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WHISTLEBLOWER IS OUR normal recipient of articles left under the photocopier lid, unused first drafts, etc., but he has passed the following on to me saying it was 'too hot to handle'. I can't make head or tail of it, but I thought our readers might.
'I have great pleasure in presenting my tenth and last — did you get that, Tony, last — Pre-Budget Report. I know you were expecting something spectacular, but quite honestly I just can't be bothered. If you haven't realised by now that I like to keep all the good news to announce on Budget day, then my cynical comment in the piece about ISAs (which you will find waiting for you in the Vote Office when I sit down) that the limit will be “at least £7,000” should finally have made it obvious that the best you are going to get today is the sizzle, not the steak.
'We had a competition in the Treasury to come up with the most boring and obscure subjects that we could major on in the Report, a bit like the guest magazine of the week on “Have I Got News For You”. Ed suggested stamp duty land tax, so we did a bit on that, but it almost got interesting so we stopped. Dawn wanted VAT, but that's a bit tricky at the moment, what with HMRC sending out cheques for billions of pounds made out to “A Fraudster Esq”. Then Stephen suggested life insurance companies. What a winner! Six PBRNs on life insurance and friendly society taxation (eight if you include the ones on reserves and Lloyd's), almost more than the number of people who will actually care about them. And none of them mention the changes to pension term assurance — not that we've actually decided what they are yet...
'Of course there were a few nearly interesting things we had to include. For example, we had wanted to limit the right to take an alternatively secured pension to those who could prove that they had a religious objection to pooling mortality risk.
However, I'm also announcing the creation of an independent body to oversee planning, and I don't want them overloaded with new applications to build meeting halls for the Brethren, who would be flooded with thousands of converts. So instead I can announce that we're going to force people to take an income of at least 65% of the level annuity rate and allow them to take up to 90% — still on the mortality tables for a 75 year old, whatever age he or she has actually reached.
Then when he dies we're going to impose an unauthorised payment charge on a transfer to other scheme pensions, and if there's anything left we'll charge IHT on that. Just get the message, will you — most of you are meant to be buying annuities.
'That's about it, really. Dull as ditchwater. Of course some people will find anything interesting. That Peter Arrowsmith will probably be interested in the new personal allowances and NI limits, though there's nothing surprising about them. He might also ferret deep enough into the paperwork to realise that my long piece about the need to extend child benefit to pregnant mothers from the 29th week of pregnancy, in recognition of the importance of a healthy diet and the additional costs faced before and at the time that a child is born, doesn't actually come into effect until April 2009. And no doubt some smart Alec (my money's on Peter Penneycard from PKF) will point out that in exempting microgeneration income from income tax I've given David Cameron a tax break for the wind turbine on his house.
'But these are just crumbs; cold comfort for all those magazines and newspapers who have put aside pages and pages for coverage of my speech, and now have to fill it up with speculation and comments about what I am not going to say to you here today. Like dealing with residence and domicile, for example; or the taxation of small businesses. Just because consultation documents were issued years ago doesn't mean that I have to do anything about them.
'That's it, I commend the speech to the house etc etc. Now who had ten minutes dead in the sweepstake? Oh, it was me. What a surprise ...'.
Mike Truman.
Green changes
Following the Stern review and the press speculation, we waited with baited breath for the radical green changes. There were some changes but not as many as were expected and certainly not enough for tax practitioners to get excited about. The changes made include the following:
The landlord's energy saving allowance (LESA) has previously only been available to individual landlords who let residential properties. It was intended to provide an incentive for landlords to be energy efficient but would find it difficult to recover the costs through increased rents. The 2007 Budget will extend the availability of the allowance to companies that let residential properties and the existing cap of £1,500 will be changed from per building to per property. This is good news for landlords with a number of flats in the same building. Going forward, qualifying expenditure will also include the installation of floor insulation and the allowance will now be available until 2015. As these changes amount to state aid, they are subject to EU approval.
