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Another fine mess

Recent changes to the tax system do not give RICHARD MANNION much confidence in the way that tax legislation is made


  • Some changes in the 2007 PBR were entirely unexpected
  • Ireland has created a new Commission on Taxation to review its tax system
  • How the opposition parties might review the UK system
  • Tax is too important to be a means of political point scoring

When Mr Darling announced that he would give his first Pre-Budget Report on 9 October, all political commentators were predicting an autumn election.

On that basis it was expected that the Pre-Budget Report would be a holding exercise with a more detailed review to be carried out after the election.

However, immediately before the PBR, the Tories started to gain ground rapidly on the Labour party and their autumn conference attracted huge media interest.

In the course of the conference, the shadow Chancellor George Osborne said that when they got into Government, the Tories would take action to alleviate the inheritance tax burden created by rising house prices. In addition, they would tackle the perceived unfairness of the tax breaks for non-domiciled individuals.

Just a few days before the PBR, it was confirmed that there would be no election in 2007. It then came as a huge surprise on 9 October to hear Alistair Darling announce an important new relief from inheritance tax for married couples, a complete regime change for capital gains tax, and far-reaching changes to the rules for non-domiciled individuals.

It is understood that the inheritance tax relief had been under consideration for some months, but the capital gains tax and domicile changes were entirely unexpected bombshells.


While it is true that there had been a good deal of press comment regarding the 10% tax rate enjoyed by so called 'fat cats' in the private equity industry, there had been no indications that the capital gains tax system established by Gordon Brown in 1998 had become a 'failed system' which needed radical overhaul.

Certainly there had been no public consultation by HM Treasury or HMRC regarding the health of that system and the need for change.

The non-domicile rules had been the subject of review for many years, but each time the papers had been filed away in the 'too difficult' drawer. This was presumably because it was recognised that any action taken to tighten up the non-domicile rules could discourage wealthy individuals from other countries coming to the UK.

Certainly there had been no recent public consultation preceding the PBR on how the rules might be changed in order to produce a workable system. The non-domicile proposals and the subsequent draft legislation gave every indication that the rules had been prepared in a mad rush.

In the weeks following, Mr Darling found himself under siege from the professional bodies and other interested parties in respect of both the non-domicile proposals and the increase in the capital gains tax rate for entrepreneurs.

Unnecessary uncertainty

At the same time he came under huge pressure regarding the Government's proposals for countering 'income shifting' in family businesses. These would have resulted in huge administrative burdens for a substantial number of businesses and an additional layer of complexity for those taxpayers that far outweighed his attempts at simplification announced in the PBR.

The original non-domicile proposals underwent many changes and, consequently, it was virtually impossible for advisers to give their clients precise advice on the impact of those new rules in advance of the 6 April deadline.

In January, Mr Darling announced a major change to the original capital gains tax proposals when he introduced entrepreneurs' relief, followed some time later by detailed rules which were just about as complicated as you could make them. Then on Budget Day he announced that the income shifting proposals were to be delayed by 12 months to allow further consultation.

On 19 March, Alistair Darling was asked in the House of Commons why he had not delayed the changes to the non-domicile rules and the capital gains tax regime. He replied: 'most people believe if you cannot decide what to do, you should just get on and implement it'.

In my view, if you cannot decide what to do, you should delay making a decision until you have carried out the necessary research and analysis.

In March 2008, the Treasury business and indirect taxation director, Edward Troup, said in his evidence to the Treasury Select Committee that there had been considerable misunderstanding over the number of businesses that would be affected by the income shifting proposals.

He said that the Treasury had been quite clear that the rules were to act as a deterrent to those who wanted to mitigate tax in a way that the Government did not intend. He also stated that the rules were not intended to be an administrative burden for small businesses.

I can only assume that Mr Troup had not studied the consultative documents issued by his department. If he had done so, he would have realised that the judgments needed to decide whether income had indeed been shifted would have involved a huge amount of record keeping and subjective analysis.

Bearing in mind that HM Treasury is supposed to be in charge of the long-term planning of the UK tax system, there appears to be a worrying lack of understanding of the impact of tax policy in the real world and in particular in the real world of small businesses.

Is there a better way?

The background explained above suggests that this is no way to run a tax system. And this raises the question of whether there is a better way. It is interesting to note that Ireland established a Commission on taxation on 14 February 2008 to review the structure, efficiency and appropriateness of the Irish taxation system.

The Irish equivalent of our Chancellor of Exchequer indicated that the Commission's work would help to establish the framework within which tax policy would be set for the next decade and it should take a strategic, considered and balanced perspective that recognised the evolving challenges ahead.

The Commission comprises experienced members from all sectors of the Irish economy, led by the recently retired chairman of the tax authority.

In a speech given in February, the shadow Chancellor, George Osborne, said that Mr Darling's Pre-Budget Report had been a perfect lesson in how not to make tax policy and he referred to badly thought-through proposals announced with no consultation and with no reference to underlying principle.

Mr Osborne concluded that we urgently need a new approach and a fundamental rethink to prepare the UK tax system for the 21st century. This would involve designing tax policy to address long-term challenges and based on solid underlying principles.

He referred to his service on finance committees in the House of Commons when he had watched in dismay as the Treasury produced hasty and ill-thought out changes to the tax code which then passed into law with little consultation and no scrutiny.

Mr Osborne called for long-term reforms to the way we make tax law in this country, including a requirement for the Treasury to publish technical changes to the tax system in the autumn before the Budget.

This would enable proposed changes to be scrutinised by a new Parliamentary committee which would take evidence from external experts from the tax professions.

In this way, by the time legislation reaches the statute book, it would be thoroughly examined and scrutinised by the people who would have to implement it.

Perhaps his most fundamental proposal was the establishment of a new office of tax simplification which would examine the existing tax system and make proposals for simplification.

Focus groups

Turning to the Liberal Democrats, they published a paper in 2007 entitled 'Fairer, simpler, greener' in which they proposed the establishment of an independent tax law commission, modelled on the existing Law Commission, to review existing tax legislation and make recommendations for reform.

In addition, they proposed splitting the Finance Bill process into a shorter annual Finance Bill covering basic tax changes, together with a Tax Reform Bill which would cover technical reforms and long-term proposals for reform of the tax system over a period of years.

Various stakeholders such as trade bodies, unions, professional advisers and lobby groups would be invited to play a full part in the process.

Mr Darling's recent announcement that he is going to establish a high-level group of executives to look at the long-term challenges to the UK tax system, particularly those affecting multi-national corporations, is a welcome step in the right direction.

However, this working party needs to be much more than a talking shop if we are to see any tangible benefits and there is a danger that the new group could be used as a smokescreen to divert us away from the real issue.

I am conscious that whenever Dawn Primarolo was asked about her plans for simplification of the tax system, she would point to the Tax Law Rewrite process, but of course writing extremely complex law in simpler words did absolutely nothing for the cause of simplification.

Without wishing to beat any particular political drum, the sort of thinking coming from the main opposition parties sounds eminently sensible and I will be waiting to remind them of their proposals if they come into power. Bearing in mind that much of the 2007 Pre-Budget Report seems to have come out of the Tory conference, could it be that once again Mr Osborne will find that his proposed reforms have become Labour party policy?

The fundamental point is that the country needs a framework for establishing tax policy for at least the next ten years and not a series of knee-jerk political reactions. The UK tax system is far too important for politicians to mess around with.

Richard Mannion is national tax director at Smith & Williamson and can be contacted on


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