and HMRC will be working
with taxpayers and businesses to ensure that a range of options are
available. The costs involved would vary, depending largely on levels of IT
literacy, and whether a business chose to buy or borrow the necessary
equipment. Our best assessment is that up to 250,000 taxpayers will need
to obtain access to the internet as a result of these proposals (unless they
were planning to go online anyway). HMRC will be offering help and support
to ensure that the costs are kept to a minimum and the benefits of online
filing achieved.
112
With an internet subscription costing about £10 per month, or £120 per year, the total
costs to business if they had to go electronic under these provisions would be around
£30m. In reality, many businesses are moving over to electronic solutions and using
email and internet access, but the key point is that they are making the move for
business reasons, not because they are being forced to use electronic services.
113
We do not see the need to link the provision for electronic filing on tax returns to the
need to make electronic payment. We understand, for example, that no change was
made to the payment procedures in the Netherlands or Belgium when they
introduced e-filing. We would welcome clarification as to what are acceptable
methods of electronic payment for the purposes of clause 93. For example, we
understood from the HMRC Open day that a Bank Giro Credit is an electronic
payment for these purposes. Is this correct?
114
We would welcome confirmation that HMRC will continue to work closely with the
professional bodies to develop high quality e-services that taxpayers wish to use as a
matter of business choice, and that there are no current plans for compulsory
electronic filing of income tax returns or compulsory electronic payment of income tax
liabilities.
115
The Explanatory Notes for clause 92 need to be amended as they appear to predate
the clause in the Finance Bill and the notes do not agree with the relevant subsections in the Finance Bill.
116
Clause 96 and Schedule 24 – Penalties for errors
This clause and Schedule reform the current penalty rules for errors. We have been
actively engaged in the penalty regime review and broadly welcome the move to a
single system replacing the plethora of existing rules. However, we believe that the
detailed provisions set out in Schedule 24 need to be amended to take account of the
following points.
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117
118
119
Paragraph 1 - HMRC 'think'
Paragraph 1(1) includes the phrase 'HMRC think'. The Explanatory Notes to the
Schedule suggest this is little more than the use of modern language. We disagree.
We have expressed already our concerns about the use of this phrase in the
consultation on the New Management Act. 'HMRC think' does not suggest that
HMRC are using their best judgement or taking a reasonable approach. We believe
this phrase will lead to confusion and court cases to determine its true meaning. We
believe the use of this word is not helpful and it should instead be replaced where it
occurs with a construction such as 'HMRC is satisfied' or ’HMRC reasonably
believes’.
We would also like to see the legislation specifically state that no penalty can be
charged under s167(3), Customs & Excise Management Act 1979 in relation to any
of the documents set out in the table in paragraph 1.
HMRC assessments
The requirement in para 2(1)(b) for a person to notify HMRC of any mistake made by
HMRC staff within 30 days of the assessment is unreasonable. Many taxpayers rely
on HMRC to get it right and either do not check assessments or do not have the
ability to do so. It seems unreasonable to impose a penalty on such a person in these
circumstances.
120
Furthermore the 30-day period can be unreasonably short where, for example, the
taxpayer is on holiday at the time the assessment is raised or has moved house and
the assessment has to be forwarded to him or her.
121
We understand from HMRC’s Finance Bill Open Day that the provision is aimed at
what appeared in the draft New Management Act clauses under 'Default
Assessments'. If so, the section ought to be clearly limited to such assessments and
ought not to apply at all where the assessment is displaced by a return, as the noncompliance is the failure to file the return and any loss of tax caused by the underassessment can be reflected in the penalty charged for the late delivery of the return.
In such circumstances there is a double penalty if penalties are also payable under
section 2.
122
We would be grateful if HMRC would clarify exactly what this paragraph is aimed at
and if it is limited to 'Default Assessments'. Paragraph C14 of the background notes
states 'This carries forward a provision previously only applying to VAT'. However,
we cannot trace the relevant provision in the VAT legislation. Section 63(1)(b) does
impose a similar requirement in very limited circumstances but that requirement is far
narrower than the paragraph 2 of Schedule 24 requirement.
123
Degrees of culpability
Paragraph 3(1)(c) introduces the definition of 'deliberate and concealed'. We would
welcome further clarification as to what is meant by 'making arrangements' to
conceal an inaccuracy. We would assume it will cover collusion with another person
and falsifying supporting documents. But could it also be used to cover seeking to
split income between a husband and wife if the steps taken turn out to be ineffective?
