Response to Hmrc Consultation Document: Working with Tax Agents the Next Stage s1

RESPONSE TO HM TREASURY AND HMRC CONSULTATION DOCUMENT: DELIVERING A CAP ON INCOME TAX RELIEF: A TECHNICAL CONSULTATION

1. INTRODUCTION

1.1 The AAT is pleased to comment on the issues raised in the HM Treasury and HMRC consultation document “Delivering a cap on income tax relief: “a technical consultation” (the condoc).

1.2 We have nearly 50,0001 full and fellow members and 71,0001 student and affiliate members worldwide. Of the full and fellow members, there are approximately 3,7001 Members in Practice (MiP) who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types.

1.3 The AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law.

1.4 In pursuance of those objectives the AAT provides a membership body. We are participating in this consultation as part of our contribution towards the public benefit of achieving sound and effective administration of taxes. In addition, we feel that the issues raised in this consultation paper will affect our membership.

2. GENERAL

2.1 We always endeavour to consult as widely as possible internally when gathering feedback in order to respond to public consultations that we consider appropriate for us to comment upon. Recognising the significance of the proposals contained within the condoc we have, therefore, engaged with key elements of our membership to ensure that our response reflects the wider view of our internal stakeholders.

2.2 A typical MiP is engaged by their clients to provide practical, cost effective, day-to- day tax compliance services. Such members play a valuable role in relieving their client businesses of the burden of an ever more complex tax system and in ensuring that their clients pay the right amount of tax at the right time.

3. OBJECTIVES OF THE CONSULTATION

3.1 We note that the consultation outlines the Government’s aim to:

i. Maintain a fair tax system whilst at the same time ensuring individuals with the most income contribute the most in taxation. ii. Reduce the scope for aggressive tax planning to legally subvert the use of reliefs for tax avoidance purposes. iii. In pursuit of 3.1(ii) (above), to introduce a cap on certain reliefs, currently uncapped, by restricting individual’s claims to the greater of £50,000 and 25 per cent of income.

1 Figures are approximate at 30 September 2012 iv. To restrict the application of the cap to reliefs used to reduce the amount of general income liable to tax (2.4 & 2.14). v. To leave the computational rules affecting the calculation of individual income streams intact. However, where computational rules either create or augment a loss that might be set off against general income, the loss relief will be caped according to the formula set out in 3.1(i) (above), unless specifically excluded.

4 AAT POSITION

4.1 AAT recognises that the backdrop of the current economic climate imposes a pressing need for the Government to balance public finances and that the proposed capping of reliefs as set out at 2.14 of the condoc is one avenue of what, by necessity, needs to be a multi-faceted approach in pursuing this aim.

4.2 AAT is disappointed that prior to the issue of the condoc there had not been an opportunity to comment upon the proposals to cap income tax reliefs either prior to or post the 2012 Budget. As a consequence a considerable proportion of response has been taken up with our observations over the practical impact of the wider aspect of the operation of the capping proposals which we consider to be of great significance to our MiPs, their clients and taxpayers in general.

4.3 Whilst we are pleased to note that since the Chancellor’s pronouncements in the budget over capping of reliefs that “following extensive engagement with the charity sector” (2.13) charitable donations have been excluded from the cap, we do recommend that a wider debate should be held over whether it is right for donations to charities to be incentivised via the taxation system.

4.4 AAT is pleased to note that paragraph 2.3 restricts the proposed capping of reliefs to those currently not already capped and those capable of offset against general income.

4.5 It is of particular concern to AAT that it has been felt necessary to cap loss relief for sole traders and partnerships as it is our opinion existing reliefs were perfectly adequate. Members consulted were unable to give examples of the abuse (see also 5.1 below).

4.6 We are also pleased to note assurances given at 2.7 of the condoc in respect of a taxpayer’s ability to carry forward a computational relief and those given at 2.8 in respect of structural credits.

4.7 AAT endorses the common sense of the proposals made to retain existing limits at 2.9, 2.10 and 2.12 of the condoc in cases where the rules already in place were designed with specific policy objectives in mind. However, on reading paragraph 2.11 we are not persuaded of a need to exclude Business Property Renovation Allowances (BPRA) (see 2.11) from the proposed cap.

