Governments have the right to change the tax laws. Taxpayers have thelcome. right to a degree of certainty in their tax affairs. Governments rarely bring in legislation which is retrospective to tax rules for a transaction that has already taken place; although it is not unknown, it is usually confined to cases of plugging a loophole in the system that is being blatantly exploited, or relieving taxpayers of unforeseen tax liabilities which parliament did not intend to arise when the legislation was introduced.
Yet there is another form of retrospection, when the law is changed from a future date which attacks a structure or arrangement already in place, but only from a specific date, usually the date of announcement or some future date. As a result, politicians can argue that the change is within their undisputed right to amend the tax law and is not backdated.
But three changes in this year’s Budget have disturbing consequences: the abolition of golden trusts; the foreign earnings deduction; and the cash basis for professions.
Attack on overseas trusts
When an attack was made on overseas trusts in the 1991 Finance Act, what is now TCGA 1992 s86 was introduced to charge the settler of an overseas trust to CGT on gains made by the trustees which, being outside the jurisdiction, would not be within UK CGT rules.
What is now proposed is that pre-19 March 1991 overseas trusts be brought into line with their more recent brethren. This can, however, present the settler with insuperable problems.
A case in point concerns a businessman caught in the property crash in the early 1990s who lost a large proportion of his fortune. He has retired from business and is living on a substantial pension in a comfortable house which his wife bought years ago. He had set up a children’s trust in the 1970s which has continued to prosper, and in the course of the professional management of its assets, realises substantial gains from time to time and has a number of valuable assets.
The settler was, of course, excluded from benefit from the trust, which still has a minor beneficiary. The trustees have a responsibility to the beneficiaries to manage the investments properly, which would inevitably entail selling and reinvesting which will produce substantial gains, and a charge on the settler, of several hundred thousand pounds.
Is it right the settler should face bankruptcy because he put assets legitimately in trust 20 years ago?
The foreign earnings deduction was originally introduced to encourage export for people working for substantial periods of time overseas at the sharp end of the export drive.
Many individuals are working abroad on the basis of their earnings escaping taxation. Overnight this advantage was taken from them and they will only end up with 60% of the salary they anticipated.
The foreign earnings deduction was hijacked by exceptionally high earners, but the solution may be to continue the relief until 5 April 1999 for existing contracts and to introduce a cap of, say, #100,000 to the earnings qualifying for the foreign earnings deduction in the meantime.
The third provision widely seen as unfair in is the abolition of the cash basis for professions. There are not any real objections to the principle of the change from a cash to an accruals basis, although this must make life more complex for many small businesses which qualify for cash accounting for VAT.
The main objection is the so-called ‘catch-up’ charge which hits harshly on the current partners who have to bear the charge for the benefits often obtained by partners long retired. The government did listen to many of the representations in this field and spreading the ‘catch up’ charge over ten years is undoubtedly of great assistance but it does not eliminate the problem.
The point about these changes is that existing taxpayers are affected in ways they could not reasonably have foreseen, which comes down to the extent to which taxpayers’ reasonable expectations should be taken into account by government when rules are changed.
Nigel Eastaway of TaxServe is chairman of the technical committee of the Chartered Institute of Taxation.
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