There have even been cases of listed companies suggesting that legislation would be introduced in the 2001 Finance Bill and working towards restructuring operations on that basis. When the legislation failed to appear they had to abort their plans, resulting in a fall in share values.
The main driver for the Treasury seeking reform is international tax competition. Other European countries already offer relief or, have been formulating their own reforms. The starting points for reform in certain European countries were from much worse positions than in the UK, but they have now leapt ahead – notably Germany.
My concern is that the government is trying to reform as little as it can get away with.
First, the vast majority of those involved in the consultation process wish to see an exemption of the gains, rather than the compliance burden, which would follow the adoption of a deferral system. The exemption would provide certainty and future transparency. Whether a dividend exemption is adopted or not, it is unnecessary to have a substantial shareholding threshold as the only criteria for the relief.
Surely the entire justification for the reform is to help businesses restructure without tax penalty. I am concerned that joint ventures and consortia would be caught out by a fixed 20% equity ‘holding’ rule. Where companies adopt FRS 9 to account for the investment, they should also qualify.
Secondly, the foreign dividend exemption is not acceptable in the way it is proposed. Basically, the proposal will by-pass or complicate the onshore pooling rules and result in a greater tax burden for the company as it will no longer be able to mitigate the tax suffered on the ‘low tax’ dividends.
Thirdly, the six-year claw back period is totally out of touch with commercial reality. The section 179 provisions should only be used for anti-avoidance and the time limit should be reduced to two years.
My final plea is to ask the chancellor for a pre-budget announcement on the effective date of the new reforms, together with draft clauses.
- Chas Roy-Chowdhury is head of taxation at ACCA./i>