The major changes to taper relief have broadly received a favourable press, with the ability to benefit from a capital gains tax rate of only 10% after four years being welcome news to many investors. However, there are some anomalies. The main one is that shares bought before 6 April 2000 may suffer a higher rate of capital gains tax than those acquired later: this quirk arises where the earlier shareholding changes its status to a business asset as a result of Budget changes. It is difficult to understand the policy reason for taxing assets held for a longer period more harshly than those held for a shorter period.
The chancellor also announced that all shareholdings held by employees in ‘quoted trading companies’ would qualify as business assets and hence benefit from the enhanced taper relief. One might expect it would be easy to identify whether a FTSE quoted company qualifies under this rule, but unfortunately it is not: any investment activities could prejudice the qualification. The Inland Revenue’s initial reaction was that quoted groups would have to monitor their status on a daily basis: hardly a practical answer. We hope the definition can be amended during the passage of the Bill.
The changes to the taxation of company cars were announced some time ago, and are now being enacted with effect from 2002-03. However, the benefit is still to be based on the list price of the car, not the actual cost to the employer. This is inconsistent with other benefits and will create uncertainty since the DTI has advocated the abolition of the recommended retail price for cars.
Less well-publicised was the possibility that mileage rates for employees using their own cars are likely to be amended, and will be ‘improved’ in order to send better environmental signals. This makes it very difficult for employers and employees to make informed choices on company car policy.
The IR35 debate continues, and, in particular, the position for subcontractors in the construction industry is causing concern. There is no interaction between the tax regime for subcontractors and that for personal services, which means many subcontractors will suffer a marginal tax rate of over 60%.
Whilst this will be only a cash flow cost, cash flow is important. A simple solution would be to allow the subcontractor to deduct the tax already paid under the deduction scheme from his PAYE liability.
The changes to charitable giving will result in a significant boost to charities’ incomes, and the simplification of the gift aid scheme has been welcomed. However, the CIoT remains concerned at the policy decision to link the tax credit on charitable giving with the tax paid by individual donors. We fear many pensioners will sign declarations in error, or will be embarrassed to have to disclose to their local Church Treasurer that their income is too low for them to be a taxpayer. Furthermore, the record-keeping requirements are burdensome for those who are not higher rate taxpayers. We find it hard to believe the amounts of tax involved justify the regulatory burdens.
The increasing rates of stamp duty are focusing more attention on this area. It now seems particularly anomalous that there is no relief for the transfer of a business as a going concern, unlike the position for capital gains tax and VAT. Even worse, clause 118 of the Bill would impose a charge to duty on a gift of land to a company in pursuance of the incorporation of a business: a potential trap for those advising entrepreneurs in this area. It is time for a thorough review of the stamp duty legislation.
In many ways, it is hard not to be disheartened by this Finance Bill: it appears the calls for a simpler tax system have not been heard. All we can do is to keep consulting, keep pointing out the anomalies and keep asking whether the potential benefits justify the regulatory burdens.
– Heather Self is the chairman of the Chartered Institute of Taxation’s Technical Committee and a partner with Ernst & Young.