4.8 In HMRC’s Tax Information and Impact Note 06 December 2011 “Capital Allowances: Extension of Business Premises Renovation Allowances” we were able to see estimates of the costs (£30m p.a.) to the Exchequer but were unable to see any form of adequately costed benefit analysis. Although we were pleased to note that regular “Monitoring and Evaluation” was in place and set to continue for the duration of the scheme. We recommend a thorough review and cost benefit evaluation of BPRA data collected to date to ensure policy objectives are being met before its exclusion from the proposed capping regime.

4.9 AAT does not have any particular concerns in respect of points 5 to 7 of the “Reliefs subject to the cap” (page 9). ITA 2007 S128 states that a claim must be made for loss relief and that it must specify the year to which the loss is to be applied, either the loss making year or the previous year to that or to both. As it is the intention of legislation that the offset merely reduces employment income down to nil for the year in which the cap is calculated, there should not be any need to impose relief capping. Generically AAT does not believe that claimants ought to be penalised if loss relief is being claimed for employment losses. However, we would also want the law to prevent taxpayers taking undue advantage of a system which allows them to allocate the loss and hence manipulate the cap value. Furthermore, as with payroll giving we feel the loss relief ought to be added back before the cap is calculated in order to equalise the treatment between those whose taxable income is unaffected by employment losses and those who are not.

4.10 If the proposal is to impose a £50,000 relief cap in respect of employment related losses purely as a general avoidance measure it is inappropriate. Current legislation is already sufficiently robust, in that it already significantly restricts a taxpayer’s ability to create employment losses capable of offset against general income.

4.11 AAT does not wish to comment specifically upon the proposal to cap relief in respect Share Loss Relief or Deep Discounted Securities.

4.12 We are unable to understand the need to cap reliefs at £50,000 in respect of Qualifying Loan Interest (QLI). It is AAT’s belief that existing legislation is sufficient and we are unaware of a growth of abuse of the reliefs under this heading.

4.13 In our opinion the imposition of a cap on QLI in recessionary times is likely to have an adverse impact on would-be investors who traditionally have been claiming relief in accordance with the intention of the legislation for legitimate reasons.

4.14 Whilst there are areas of the Impact Assessment (condoc pages 19-21) where we accept the figures at face value and without question, we acknowledge that the compliance costs, the implementation costs, and resultant administrative burden to the taxpayer are likely to be low. The AAT does, however, have a concern that if the proposals were to be adopted it would be a step away from the simplification of the taxation regime in the UK.

4.15 We are also concerned over the lack of detail under the “Other impacts” section (condoc page 20) in respect of small businesses. The absence of detailed, contextual and costed information restricted our ability to evaluate the impact of the proposals.

4.16 Our concerns, as expressed in 4.8 (above), are further underpinned by the second sentence in the same section in respect of the carrying forward of unrelieved losses for “in most cases” eventual relief. In our opinion this sentence is a gross over-‘simplification of the reality. In many cases a business running at a loss can only continue to do so for a limited period of time. If the loss making sole trader or partner is able to offset all losses arising in a year against general income it might enable the business to survive more easily than otherwise it might in the future if the capping proposal were to be implemented. For example, under the proposals a trader with capped losses might be left struggling to fund a tax liability which would not have existed under the current regime. The struggle to pay the tax liability could result in bankruptcy, a forced sale of the business or the withdrawal from it of vital working capital to pay HMRC, ultimately delaying the recovery of the business.

4.17 Furthermore, the excess of unrelieved losses will expire at the time of the cessation of the business unless capping is not applied in cases of set off against general income at the time of cessation.

4.18 The AAT has a concern that if a static figure of £50,000 were to be introduced, over time the impact of fiscal drag would result in many more being affected by the measure than had originally been intended.

