Huge change in approach means we'll get 3 Finance Acts in 2010

The first (truncated) 2010 Finance Act was rushed through just before the House rose for the General Election.

The Budget Red Book notes at para 2.118 that a new Finance Bill will be published very shortly "to ensure swift Royal Assent for its key priorities". This will result in the Finance (No 2) Act 2010.

We are also promised a further Finance Bill in the autumn. This will be published in draft for comment in July. This is in accordance with the proposed new convention whereby the majority of tax changes are initially published in draft for consultation three months before formal publication (para 2.11 of Tax policy making: a new approach).

This third bill will then become Finance (No 3) Act 2010.

I'm telling you - the proposals for a New approach to Tax Policy Making are ambitious and very welcome. It seems clear that the professional bodies have got their points across effectively to the both the Tories and the LibDems in recent years. The last Government's approach to Tax Policy making on the hoof and the evidently rushed and botched legislation that ensued was a disgrace. These new proposals, if carried through, will set a new standard and help improve our creaking tax system.

Tax Policy Making - Oxford University Tax Conference

I was already looking forward to attending the Oxford University's Centre for Business Taxation Summer Conference on 2 July 2010. The keynote speech will be presented by David Gauke, Exchequer Secretary to HM Treasury. This is quite a coup as it is his name that appears as the signatory on page 3 of the June Budget Consultation document "Tax Policy making: a new approach."

As indicated in my last blog post I consider this to be an ambitious and welcome set of proposals to move far away from the increasingly crazy process that the last Government permitted - if not encouraged.

There is no charge for attending the Oxford business tax conference which takes place on 2nd and 3rd July 2010. Programme and booking details here.

Draft tax legislation to be available for comments

First impressions of the June Budget document on "Tax Policy Making - a new approach" are very positive. If all of the proposals therein are brought into effect this would represent a bigger change even than the move of tax policy making from the (old) Inland Revenue to HM Treasury in 2005. And these proposals are far more welcome, progressive and taxpayer friendly too.

Without attempting to summarise the entire 16 page document let me just highlight one of the most welcome ambitions expressed therein:

3.4 Subject to views from interested parties, the Government proposes a minimum of eight weeks for comments on the draft Finance Bill legislation. This will ensure that there is sufficient time for the Office of Parliamentary Counsel to consider comments and amend the draft legislation, where necessary, ahead of publication of the Finance Bill.

3.5 However, a significant volume of changes to the tax code are dealt with outside the Finance Bill, through secondary legislation. Where secondary legislation makes a substantive change to the tax code, the Government will apply the same principles and disciplines as are applied to Finance Bill legislation, including publishing the legislation in draft for scrutiny. For secondary legislation, the Government proposes a minimum of four weeks for consultation on the legislation itself.

3.6 The Government welcomes views from interested parties on the practicalities for consulting on draft legislation, including the format and channel for providing comments, to ensure that it is efficient and effective for all involved.

Anticipating the Emergency Budget - Corporate Tax Directors

I spent last night at a private dinner discussing the forthcoming 'emergency' Budget with a number of Corporate Tax Directors.
Their hopes and fears can be summarised as follows:

Fears expressed about the content or consequence of Budget announcements:
- an immediate increase in the standard rate of VAT;
- an extension of the proposed bank levy;
- international companies expanding elsewhere in preference to UK;
- further increases in personal taxes that lead to a brain drain;
- restriction to basic rate tax relief for personal pension contributions;
- property companies being picked on due to a perception that they are wealthy and don't employ many people;
- a big hike in VAT over time with stepped interim increases;
- bringing forward the dates on which CT quarterly instalments are due, so as to create a windfall gain for the Treasury;

The following hopes were shared as regards the Budget:
- evidence of a coherent strategy and framework for corporation tax (CT);
- reduction in the rate of CT;
- more competitive CFC regime;
- evidence of joined-up thinking;
- a more internationally competitive corporate tax system;
- dropping plans to further reform the taxation of non-doms;
- a further con doc prior to introduction of a GAAR. (It was noted that in Germany companies have to pay €90,000 for the equivalent of Revenue clearances); and
- the deferral of any VAT increase until at least 1 October;

Entertaining Dave Hartnett, Permanent Secretary for Tax

Oh how I laughed when I saw the reports this week that Dave was Whitehall's most wined and dined civil servant.

I've met Dave many times over the years at official functions and events - and occasionally at formal meetings at HMRC (when all I've been offered is a cup of tea and plain buscuit).

The reports that Dave is a Whitehall's dinner winner all try to insinuate that there was something underhand and inappropriate going on. Such reports are SO far from the truth that they are laughable.

On the occasions I have seen Dave at events for the accountancy and tax profession, where he is being 'wined and dined' he is invariably required to give a speech of some sort. He always starts his talks with his standard and politically correct phrase: "Sisters and brothers in tax..." He evidently believes we should all be working to the same end result of everyone paying the 'right' amount of tax. Many professinals bristle when they hear his views. I suspect I am in a minority in respecting and greeing with much of what I've heard him say over the years.

Dave is no one's poodle. Even when an invited guest he consistently and publicly attacks those 'professionals' who are engaged in 'abusive' tax avoidance activities. He speaks about the need for the accountancy and tax professions to work WITH HMRC to ensure higher levels of tax compliance and reductions in tax evasion. And he defends HMRC activities and his political masters even when I suspect he knows that the professions' criticisms have some justification.

