The UK tax system has become so complicated that it now eludes proper democratic control. When the Tax Faculty of the Institute of Chartered Accountants launched its Ten Tenets Towards a Better Tax System discussion paper in October last year, we did so in order to draw attention to this pressing public policy issue.
The campaign has increased significantly in momentum over the last nine months.
In May, we published a detailed booklet explaining the thinking behind each of our proposals.
In one chapter of this we used our ten guiding principles as a marker by which to assess how well the new rules for personal service companies (IR35) fare when put under close scrutiny. The results were not encouraging.
The Inland Revenue has publicly taken issue with some (although by no means all) of our views.
We welcome this dialogue and hope it can help to move the debate forward.
At the same time, we believe there is still much that the Chancellor and the tax authorities have failed to address.
In its response (which can be found on the Revenue’s website), the Revenue provided useful clarification on a number of issues including our concern over PAYE liability in the case of overseas service companies and the application of the agency rules in partnership cases. At the same time there were many issues we raised that were simply not addressed.
So, in the spirit of public debate we have reappraised IR35 against the 10 tenets in the light of these clarifications from the Revenue. The results still leave room for significant improvement.
Tenet 1: legislation should be enacted by statute, with proper Parliamentary scrutiny.
The proposals are written into primary legislation and will form part of the Finance Act 2000. Sadly, though, it has become clear that the Chancellor’s intention with these proposals is far broader than he first stated. Mark: 7 out of 10
Tenet 2: in almost all circumstances, the application of rules should be certain.
These proposals are widely drawn, then reduced by exceptions. This leads to anomalies. And there is uncertainly about the dividing line between who is an employee and who is self-employed. These proposals will create real uncertainty if taxpayers are unsure of their status. Mark: 3 out of 10
Tenet 3: tax rules should aim to be simple, understandable and clear in their objectives.
Positively, the rules use the style developed by the Tax Law Rewrite Project, but strangely they do not follow this consistently. We as tax specialists did not fully understand all the draft legislation which reinforces the complications that will be faced by others having to use the rules. Mark: 2 out of 10
Tenet 4: tax should be easy to collect and to calculate.
Collection is straightforward and will be through the PAYE system. The calculation is complicated by the uncertainties as to which contracts are caught. And there will be problems calculating liabilities in time for when payment to the Revenue is due (which will normally be 19 April after the end of the tax year) despite the Revenue’s concession that it will accept estimated figures at that stage if necessary. Any tax not paid by the correct date will be subject to an interest charge, which to most taxpayers will not be acceptable. Mark: 5 out of 10
Tenet 5: tax should be properly targeted.
We believe many people will be caught by these rules when there were probably not intended to be. Furthermore, many taxpayers do not readily know if they fall within the scope of the legislation. Mark: 5 out of 10
Tenet 6: changes to the underlying rules of tax should be kept to a minimum.
The proposals represent a major sea-change in the UK tax system. They will impact on many people in longstanding commercial arrangements, where the ground rules will now be altered. Like many other tax changes, this one appears to have been introduced to counter the unintended impact of previous policy changes; no doubt a further change will be needed at some point soon. Taxpayers are entitled to greater constancy. Mark: 1 out of 10
Tenet 7: all proposals should be subject to proper consultation.
The proposal was briefly mentioned in the March 1999 Budget. There was no formal discussion paper or consultation document. When wider discussions did take place, they were confined to problems of implementation, excluding the principles behind the reform. When draft legislation was posted on the Revenue’s website, it was marked ‘for information only’. Mark: 2 out of 10
Tenet 8: tax rules should be subject to regular review.
It is too early to judge this, but IR35 could have been an opportunity to build in an automatic timetable for a review. Mark: 5 out of 10
Tenet 9: tax should be fair and reasonable, with a right of appeal to an independent tribunal.
The new rules are both unfair and unreasonable. Unfair because they take a select group of people and treat them in a new way without making it clear how to determine who is and who is not implicated – or why. And unreasonable because, in an age of self-assessment, they require large amounts of subjective judgement which can be open to dispute. Mark: 0 out of 10
Tenet 10: tax should be framed to encourage investment, capital and trade in and with the UK.
These rules do not encourage healthy tax competition. They will distort business decisions and may make some businesses uncompetitive. Some will now be attracted to more welcoming tax regimes in continental Europe. Ironically, given the government’s enthusiasms, the information technology and e-communications industries could be particularly harmed. Mark: 0 out of 10
Judged against these 10 tenets, we have awarded the new personal service company rules a score of 30 out of 100. This is a poor result. But imagine how some of our older tax legislation could fare.
There is now a clear need to review all tax legislation against modern principles. We can’t think of a better way to start the new century.
– Francesca Lagerberg is senior technical manager of the English ICA Tax Faculty
English ICA Tax Faculty
Inland Revenue’s response www.inlandrevenue.gov.uk/IR345/comments.htm.
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