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KEVIN SLEVIN FTII, ATT, TEP highlights a grey area in the taper relief provisions which requires urgent attention.
Any reader who has been left no alternative but to advise on the issue of taper relief will know the meaning of the word insecurity so no further comment is called for. However, this article is not another article in the debate about what is and is not to be regarded as a 'security' for the purposes of taper relief.
KEVIN SLEVIN FTII, ATT, TEP highlights a grey area in the taper relief provisions which requires urgent attention.
Any reader who has been left no alternative but to advise on the issue of taper relief will know the meaning of the word insecurity so no further comment is called for. However, this article is not another article in the debate about what is and is not to be regarded as a 'security' for the purposes of taper relief.
Why not? Because after handling numerous cases where this matter has either been relevant, very relevant or extremely relevant, I have to confess not to know for certain how one should interpret the word 'security' in the context of taper relief. I have a personal view of the law but my clients are seldom interested in my personal view of the law. They are mostly interested to know what I think the Revenue might think! (For the full background to issues relevant to this article, see Mark Rowland's article in Taxation, 5 July 2001 and the article by John Tallon QC in Taxation, 16 August 2001.)
Of course, I can say with some authority what is not going to be accepted by any switched-on Inspector of Taxes as a security. Furthermore, I can talk at length about the strength of any case we might wish to make to the Special Commissioner if the client – or his solicitor – thinks he knows best and wishes to be more bullish than he thinks I am allowed to be by the constraints of my profession. But I cannot point towards any source giving the Revenue's definition of security in the context of taper. If the Revenue knew the definition, it would have published it by now.
But surely the Tax Bulletin article (Issue No 53) said it all? – far from it! The Revenue could not define security with certainty any more than the tax profession. The Tax Bulletin article was intended to be helpful and it was. But in effect, reading between the lines, it was saying 'we don't know either'. The most direct statements in the aforementioned article on the topic in question – for perfectly understandable reasons – can be listed as follows:
- 'It is our view that not all debentures will be securities'.
- 'We think …. that a company debenture possessing the characteristics of "the debt on a security" will be a security in the context of section 132, Taxation of Chargeable Gains Act 1992. We therefore accept that any such debenture will also be a security for taper purposes.'
- 'Any question as to whether a particular instrument was a security would, in the first instance, be a matter for the relevant Inspector of taxes to consider.'
This is not exactly a definition, is it? As a Chartered Tax Adviser who deals almost every working day (or so it seems) with taper relief, I believe this relief needs to be revised in many respects but none more so than as regards the meaning of security. Whatever the rights and wrongs of the current situation as to the meaning of security, something has to be done (and done quickly) if the Chancellor's clearly stated aims for the tax system in this area are not to be partly frustrated by the system itself. It is understood that taper relief went from being a twinkle in the Chancellor's eye to draft clauses of the 1998 Finance Bill in an incredibly short space of time, especially given the radical nature of this major tax change and its importance – in particular, its impact on the business community.
The Chancellor has already demonstrated a refreshing approach in his handling of tax matters by repeatedly being willing to re-visit legislation that he has introduced so that it can be 'fine tuned' so as to ensure the objectives are reached. It seems that gone are the days when the Government would simply refuse to listen to any criticism of a tax measure no matter how constructive and well intentioned that criticism was. In the past it seemed the concern of Government was not to be seen to have got it even slightly wrong! Whereas now the focus appears to be on getting it right. In my view this is a major step forward that has largely gone unnoticed.
Memo to Chancellor – urgent please!
It simply cannot make sense for the current situation to prevail much longer. Thousands of pounds in professional fees are being incurred by business men and women trying to realise their business assets and no doubt similar sums are being incurred by eager acquirers trying to invest in the future – and doing so without having to immediately part with cash. Many tax professionals are engaged in what may, at first, seem like a merry-go-round but which often turns into a chamber of horrors.
There is absolutely no doubt in my mind that there was never a moment's serious thought given to this complex issue by the draftsman of the legislation. If he had invested ten minutes of his valuable time on the point at issue, he would have simplified matters. Likewise, I am convinced that the Revenue was too busy making the legislation work to spot the problem and nip it in the bud.
Of course, we all know the situation changes with effect from 6 April 2002 because most vendors selling their business at that point in time will simply ensure that, if part of their consideration is to be satisfied by the issue of loan notes, the loan notes in question will take the form of qualifying corporate bonds, thereby freezing (and thereby securing) the vendors' entitlement to taper relief as at the date of disposal. (After 5 April 2002, it will only be proprietors disposing of their businesses with less than the maximum entitlement to taper relief who will be interested in what is and what is not a security – for example, those who have recently incorporated a business previously operated as a sole-trader or in partnership.)
But what about the position from 6 April 1998 to 5 April 2002? It cannot be right for the Treasury to simply weather the storm between now and next tax year and let, dare I say, the present 'circus' continue for another five months or so.
What is needed is decisive action by the Treasury. All that is required is a simple announcement to the effect that the Chancellor has once again demonstrated his commitment to enterprise by stating that he is going to simplify immediately the taper relief provision by introducing a statutory definition of the word 'security' (applying to all securities, i.e. not just those obtained wholly or partly in exchange for shares).
If such a stand alone all singing, all dancing definition is not easily produced, section 251(6), Taxation of Chargeable Gains Act 1992 should be extended so as to apply to taper relief in respect of securities applied following a reorganisation as set out therein. Furthermore, the announcement should also say that, while the legislation has hitherto been silent on the point, the Government is to give retrospective effect to this legislative change in any case where the taxpayer so elects. At the stroke of a pen, the Chancellor could introduce a degree of certainty into the mergers and acquisition business that has not existed for some time.
I am not asking for the moon – just for a little less insecurity for my clients.
Kevin Slevin is a tax partner with Francis Clark and a member of the Council of the Chartered Institute of Taxation. He can be contacted on 01752 301010; e-mail kss@francisclark.co.uk.