As making arrangements to conceal an inaccuracy increases the culpability, we
believe there needs to be clear guidance so that taxpayers know that by entering into
a specific action they are increasing the penalty for which they might become liable.
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124
Paragraph 3(2) again reverts to the terminology of 'HMRC think'. As outlined above,
we do not believe this is appropriate language. It is unreasonable to treat a mistake
as inaccurate merely because an Officer of HMRC thinks that the taxpayer
discovered the inaccuracy, when in reality the taxpayer did not do so. We believe
subsection 2 should only apply if, as a question of fact, 'P' (as defined in the
Schedule) discovered the inaccuracy. Both the Appeal Commissioners and the VAT
Tribunals are experienced on finding facts on the basis of available evidence so a
test that something is careless if P discovered the inaccuracy at a later time would
not undermine what Ministers are seeking to achieve in this area.
125
The sub-paragraph should in any event only apply where HMRC are still able to
assess the tax at the time the inaccuracy is discovered. It should not be capable of
being used so as to turn a mistake into carelessness so as to extend the time limit for
HMRC to assess the tax.
126
Potential lost revenue
Paragraph 5(1) includes the phrase 'as a result of correcting the inaccuracies'. This is
widely defined and the concern is that it could be used to cover 'potential lost
revenue' to take account of the tax lost as a result of an identical inaccuracy in a
similar document in an earlier year. For example, if a person misreads a loan
agreement and as a result over claims relief for interest as a result of which his
income tax return is inaccurate, the penalty for that inaccuracy should not reflect the
fact that he had also misread the document in earlier years so that his earlier returns
are also inaccurate.
127
Paragraph 5(2) defines tax as including NIC but this is not the case for paragraphs 1
and 2. The result seems to be that there is no penalty for underdeclaring NIC as such
but if an inaccuracy results in an underdeclaration of income tax then the penalty for
the income tax underdeclaration can also reflect the loss of NIC. We would welcome
clarification that this is the correct interpretation.
128
Please also confirm that the NIC is limited to NIC payable by P, because otherwise
there is a risk of a double penalty on the NIC element. For example, if P is an
employer the loss of NIC includes employees' NIC but the employee may already be
liable for a penalty for under declaring his or her income, which could include an
element to incorporate NIC.
129
130
131
Reductions for disclosure
Paragraph 9(1)(c) causes some concern. We would like clarification that this could
not be used by an HMRC Officer to obtain access to records for a later year than an
Officer is entitled to obtain under section 19A, TMA 1970 or para 27 of Schedule 18
to the FA 1998.
Paragraph 10 again makes liberal use of the phrase 'HMRC think'. We believe this is
inappropriate as it should be left to the Appeal Tribunal to decide as a question of
fact whether the disclosure has been prompted or unprompted.
Special reduction
It is noted in para 11(2) (a) that there can not be a deduction for special
circumstances on grounds of ability to pay. We appreciate the need to enforce
compliance but we do think HMRC needs the discretion to temper enforcement with
compassion in appropriate circumstances.
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132
133
134
135
136
137
138
Equally in para 11(2)(b) it seems unreasonable that if, say, a husband underdeclares
income because he believed it was his wife's income, the tax payable by the wife
cannot be taken into account. The same applies for groups of companies.
Suspension of penalties
We welcome the idea of suspending penalties, which reflects an innovative approach
to the new powers regime.
We would like to see guidance on how paragraph 14(5) will work in operation so that
HMRC are not free to impose unreasonable conditions on allowing suspension of
penalties.
Appeals
With regards to paragraph 16, we cannot understand why there should be no right to
take an appeal against a penalty to the Special Commissioners. This particularly
applies in relation to an appeal to which para 17(4) applies. General Commissioners,
who are not usually lawyers, cannot reasonably be expected to apply 'principles
applicable in proceedings for judicial review' which is clearly a difficult question of law
– indeed so difficult that even under the reform of tribunals the First Tier tribunal is
not intended to be able to cope with it.
Agency
We would welcome confirmation in relation to paragraph 18 that if P sought advice
from a qualified professional person, who he reasonably believed to be confident to
give such advice, then he or she is protected by para 18(3) should that advice turn
out to be incorrect.
