Unfortunately, both of these have a deadline for responses of 11 August, barely seven weeks after they were issued and bang in the middle of the holiday season. The tightness of the timetable is unfortunate, given the significance of the potential changes, but is not wholly the fault of the Revenue. Rather, it is a further symptom of the government’s mishandling of the DTR debate.
Both consultations were announced on Budget day as part of the ‘balanced package’, which included the abolition of mixers. However, at that stage all we had was a clear picture of the tax raising measures and vague promises of future consultation on the reliefs.
On 3 May we had the announcement of the deferral of the DTR measures, and this was coupled with a much firmer picture on the consultations now under way. Perhaps rashly, Dawn Primarolo promised we would have draft legislation by the time of the Pre-Budget report in November: in practice, that means Parliamentary Counsel needs to start drafting in September.
So it’s time to tear yourself away from the rules of Quidditch and focus on the more arcane subjects of goodwill depreciation and rollover relief for shares. The second is perhaps the more straightforward proposal. Broadly, where a company sells shares, the disposal will qualify for rollover relief if a number of conditions are met.
The suggestion is that the shareholding should be at least 30% of the ordinary share capital and should have been owned for at least two years.
Reinvestment will be possible within the usual rollover period (one year before the disposal to three years afterwards) and can be made either into qualifying shares or into other assets such as land and buildings.
Clearly this will be a measure broadly welcomed by companies, since it will reduce tax costs. However, there is a risk that it will be so hedged around by anti-avoidance measures that actually claiming the relief will be as hard as catching the Golden Snitch (you have probably gathered by now that my holiday reading definitely includes Harry Potter).
Rules to prevent value-shifting are a necessary precaution, but does the relief also need to exclude close companies and any disposal to a connected non-resident? And would a limit of 20% rather than 30% be more appropriate, given the link to the requirement for equity accounting?
The goodwill debate is a difficult one. Again, this is a relieving measure and so will receive at least a cautious welcome, but note the proposal is if relief is given by amortisation, profits on sale will be fully taxable without rollover relief.
It does not take much thought to recognise that tensions between buyers and sellers will increase on many deals: the buyer will want assets, to get amortisation, whereas the seller will want to sell shares in order to claim new rollover relief. It is a pity the two consultations are being conducted simultaneously but separately: there are several overlapping areas that need to be co-ordinated if the end result is to make sense overall.
The big question in relation to goodwill is whether relief should follow the accounts or be based on a capital allowances regime.
The Revenue seems to be indicating a preference for the former, with hints that other areas of difference between accounting and tax law could be reviewed in the future. Intuitively, I think this makes sense: but I am not convinced the government would take the risk of being bound to follow accounting depreciation policies.
The worst outcome, in my view, would be a system that supposedly follows the accounts but imposes complex definitions and limits on acceptable accounting policy. Might it be better to stick to a capital allowances system for goodwill? If so, do businesses want a more far-reaching review of the system, or have you had enough change?
– Heather Self is chairman of the CIoT’s technical committee and a partner with Ernst & Young.
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