Autumn Statement 2016: Tax recommendations from ICAS
In this second of two articles, Donald Drysdale looks at the ICAS submission to Philip Hammond in advance of his Autumn Statement on 23 November 2016.
ICAS submission to HM Treasury
ICAS recently wrote to HM Treasury setting out policy suggestions for the Autumn Statement. These reflected demands from ICAS members for stability, certainty and significantly less change to the UK tax system.
Devolution and tax policy
With increasing devolution of taxes across the UK, ICAS calls for stronger co-ordination of such changes – particularly if further powers are to flow back from the EU. There is a need for effective co-operation, especially where a tax such as the Scottish rate of income tax is only partly devolved.
Complexities arise because different components of devolved and reserved tax powers are intricately intertwined. This applies not only to a range of Scottish taxes and corporation tax in Northern Ireland, but also to other measures such as the apprenticeship levy, which is collected through UK powers but disbursed by the devolved administrations).
Sound intergovernmental relationships are needed so that UK and devolved fiscal teams all understand prospective measures and can plan accordingly. For example, advance plans for allowances and tax rates for all taxes (e.g. income tax, SDLT, LBTT) need to be shared to permit effective co-ordination.
Making Accounting Digital (MAD)
ICAS supports the overall objectives of Making Tax Digital (MTD), as defined by HMRC in 2015, but opposes the timescale for implementation and the mandatory approach – especially for SMEs. A voluntary approach would encourage those creating the new system to make it beneficial and easy for users, while also striving to improve HMRC service standards.
ICAS describes ‘Making Tax Digital’ is a misnomer. The key thrust of the MTD consultations is on ‘Making Accounting Digital’, and I feel ‘MAD’ is a much more appropriate acronym. Accounts are not simply about tax – they provide information about profitability to support business, lending and creditor decisions. Cash accounting may be a useful simplification for micro businesses, but is inappropriate for more substantial organisations.
For small businesses, particularly those with a single owner manager, the time and costs of maintaining real-time digital records and making quarterly tax submissions would be immense. Rather than tackling the tax gap, ICAS suggests that there is a grave danger of currently compliant businesses moving into the shadow economy.
Negative messages about tax agents in HMRC publicity around MTD are also causing concern. Development of agent online services consistently lag behind the introduction of business and personal tax accounts, causing major problems for agents – without whose active participation MTD faces much greater risks of failure.
Strategic direction for business taxes
ICAS calls on the new Chancellor for a statement of his long-term strategy for business taxes. This should emulate the 2010 Corporate Tax Roadmap which set out long term strategic aims, rather than the list of short term policy proposals issued earlier this year.
The current tax regime can incentivise tax avoidance
There would be merit in reviewing the substantial difference between the current corporation tax rate of 20% (due to fall to 17%) and the additional personal tax rate of 45%, which distorts decisions about business structure and encourages tax planning. Efforts to frustrate tax avoidance necessitate frequent legislative changes, such as the recent dividend tax reforms, adding unwanted complexities to a tax regime that already overstretches HMRC and taxpayers seeking to comply.
ICAS sees similar problems caused by differences between the capital gains tax (CGT) and income tax rates. Income tax additional and higher rates are currently 45% and 40% while most personal gains are taxed at 20% or 10%. Thus, it pays to extract value from companies as capital gains rather than income. To discourage this, new legislation now applies to distributions in liquidation, including a targeted anti-avoidance rule (TAAR) to tackle perceived abuses, but these may adversely affect transactions that are not tax-motivated.
An overall business tax strategy in the Autumn Statement should aim to remove distortions, thus creating a tax regime that offers fewer opportunities for avoidance. Complex anti-avoidance measures cause problems for compliant businesses, while only creating new challenges for determined avoiders.
Certainty and Stability
Successive reductions in the corporation tax rate may help the UK to attract foreign investment. However, frequent and unpredictable changes also tend to deter inward investment rather than encourage it.
Recent unexpected changes to the rules on company losses for larger companies are criticised because they could have unintended consequences for companies subject to certain regulatory regimes. ICAS wants a sensible balance between reductions in tax rates and any counterbalancing changes which might have detrimental results.
In recent years, there have been major reforms to pension tax, increases in state pension age, the abolition of contracting out, the introduction of auto-enrolment, the announcement of lifetime ISAs and the recent government U-turn on a new secondary market in pension annuities. There is a desperate need for long-term stability for the UK pensions regime, and this could be aided by the establishment of an independent pensions/retirement savings commission as a standing advisory body with cross-party consensus.
ICAS supports the work of the Office of Tax Simplification (OTS) but believes that too little is being done to address complexity in tax policy and in existing and new tax legislation. While lip service is paid to simplification, many recent proposals have either failed to simplify the tax regime or worse – introduced greater complexity.
If the government is serious about simplifying the tax system, the OTS should be involved at an earlier stage. It should be asked to consider proposed changes before they go out for consultation, to challenge the government and HMRC at that stage and through the consultation process on whether they will simplify taxes or at least avoid introducing excessive complexity.
Existing tax reliefs should be reviewed, and ineffective reliefs removed. All new reliefs should include a sunset clause so that they are reviewed after a set time; if they are not delivering the expected benefits they should be allowed to expire.
Administrative tax burdens and HMRC resourcing
Policy makers don’t understand the operational impact of tax policies on taxpayers, according to ICAS. It wants to see more business and behavioural awareness – quoting PAYE, self-assessment, RTI and now MTD as steadily increasing administrative burdens on businesses and individuals.
Reductions in HMRC staffing levels since 2010 have adversely affected service levels to businesses and individuals who can’t access HMRC’s customer relationship managers for large businesses or High Net Worth Unit for wealthy individuals. Recently even the service provided by customer relationship managers has deteriorated.
Inadequate HMRC resources weaken key measures to tackle tax evasion. For example, common reporting standards should assist HMRC by providing information about taxpayers across borders, but only if HMRC have sufficient resources to analyse the data and follow up where necessary. ICAS fears that MTD may be used as an excuse to reduce HMRC staff numbers further; by contrast, what is needed is for staff to be freed up to provide vital assistance to those struggling with the transition to MTD, thus rebuilding trust in HMRC.
Article supplied by Taxing Words Ltd
This article was first published on 1 November 2016.