Partnership
We have concerns about paragraph 20. It seems to give no right of appeal to any
partner other than P. This seems unreasonable bearing in mind that the quantum of
the penalty depends on the conduct of the taxpayer. P is acting as agent for his
partners in completing the partnership return and a partner ought to be able to claim
the protection of para 18(3). Furthermore if P were to deliberately omit something
with concealment, it seems conceptually wrong to also deem his partners to also
have done so if they can demonstrate that they were not aware of the concealment
and accordingly their only failure was not to check the return with sufficient care.
Paragraphs 24 to 27 replace the original draft paragraph 12(2). The old draft defined
terms by reference to ICTA 1988 so there was a common definition for the
application of penalties irrespective of which tax the penalty relates to. This seemed
sensible in the context that a single conduct can give rise to penalties for different
taxes, so logically there should be a single penalty calculated by reference to all of
the taxes concerned. Defining the term differently depending on the tax concerned
undermines this concept, as effectively the part of the penalty applicable to each tax
needs to be approached separately in the context of the different definitions
applicable to that tax.
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PART 7
MISCELLANEOUS
Value added tax and insurance premium tax
139
140
Clause 97 – VAT: joint and several liability of traders in supply chain where tax
unpaid
This clause allows the Treasury to amend the provisions in section 77A VATA 1994
that where a business purchases relevant goods and, at the time of the purchase,
knows or has reasonable grounds to suspect that some or all of the VAT payable by
another business in the supply chain (whether before or after him) will not be paid,
then that business will be held liable for the VAT of the non-paying third party. Given
our continuing misgivings about section 77A, which we expressed when it was being
enacted in Finance Bill 2003, this section should be amended so as to comply with
the EC Treaty and EU law. The amendments should be made by way of primary
legislation rather than by Treasury Order, to ensure that the amendments receive the
benefit of Parliamentary scrutiny.
Our detailed concerns with section 77A have changed little since its introduction by
Finance Act 2003. These are explained in our representations to the Chancellor on
Finance Bill 2003 (TAXREP 14/03 - see
http://www.icaew.com/index.cfm?route=119265) at which time we listed our concerns
that the provisions:







141
apply equally to the innocent as well as the guilty;
contain wholly inadequate safeguards, particularly a lack of proper judicial
protection for taxpayers;
appear to require businesses to police the entire supply chain;
will in practice require some legitimate businesses to cease trading;
require HMRC to breach taxpayer confidentiality in respect of other
businesses if the appeal rights of the taxpayer are to be respected;
can be expected to reduce the very co-operation from businesses that HMRC
most requires to combat this type of fraud; and
do not even require there to be a fraud.
We requested that the clause that is now section 77A should be amended to make it
clear that it only applies in cases of fraud. As a European Commission official stated
in a letter published in the Tax Journal in April 2006 (explaining why the Commission
had intervened against the UK in the Optigen case):
‘It is naturally necessary to take vigorous measures to combat tax fraud, but
that objective does not justify making innocent bystanders pay for the crimes
of others.’
142
We are unconvinced that this extension of the 2003 provisions will do much to
counter MTIC fraud in the UK. Experience since 2003 has shown that the use of
section 77A has been of little use in the battle against MTIC fraud. We do not believe
that the proposed changes will improve matters in this respect. HMRC clearly face
considerable difficulty in seeking to hold one business liable for the VAT debts of
another (of which it may not even have heard). Whilst supporting HMRC’s efforts to
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combat MTIC fraud, it is a serious infringement of a taxpayer’s rights to impose a tax
charge on him where he has acted honestly, but merely failed to identify risk. If a
liability is to be imposed in such circumstances, it should be a decision made by
Parliament after proper debate, rather than by the Treasury.
143
It is of particular concern that the proposed new section 77A(9A) appears to allow the
Treasury to override the protection given to taxpayers under section 77A(7). If the
Treasury is to be given power to amend the presumptions, it should be limited to
amending section 77A(6).
144
We remain concerned at the lack of proper judicial protection for taxpayers.
145
Clause 98 – VAT: non-business use etc of business goods
We welcome the repeal of the unlawful legislation introduced by section 22 Finance
Act 2003. The section was introduced to override an earlier ECJ judgment, and has
never been generally accepted as good law in the UK. We stated at the time that it
was clearly contrary to EC law and case law for the UK to legislate against a
judgment of the European Court of Justice. The July 2005 ECJ judgment in the
Dutch Charles & Charles-Tijmens case, to which HMRC refer in BN 56, merely
confirmed what the court called ‘settled case law’ dating back to cases decided in
1991, 1995 and 2001. HMRC should therefore have been well aware in 2003 that
the UK provision was unlawful.