4.19 As a final observation, taking into account the number of points that we have felt it necessary to list under the section of our response document, AAT has strong reservations over the nature of the questions as set out in box 3.c (page 16). The five questions seem to have been predicated on a blind acceptance of the need for a reliefs capping provision in the first place and, as a consequence, ignore the more fundamental question. Which is “Do you agree with the Government’s view that there is a need for a cap on income tax relief.” In recognition of this omission AAT asks that as much consideration is given to sections 4, 5 and 7 of our response document as to section 6.

5. CONSULTATION QUESTIONS

“Do you agree that a new definition of adjusted total income for the purposes of the cap is required?”?”

5.1a AAT agrees that a new definition of adjusted total income for the purposes of the cap is required.

5.1b The inclusion of the new definition into proposed legislation will have benefit of affording a level of certainty to all those that might either be affected by, or those required to apply, the cap.

5.1c We are concerned that the omission from the consultation document of a clear first draft of the proposed definition of adjusted total income for comment is an opportunity missed.

5.1d In addition to the publication of the new definition of adjusted total income we recommend the design and publication of some practical examples of the calculation in action.

5.1e If the suggestions made in 5.1c and 5.1d are taken up, we recommend that respondents to this consultation are given an opportunity to review and comment upon the suitability of draft legislative clauses and the accompanying guidance at an early stage. The adoption of the suggested course of action will result in a better outcome for all interest parties.

“Do you consider that the definition of adjusted total income for the purposes of the cap – set out in paragraphs 3.6 to 3.11 – achieves the required parity between different pension arrangements?”

5.2. Taking into account the comment made at 5.1c (above) we consider from the explanation of its operation that parity between different pension arrangements is achievable. Our response is qualified due to the absence of a clear and tightly worded definition.

“ Do you consider that the proposed mechanism for allowing relief obtained via Payroll Giving to be included in the definition of income is satisfactory?”

5.3 AAT agrees that the adding back of payroll giving deductions to arrive at the taxable pay for cap valuation purposes is a fair method of dealing with such deductions from pay. To do otherwise places those who choose payroll giving as their method of donation at a disadvantage. Worse it could discourage them from using payroll giving as their method of donation.

“Do you see any opportunity for errors or misunderstanding in the application of the cap? If yes, please suggest how you believe HMRC guidance or processes could help manage this.”

5.4 We do not see any opportunity for errors or misunderstanding. However, we do believe that there is a need for a clearly worded definition (see 5.1c above) and guidance (see 5.1d above) to ensure that the opportunity for errors and misunderstandings are minimised.

“ Do y o u h ave any f ur t her c omm e n t s on t he pr a c t i c a l i t i e s of calcu l a t ing or a pp l ying t he c ap?”

5.5 We do not have any further comments to make in respect of the practicalities of calculation or application.

Summary

6.1 AAT is very supportive of the Government’s attempts to balance public finances. However, given that the proposals in respect of the capping of reliefs are not specifically designed to target tax avoidance (page 3). However, we do have concerns over the introduction of what could be perceived to be a disproportionate measure to ensure that those with the most income, will also pay the most tax. We feel that it will have unintended consequences further down the income chain other than Government’s intended objective and, as a consequence, act as a disincentive to would be entrepreneurs. 6.2 AAT does not support the proposal to implement a cap in respect of losses accruing to individuals carrying on a trade, profession or vocation as given in 1-3 (condoc page 9). Our members’ experience of sole traders and partners is that they genuinely carry on their trades with a view to making a profit. If the Government or HMRC is detecting a growing problem in this area we endorse the use of a more targeted countermeasure to resolve the issue.

6.3 We would like to reiterate our earlier comment (paragraph 4.18) that if a static figure of £50,000 were to be introduced, over time the impact of fiscal drag would result in many more being affected by the measure than had originally been intended.

6.4 Ignoring our reservations in respect of the wider operation of the Capping relief proposals, AAT’s main concerns in respect of the questions set out in the condoc was that whilst we agree there is need for a clear definition of adjusted net income we did not feel that there was one set out in the condoc even though it did manage to get across by the inclusion of examples what was meant. We would recommend that HMRC work with lead tax and accountancy bodies to construct a clear definition of adjusted net income and to back it up with a suite of practical examples.