Following the reform of company car tax in 2002, the taxable benefit is based on carbon emissions. The 2006 Budget announced a decrease in the carbon dioxide per kilometre figure for the lower threshold rate of 15% from 140 grammes to 135 grammes, together with a new 10% band for cars with emissions of up to 120 grammes per kilometre, from 6 April 2008. It was announced that the Government will consider company car tax thresholds for 2009-10 in the 2007 Budget, as well as favourable tax treatment for 'flex-fuel' vehicles, which are capable of using high-blend bioethanol E85.
As part of the Government's battle against the climate change problem, air passenger duty rates will be increased with effect from 1 February 2007. The lower intra-European rates will be increased from £5 to £10 for the economy rate and the non-economy rate will be increased from £10 to £20. The rates for passengers flying to other destinations will be increased from £20 to £40 (economy) and from £40 to £80 (non-economy). From the same date, the scope of the 'European rates' of duty will be extended to include flights to those countries that signed up to the European Common Aviation Agreement
The rate of landfill tax has also increased. As from
1 April 2007, the standard rate of landfill tax will be £24 per tonne, up from £21. The lower tax rate applicable to inactive landfill waste disposals will remain at £2 per tonne.
Other green changes announced were as follows.
- Tax exemption for sale of surplus energy to energy companies where the householder does not sell it in the course of a trade.
- Inflationary increases in the excise duty rate for road fuel and the effective duty rate for non-road fuels as from 7 December 2006.
- Increases in the effective duty rates for biodiesel and bioethanol, and natural gas to maintain the differential with main road fuels; an increase in the effective duty rate for LPG to reduce the differential with main road fuels by the equivalent of one pence per litre.
- A series of tax incentives for the development of biofuels.
- Amendments to the schedule of excepted vehicles entitled to use rebated gas oil.
- The aim to introduce a stamp duty exemption for 'zero carbon' homes in 2007.
Paula Tallon, Chiltern plc.
Managed service companies
The Pre-Budget Report includes consultation on legislation in respect of managed service companies (MSCs), designed to counter their 'unfair competitive advantage over compliant businesses and workers'. The MSC is basically a communal personal service company, where a 'scheme provider' forms and runs a company — the MSC (also known as a 'composite' or 'managed personal service company'). Usually between ten and twenty otherwise unrelated workers are employee/shareholders of the MSC, which generally contracts with an agency, which in turn finds work with a client for the worker. The client pays the agency for the worker's services, which takes a fee, before making payment to the MSC. The MSC deducts a fee for managing the company and then pays a salary and/or dividends to the worker, who will own a separate class of shares from the other worker/shareholders.
Although HMRC accept that the IR35 legislation applies to such an arrangement (and did admit that in a small number of cases it had 'recovered money from a director or shadow director using the provisions of the Insolvency Act'), it states that 'these rules are in the vast majority of cases not being followed by MSCs, which are therefore avoiding employed levels of tax and NICs'. There is also concern that because the worker is employed on an ongoing basis by the MSC, work for different clients enables each assignment to be treated as a temporary workplace so that the rules for travel and subsistence expenses can be used to advantage.
HMRC's view is that 'MSCs are almost invariably disguising employment' and, with a view to providing a level playing field, a consultation document, Tackling Managed Service Companies, sets out their thoughts and draft legislation. Rather than allocate more resources to trying to enforce the IR35 regime, HMRC's draft legislation will work in a similar way to the IR35 legislation by applying PAYE income tax and NIC liabilities to all of the income received by a worker via an MSC. HMRC will also be able to pursue third parties for any unpaid PAYE income tax and NIC liabilities in the event that the MSC goes into liquidation.
It is proposed that legislation will apply from 6 April 2007 for income tax purposes and from Royal Assent for NIC. Peter Arrowsmith said that 'as far as the National Insurance side of things goes, I assume that this will be through some legislation equivalent to the “Personal Liability Notices” provision found at Social Security Administration Act 1992, ss 121C and 121D. Draft legislation on this latter aspect is promised for the end of January 2007'.
HMRC estimates that the measures should yield tax in excess of £1 billion over the first three years of operation. With regards to those 'limited numbers of MSC workers who are in business on their own account, and the underlying contract is one of self-employment … in order to continue to trade in the corporate form but not pay employed levels of tax and NICs … these workers would have to move into personal service companies'.
Yesterday's demons are thus today's guardian angels.