146
Clause 98(4) and (5) give power to make Regulations. We are concerned at how the
reduction to a ten-year adjustment period cited in BN 56 and the Explanatory Notes
will be implemented for past transactions, as retrospective legislation is likely to
break the requirement for legal certainty. BN 56 states that 'The regulations are likely
to provide for transitional relief'. We consider that transitional rules will be essential if
the new UK law is to be compliant with EC Law in terms of proportionality and legal
certainty. In particular, there must be no retrospection or de facto retrospection
requiring a taxpayer to pay an increased VAT charge in respect of earlier years.
Without such a provision, the new law risks compounding the illegality of its
predecessor and would almost certainly lead to litigation.
147
The Explanatory Notes suggest that the Regulations made under clause 98(4) and
(5) will make provision for determining the period over which the cost is to be spread.
We believe that ECJ case law does not entitle the Treasury to determine how ‘the full
cost of providing the services’ is to be calculated. The ECJ has already stated that it
is the appropriate proportion of the actual cost of the asset.
148
Clause 99 – VAT: transfers of going concerns
We welcome this as a sensible change to bring VAT legislation into line with common
practice and direct tax, company and insolvency laws.
Other miscellaneous measures
149
Clause 106 – Limitation period in old actions for mistake of law relating to
direct tax
This clause needs to be amended so as to ensure that it is compliant with the EC
Treaty and conforms with the principle established by the European Court of Justice
in the case of Marks & Spencer v Customs & Excise (Case C-62/00). We
recommend that this provision allows for a reasonable transitional period.
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150
151
Clause 108 – Meaning of “recognised stock exchange” etc
We would welcome confirmation that HMRC under the proposed legislation will not,
without proper consultation change the position of companies that are treated as
unlisted, or listed, under the statutory provisions, that the status of AIM will not be
changed without prior consultation and that there is by design no amendment to
section 272 IHTA 1984 since unquoted for IHT purposes is defined as meaning not
listed on a recognised stock exchange.
Clause 109 – Mergers Directive: regulations
We recognise the pressure on Parliamentary Draftsmen but we are concerned that
significant changes to UK statutory provisions are being dealt with in secondary
legislation without the opportunity for proper Parliamentary scrutiny.
FJH/PB
4 May 2007
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NOTE. The case studies in appendices 1 to 3 are all real businesses which will
suffer if the proposed schedules are not modified.
Appendix 1
Case studies on Clause 26 – Restrictions on trade loss relief for partners
Case Study 1 – Hairdressing Salon
A hairdressing salon and nail bar was set up by a brother and sister. The brother is a
sleeping partner and the sister received a prior share of profits for working in the
business. As with many new businesses, there are losses in the first year as turnover
is very low. The turnover is £25,000 with tax adjusted expenses of £60,000. As a
result, there is a loss in the first year of £35,000 which is wholly attributable to the
sleeping partner because of the prior share of profits due to the sister. The second
year of the business shows a much higher level of turnover and so a small profit, but
because of the prior share, not much of this is attributable to the sleeping partner. It
would therefore be a considerable period of time before he utilises his losses if he
was restricted from claiming them against other income or by carrying them back to
previous years as opening year losses.
Case Study 2 – Kennels
Mr Smith is the manager of a supermarket. His wife decides to open a kennels and
they incur substantial expenditure in converting part of their property to be a kennels.
The business is structured as a husband and wife partnership. The decision to set
up the business will in part be financed a substantial tax repayment due to Mr Smith
in the first year which will help to reduce the significant capital cost of building the
kennels. The proposed changes would restrict this relief.
Case Study 3 – Public House
A pub was purchased by a husband and wife. The wife was a full time school teacher
and the husband ran the pub. The couple had four children and had sold the family
home to finance the purchase of the pub. It would clearly be difficult for the wife to
commit to spending a significant amount of time working in the pub, but as it
happened the family home had been hers before the couple met. It was reasonable
that the couple would be equal partners in the new business. The rental payments
proved onerous and the business suffered severe losses in the early years. The
ability to claim loss relief against the wife’s income was essential in keeping the
business trading. The proposed changes would restrict this.
