ICAS gives evidence to a House of Lords inquiry into the draft Finance Bill
Charlotte Barbour and Susan Cattell outline the key points from the ICAS contribution to a parliamentary inquiry into the draft Finance Bill.
The House of Lords Economic Affairs Committee – Finance Bill Sub-Committee
The House of Lords Economic Affairs Committee appoints a Finance Bill Sub Committee (FBSC) each year to consider aspects of the Finance Bill concentrating on issues of tax administration, technical clarification and simplification rather than on rates or incidence of tax.
This year the FBSC is examining the following measures:
- Proposals for income tax basis period reform
- Notification by large businesses of uncertain tax treatment
Susan Cattell, Head of Tax Technical Policy at ICAS, gave oral evidence to the Sub-Committee on 11 October. Written evidence has also been submitted. Some of the key issues we raised are outlined below.
Basis period reform
ICAS believes that basis period reform is sensible in principle and would be a useful simplification for most new businesses. Making Tax Digital (MTD) for income tax will not be workable unless there is basis period reform, or at least partial reform through the introduction of full equivalence of 31 March and 5 April year ends for self-employed and property businesses.
However, the proposals for reform do need to be refined (if the decision is taken to go ahead) to mitigate some of the issues which have already been identified through the short six-week HMRC consultation (to which ICAS responded). There should also be time to conduct a full pilot of MTD for income tax (which is open to all businesses) before MTD becomes mandatory. Problems with HMRC’s service levels also need to be rectified before agents and businesses are asked to implement these two significant changes.
We therefore welcome the government’s announcement that the start date for MTD for income tax will be delayed for 12 months – and that basis period reform will not come into effect before April 2024. It remains to be seen whether this one-year delay to MTD is long enough to allow successful implementation of basis period reform and a full MTD pilot. It may not be, particularly as lack of appropriate software is currently a major obstacle to preparation. Uncertainty about basis period reform is likely to be deterring providers from finalising and releasing their MTD products. This could persist until a final decision on reform is announced, even though the MTD regulations have now been laid.
Notification by large businesses of uncertain tax treatment
ICAS has already responded to the two consultations on the notification of uncertain tax treatment (UTT) measure and most recently submitted comments to HMRC on the draft legislation and draft guidance. The Finance Bill Sub-Committee has also looked at this measure before, in its 2020 inquiry. We welcomed the opportunity to give evidence to the FSBC and to highlight the unsatisfactory outcome of the lengthy consultation process.
This measure illustrates the importance of following the full consultation process set out in the Tax Consultation Framework to improve the likelihood of arriving at a satisfactory outcome. Stage One of the process - setting out objectives and identifying options – was omitted for the UTT measure. As a result, other options which would not have imposed unnecessary burdens on all large businesses, never seem to have been properly considered by HMRC, leading to poorly targeted legislation and an unsatisfactory outcome.
We welcome the reduction in the number of triggers from seven (in the second consultation) to three. However, having dropped several proposed triggers (apparently because they were not sufficiently clear and targeted), the new ‘substantial possibility’ third trigger has been introduced. This is unclear, less targeted, and highly subjective; it is unlikely to be workable in practice and adds significant uncertainty to the regime. Serious problems also remain with the second trigger (HMRC’s known position). If radical changes are not possible at this stage, HMRC at least needs to address problems with these triggers.
The draft HMRC guidance on the UTT regime needs to be improved; it is currently of limited usefulness on various key aspects. Given the importance of HMRC’s wider guidance in determining HMRC’s known position on issues, it is also essential that HMRC improves its published guidance in general and ensures that it is kept up to date.
ICAS continues to believe that the UTT measure imposes unnecessary administrative burdens on the open and transparent majority of large businesses instead of being properly targeted at the uncooperative minority. Implementation will require additional HMRC resources; it would be far more constructive, and more likely to achieve the stated objectives of the measure, if those additional resources were instead directed to the existing HMRC Customer Compliance Manager and Business Risk Review regime.
ICAS would like your views
We respond to many tax-related consultations and calls for evidence and give feedback to HMRC and the Financial Secretary to the Treasury about practical issues being encountered by our Members.
We are currently looking forward to the Budget on 27 October and would welcome input from Members on significant tax proposals, as well as any ongoing practical issues with HMRC. Send your thoughts to the ICAS tax team by emailing email@example.com.