The consultation document is on the Internet at http://snipurl.com/MSCdoc and the consultation period runs until 2 March 2007.
Richard Curtis
TAARed with the same brush
The editor asked me to write up all the announcements relating to capital taxes. Perhaps he was expecting a radical rethink of the inheritance tax rules; after all, they have looked decidedly unworkable ever since 22 March 2006. Or perhaps he was expecting some tinkering with the capital gains tax taper relief regime as (consequential amendments excepted) they seem to have been overlooked in the past four Finance Acts.
So when the Chancellor sat down, I downloaded all the material on the HMRC and Treasury websites. I then trawled through it all for something to write about — not relying on reading only the headings to the various documents. I did not want a repeat of the experience of overlooking the radical proposal to change the self assessment time limits simply because they were buried in a partial regulatory impact assessment relating to the proposed increased use of online services.
For a while it looked as if I could have spent my afternoon at the gym. However, eventually, I found something that fell within my remit — the introduction of a targeted anti-avoidance rule for capital gains tax.
The new rule extends to capital gains tax one of the so-called targeted anti-avoidance rules ('TAARs') which were announced for corporation tax in the 2005 Pre-Budget Report. Consequently, the amendments made to TCGA 1992, s 8 in FA 2006 are to be reversed. The provisions which had been inserted into s 8 are to be moved to a new s 16A. This new section will provide that all capital losses (and not just those relevant to corporation tax) will be unable to be set off against gains if the losses arise directly or indirectly out of arrangements a main purpose of which is to secure a tax advantage. Section 16A will have effect for any disposal made on or after 6 December 2006.
The wording of proposed s 16A is to all intents and purposes identical to that previously inserted into s 8. Nevertheless, HMRC claim to welcome comments on the draft clause and guidance.
In the guidance, HMRC provide seven examples showing when they will and will not apply the rules. For example, timing a disposal so as to match a loss with a known gain is deemed in the draft guidance not to constitute an arrangement with a main purpose of gaining a tax advantage. Furthermore, HMRC are happy for such losses to be 'imported' from taxpayers' spouses/civil partners. Whilst such planning techniques are relatively benign, it is hard to see why they do not fall within the terms of the legislation.
Perhaps one should be grateful for any form of guidance. However, extra-statutory material is not an adequate substitute for clear legislation. As we all know, guidance can change over time. And, even when the guidance remains unchanged, there are occasions when HMRC unilaterally choose to disapply it.
By the way, is anyone interested in my spare copies of leaflet IR20?
Keith Gordon, Atlas Chambers.
Powers, PBRs and patience
If you were looking for a grand statement on the way HMRC is progressing on the review of its powers, the Pre-Budget Report was not the place to look.
Tucked away in the detailed Report itself (paragraph 5.92) is a reminder that a major overhaul of the powers remaining from the legacy tax departments of the Inland Revenue and Customs and Excise is on-going. We have had two consultations to date, but more are yet to come. The Pre-Budget Report tells us that we are going to receive a detailed consultation on penalties on incorrect returns and a further consultation on criminal powers.
Going back a stage, it is worth remembering that the powers review is a fundamental and possibly once in a generation opportunity to rethink the way HMRC undertakes investigations, enquiries and interacts with taxpayers. Every single rule and procedure is up for review. The task is so large and potentially so daunting that it is little surprise that extensive consultation is the only way to take issues forward, without accusations of a power grab, cherry-picking all the best powers from each of the old departments. We should be heartened that we are going to get a chance to input further before any final decisions are taken.
HMRC's controversial interventions pilot is not mentioned in the PBR. It has been temporarily stalled as HMRC take stock on whether a more interactive, but less safeguarded approach to taxpayers is the right way forward. It would be no surprise to discover that interventions brought in enough money to make them far too attractive an option to disregard in their entirety.
We know in relation to the new consultations that on penalties HMRC is keen to get some consistency in how penalties are used in cases around the UK. However, will it mean a consistent but higher amount? On criminal powers, consultation has shown a general interest in moving towards a linkage to existing police powers but there are concerns about handing HMRC powers of arrest. The further consultations will therefore be awaited with interest.