Case Study 4 – Management Consultancy
Two firms of management consultants operating in Bristol and Birmingham, Bristol
LLP and Birmingham LLP decide to merge. It would be possible to do this by
transferring all activities to one LLP or, alternatively, to reduce liability risks, by
admitting the Bristol partners into Birmingham LLP and admitting the Birmingham
partners into Bristol LLP, with all partners sharing profits (and losses) from both
Bristol LLP and Birmingham LLP.
If a loss was made by, say, Birmingham LLP, and that this was funded by the Bristol
and Birmingham partners all injecting part of their Bristol LLP profits into Birmingham
LLP given that:

management consultancy is, arguably, not a profession, and
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
that the Bristol partners wouldn't be working 10 hours a week for the
Birmingham LLP
following the proposed changes the Bristol partners would get minimal relief for the
losses even where they have suffered substantial economic losses. This appears
wholly unreasonable.
Case Study 5 – Farming
A husband and wife buy a small run-down farm. The husband works in the City.
They live on the farm and the husband has a lengthy commute. The husband is a
high-earner but expects his career in the City to be short-lived. The aim is to
upgrade the farm and develop it into a profitable business. They are able to upgrade
and maintain the farm to a high standard, by repairing fences, ditches and
outbuildings, investing in decent machinery and employing more staff. They are able
to do this even if the farm itself does not generate much income because of the
employment income.
Farmers already face a restriction on loss relief for their losses in year 6 if they have
sustained 5 years of losses in order to prevent hobby farming. However, this is not a
hobby. The partners are used to making money in the City/business and want to do
so in their farm activities too. They are also providing important local employment as
well as helping to preserve the countryside and the environment.
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Appendix 2
Case studies on clause 35 – Industrial and agricultural buildings allowances
Case Study 1 – IBA Hotel Example
A hotel is acquired in 2003 for more than its original cost. There was expenditure of
£360,000 qualifying for IBAs in 1993. As a result, the write off of this expenditure is
over the remaining 15 years. There would have been a claw back of IBAs when the
hotel was sold in 2003 as far as the previous owner was concerned. For the years
2003/04 through to 2007/08, there will be a writing down allowance of £24,000.
Under the proposals, this allowance will drop to £18,000 in 2008/09, to £12,000 in
2009/10 and to £6,000 in 2010/11. For the remaining seven years, there will be no
entitlement to allowances whatsoever. This will mean that of the expenditure in 2003
which was expected to qualify fully for allowances, only £156,000 of the total of
£360,000 will now qualify for tax relief.
Case Study 2 – Diversifying Farm Business
A farm has diversified into cheese production and constructed a dairy. This has been
part funded by EU regeneration monies. The impact of these changes will be a loss
of both agricultural buildings allowance on the existing farm and IBAs on the newly
built dairy. Tax relief on expenditure of £300,000 will be unavailable. At the same
time, the business faces an increase in its corporation tax rate.
Case Study 3 – Environmentally Efficient Heating Product
A manufacturer of an environmentally efficient heat product has just relocated the
business to a long disused mining site. It is a major regeneration project likely to
create many jobs. The site was acquired earlier this year, but very little construction
work has been carried out as yet. Some of the manufacturing will go overseas to
Asia but the company wishes to keep some production in the UK. This will now be
more difficult to achieve.
Case Study 4 – R&D Activity
A business undertaking R&D needs specialised buildings (laboratories and
specialised machine shops) in which to undertake the activity. IBAs are claimed on
this expenditure and the buildings contain substantial plant in the buildings. These
buildings are unlikely to have any substantial resale value due to the level of
conversion costs back to general use and contamination costs. The business does
not make capital gains and so can not recover any capital losses. The business is
continuing and so expenditure will remain in the plant and machinery pool for a long
time.
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Appendix 3
Case studies on clause 50 – venture capital schemes etc
EIS Case Study 1
A shipyard business with a turnover of £13m. Group net of assets of about £1.5m
made up of a deficit on the profit and loss account of £3m and share capital of £4.5m.
Previous share issues have breached the £2m annual limit but probably not by much.
Employee numbers are 240. There are a diverse number of shareholders.
EIS Case Study 2
A company developing high tech retail point of sale advertising and databases, taking
advantage of new media. It has a turnover of just over £2m. The company was
originally formed in 2000 with start up capital under EIS. Several rounds of
fundraising followed to finance losses and share capital investment had reached £2m
by the end of 2002. Subsequent annual share issues fund losses and new
acquisitions to grow the business which was due to culminate in a venture capital
investment. Subsequently the companies lost its EIS status because of a reverse
takeover but if the venture capital investment had proceeded, then the fundraising
would have breached the £2m threshold in the 12 month period. The employee
numbers grew over time but were still less than 50 at the time of the reverse
takeover. The numbers were around 15 – 30 throughout the fundraising stage.
