Double tax: It’s not too late to change your mind, Mr Brown

Most of the focus has been on the accuracy, or otherwise, of the Treasury’s figures. We now seem to have reached the point where the Treasury’s number of £100m can be understood, based on one set of assumptions, but that almost any other figure you care to name can be justified if the assumptions are changed. What is certain is that these proposals have caused a furore amongst businesses and that the Government is perilously close to a re-run of last year’s IR35 rumpus.

The CIOT, and other representative bodies, feel particularly aggrieved that the previous two years of consultation appear to have been largely a waste of time. We were told that mixer companies were not perceived as a form of tax avoidance, and there was no suggestion that they would be abolished. The new proposals are so radical, and so badly thought through, that the only sensible solution is for them to be removed from the Finance Bill whilst consultation – based on the Government’s real agenda – takes place.

The many problems of detail, which have already surfaced during the limited period for comment, start with the implementation dates. Different paragraphs of Schedule 30 come into effect on 21 March, 1 April and 1 July – but these provisions are inter-dependent, so any company wishing to pay a dividend under the “old” rules (which apply until 30 June) will have to recalculate any number of previous figures as a result of the, broadly welcome, changes for consolidated groups and previous mergers. These changes have already taken effect, but such is the uncertainty as to their operation that the Revenue have confirmed that companies can ignore them and carry on under the old rules for the time being!

Measures which are intended to be helpful to companies will also cause significant difficulties in the short term. Two key areas are the calculation of underlying tax rates for consolidated groups and an improvement to the rules for mergers.

For overseas consolidated groups, the underlying rate will be calculated by reference to the rate applicable to the whole group. This seems eminently sensible, except that the detailed wording is so complex that there is a question about whether the US system – which might have been expected to be the main target of the changes – is in fact included. Also, what happens if a second dividend is paid now out of profits which were already subject to a previous calculation under the old rules? There is a significant risk of double, or no, relief for some of the foreign tax.

The rules on mergers are also welcome at first sight. Previously, valid credits could be lost if an entity was not the surviving company in a merger. Now, the credits of both companies will be available for UK DTR. But, in theory at least, it is necessary to go back to the dawn of time to recalculate underlying rates of merged profits from the dim and distant past.

So even without the mixer proposals, we would be calling for a delay to enable the detailed changes to the DTR rules to be implemented properly. What of the mixer changes themselves? It is difficult to see what the Government’s true objective is here. There is talk of wanting Britain to be a competitive environment for business, and of a “balanced package” of measures – but some of the elements which will be attractive, such as the potential rollover relief for substantial shareholdings, are merely at the outline proposal stage. It is very much a case of jam tomorrow, and jam yesterday, but no jam at all today.

The key issue seems to be a misplaced sense of jealousy on behalf of smaller businesses. Such companies do not use mixers, mainly because the costs of setting up and running such a structure properly will outweigh the likely benefits. The Government’s view seems to be that it would therefore be fairer to take away this benefit from larger companies as well – but a levelling down of the playing field is hardly likely to help British business, whether large or small, compete effectively in the global marketplace.

It is still not too late to change your mind, Mr Brown.

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