I admit I've not been present when Dave has been "entertained by some of Britain's biggest banks, law firms and accountancy firms". Only at functions and events hosted by professional bodies. But, I would be astonished if his approach softens in such situations. The implication that his attitude or approach is in some way tainted by virtue of the lunch or dinner eaten during official meetings is risible.

The People's Budget of 1909

Lord Hoffman was the after dinner speaker at the CIOT London Branch dinner last week. He noted that some people consider tax law to be rather dull "But sometimes you get volcanic eruptions". He noted that 100 years ago there was just such a taxation crisis following the House of Lords rejection of the "People's Budget".

This wasn't just any old Budget as were to learn when the relevance of the story became clear.

Lord Hoffman advised us that the Lords did not approve of a proposed massive hike in the rate of income tax. It had been 9d (4p) in the pound but the Budget proposed increasing it to a shilling (5p) in the pound on incomes over £2,000. Coincidentally this is apparently equivalent to £154,000 in today's money. There was also to be a surtax of 6d (2.5p) in the pound on incomes over £5,000 (equivalent to £386,000 today).

As Lord Hoffman noted: perhaps this puts a new perspective on the 50% (50p) rate that now applies to incomes over £150,000.

The increases were considered so outrageous apparently that the House of Lords abandoned convention and rejected the Budget.

Whose Budget was it? in 1909 this was the first Budget of a new coalition Government that had been taken office after the general election had produced a hung Parliament. 101 years ago the largest party (just) was Liberal with 275 votes, The Conservatives had 273 seats but also had a majority in the House of Lords.

The coalition was led by the Liberal party with support from.... Labour.

Somehow I don't think we'll get a repeat next week. Do you?

Did Derrick Bird take advice to help him handle the taxman?

It is being reported that Derrick Bird, the gunman who killed 12 people in Cumbria, feared he would go to prison because of a tax investigation. There is reference to a sum of £60,000 he held in an offshore account and at least one suggestion (in the Sun) that this had created a £100,000 tax bill for the "psycho cabbie".

This being the TaxBuzz blog I'll stick to the tax related elements of the awful story. Attention will shortly turn to HMRC and whether the taxman's tactics included the threat of jail or if this was an unfounded fear. It's very much only ever a last resort and HMRC normally make clear that if a tax evader makes a full confession they can avoid prison. The threat is made to encourage compliance and payment of outstanding taxes.

Plenty of people will try to blame HMRC (a convenient bogeyman) for pushing Mr Bird over the edge. I doubt that's fair although stories abound of HMRC making threats to persuade taxpayers to settle their tax bills. Sometimes they have simply lost patience. Other times they are exceeding their authority but only REAL experts in dealing with tax investigations, and in possession of all the facts in this case, will know this for sure.

Even some accountants who have limited experience of such challenges from HMRC may be unaware of their new powers. This lack of familiarity with tax investigations can lead to protracted arguments that are destined to fail but only after unnecessary professional fees have been racked up - perhaps by someone making unrealistic promises as to what can be achieved. It's one of the reasons that so many accountants choose to work with tax investigation specialists like those who are members of the Tax Advice Network.

Did Mr Bird have good cause for being so worried about the taxman? Had he tried to negotiate with HMRC without professional help? Did they follow their procedures? We may never know. The fact is that HMRC have to walk a fine line. They are rightly charged with collecting tax due in respect of undisclosed income and gains. No one wants to pay up. When faced with tax evasion (for that's what it is) HMRC will issue demands for what they consider to be due and will follow these up. No one should HAVE to engage specialist professional help to resolve matters but it will often pay to do so. That's life I'm afraid.

CGT: Since when does an automatic relief constitute tax avoidance?

Poor old Danny Alexander. The papers are full of stories of how he "avoided CGT" on the disposal of a second home. The Telegraph accuses him of taking advantage of a 'loophole'. But a moment's examination suggests this is a non-story.

Did he seek advice about how to pay less CGT than would otherwise have been the case? No. Did he undertake some pre-packaged abusive avoidance scheme? No. Did he actually do anything other than sell his property? No.

After the inflammatory headlines most of the media stories then include a key fact. This is that the new Financial Secretary to the Treasury was legally able to take advantage of rules which exempt people from paying CGT for three years on their homes after buying a second property – on the condition that it used to be their main residence.

In fact these rules are set out as part of the 'private residence relief' from CGT and they apply in the same way to everyone who disposes of their main residence within 3 years of moving out.

HMRC's help sheet 283 states quite clearly:

Your period of ownership begins on the date you first acquired the dwellinghouse, or on 31 March 1982 if that is later. It ends when you dispose of it. The final 36 months of your period of ownership always qualify for relief, regardless of how you use the property in that time, as long as the dwelling-house has been your only or main residence at some point.

So, on what possible definition of the concept of 'tax avoidance' can it be said that Danny Alexander "avoided CGT"?

When I first addressed a related question last year (Flipping properties - avoiding CGT when you have more than one main residence) I noted that this is a pragmatic rule. It effectively allows you to keep the entire profit on sale of your main residence even if it takes you upto 3 years to sell it after you move into a new home. In such cases both of your homes qualify for the main residence relief during that 3 year period.