EIS Case Study 3
The purchase of an office fit out company from a construction group. This was an
established business, albeit loss making. It had a turnover of about £10m and was
bought back from a listed group as it was considered to be non-core. The share
capital investment was only around £300,000 and was by one of the previous owners
of one of the business before it was acquired by the listed group. Deferral relief was
claimed in order to roll-over proceeds from the original sale back into the acquisition
of the business. Employee numbers were below 50 but in a similar situation, that
threshold could be breached as it is not very high for a service sector business. The
reason why the employee numbers are quite low in an office fit out business is
because the amount of sub-contactor activity and the danger with a full time
employee post threshold of 50 is that it will only further encourage sub-contracting
and outsourcing which seems contrary to other Treasury initiatives.
EIS Case Study 4
Early stage software development, research and IT company, with less than 50
employees, selling product into multinational enterprises, joined AIM in 2006 raising
c. £2.5million from VCT monies. The purpose of the fundraising was to provide
capital for the employment of additional employees within the UK and to undertake a
worldwide marketing programme to help facilitate a significant increase in turnover
and profitability. Alternative sources of risk capital were not readily available to the
company. The VCT status of the investment was a significant aspect in obtaining
this important finance for growth. The AIM market was not used simply to provide an
immediate ‘exit’ route for the shareholders.
For transactions raising less than £2million, the AIM/VCT market becomes
unattractive given the relatively high costs of the admissions and fundraising process.
On the example above, the costs were in the region of £500,000.
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ANNEX 1
THE TAX FACULTY’S TEN TENETS FOR A BETTER TAX SYSTEM
The tax system should be:
1. Statutory: tax legislation should be enacted by statute and subject to proper
democratic scrutiny by Parliament.
2. Certain: in virtually all circumstances the application of the tax rules should be
certain. It should not normally be necessary for anyone to resort to the courts in
order to resolve how the rules operate in relation to his or her tax affairs.
3. Simple: the tax rules should aim to be simple, understandable and clear in their
objectives.
4. Easy to collect and to calculate: a person’s tax liability should be easy to
calculate and straightforward and cheap to collect.
5. Properly targeted: when anti-avoidance legislation is passed, due regard should
be had to maintaining the simplicity and certainty of the tax system by targeting it
to close specific loopholes.
6. Constant: Changes to the underlying rules should be kept to a minimum. There
should be a justifiable economic and/or social basis for any change to the tax
rules and this justification should be made public and the underlying policy made
clear.
7. Subject to proper consultation: other than in exceptional circumstances, the
Government should allow adequate time for both the drafting of tax legislation
and full consultation on it.
8. Regularly reviewed: the tax rules should be subject to a regular public review to
determine their continuing relevance and whether their original justification has
been realised. If a tax rule is no longer relevant, then it should be repealed.
9. Fair and reasonable: the revenue authorities have a duty to exercise their
powers reasonably. There should be a right of appeal to an independent tribunal
against all their decisions.
10. Competitive: tax rules and rates should be framed so as to encourage
investment, capital and trade in and with the UK.
These are explained in more detail in our discussion document published in October
1999 as TAXGUIDE 4/99; see http://www.icaew.co.uk/index.cfm?route=128518.
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
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ANNEX 2
WHO WE ARE
1. The Institute of Chartered Accountants in England & Wales is a professional body
representing some 128,000 members. The Institute operates under a Royal
Charter with an obligation to act in the public interest. It is regulated by the
Department of Trade and Industry through the Accountancy Foundation. Its
primary objectives are to educate and train Chartered Accountants, to maintain
high standards for professional conduct among members, to provide services to
its members and students, and to advance the theory and practice of
accountancy (which includes taxation).
2. The Tax Faculty is the centre for excellence and an authoritative voice for the
Institute on taxation matters. It is responsible for tax representations on behalf of
the Institute as a whole and it also provides services to more than 11,000 Faculty
members who pay an additional subscription.
3. Further information is available on the ICAEW Tax Faculty website at
www.icaew.com/taxfac or telephone 020 7920 8646.
The Tax Faculty of the Institute of Chartered Accountants in England and Wales
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