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2005 Pre-Budget measures come under scrutiny

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27th Jan 2006
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A Treasury Committee has been scrutinising the 2005 Pre-Budget Report's key proposals, and have now published their findings. The Chancellor has a history of ignoring the main recommendations of previous committees in numerous areas. Will anyone call him to account if he ignores these recommendations too? By Nichola Ross Martin

SIPPs and pensions simplification
This is not the first time that pension simplification has raised its head. In 1994, a Treasury committee, looked at proposals to allow all pensions schemes, including SIPPs, to invest in residential property with effect from 6 April 2006. According to reports, it said it found it hard to reconcile the ambition to control the disproportionate influence of the housing market on the economy with a proposal that will allow billions of pounds of pension fund money to wash into that market.

The Chancellor of the Exchequer indicated at that time that he thought the author of that remark was wrong.

That Committee recommended that the Treasury assess the extent to which simplification would lead to additional investment in individual houses and "create opportunities for abuse'.

The U-turn announced by Gordon Brown in the 2005 Pre-Budget reversed the previous proposal to allow SIPPs to invest in individual residential properties with effect from 6 April 2006.

The Treasury Committee were not too impressed with the turn of events. Their recommendations are 'that the Treasury examine this episode to ascertain why the likelihood of misuse was not more apparent to it at an earlier stage and whether any unnecessary costs were incurred by the timing of the change of policy. We further recommend that the Treasury report on the outcome of this examination and any lessons it has learned for the future conduct of tax policy in its reply to this Report.'

Tax avoidance ' taxing small business
Funnily enough, 'a previous Treasury Committee' had cause to comment on the Government's implementation of its policy on taxing small businesses. In its Report on Budget 2004, the previous Committee noted that it had been "widely predicted" by commentators that the introduction of the zero rate of corporation tax would lead people to incorporate to avoid tax and national insurance by reclassifying their income as dividends. They were puzzled as to why neither the tax authorities nor the Treasury had anticipated this likely effect and noted that, over the 2003-04 and 2004-05 tax years, the oversight had cost the taxpayer an estimated £670 million in lost revenues.

The Pre-Budget Report replaces the non-corporate distribution and zero rates with a new single banding set at the current small companies' rate of 19%. The Government estimates that it will make significant savings from "tackling tax-motivated incorporation": an estimated £930 million in tax years 2005-09. In the same period, introducing 50% first year capital allowances for small enterprises is estimated to cost the Government £45 million.

The current Treasury Committee recommends that the Government issue clear guidance on the tax rates applicable to small business as soon as possible. This guidance should provide sufficient information to enable those running small companies to assess whether the cost of continuing to operate as a company will now outweigh the available tax savings. It should also provide clear information about the steps to be taken to wind up a company.

It adds: "We urge the Government to assess what further measures it can put in place to encourage small companies to retain and reinvest their profits for growth."

The disclosure regime
John Whiting of PWC gave evidence to the committee on this topic, as well as that of small business taxation. He welcomed the fact that HMRC intends to hold discussions on the proposed extension of the disclosure regime and trusted that such discussions should mitigate the risk of the disclosure regime becoming unduly onerous, warning that an over-burdensome regime would be detrimental to both HMRC and the tax industry because HMRC would be "flooded with lots of disclosures that they do not need to hear about ' and we are back to disclosing a haystack of things and leaving the authorities looking for the needle and it serves nobody's interest".

The Treasury Committee says that it "looks forward" to the Government providing further detail about its proposals to extend the tax avoidance disclosure regime to all of income tax, corporation tax and capital gains tax. "We trust that HM Revenue and Customs will ensure that it consults fully and appropriately on the proposals, to ensure that the optimum balance is struck between protecting tax revenue against inappropriate avoidance schemes and ensuring that the disclosure regime does not place an unreasonable administrative burden on businesses.

Once the Government has fleshed out its proposals, we will be interested to learn which taxes will remain outside the disclosure requirements, and the reasoning behind such exclusions. In view of the broadening of the disclosure regime, we recommend that the Treasury state whether it now has any intention to introduce a general anti-avoidance rule."

Do not hold your breath.

Nichola Ross Martin

www.rossmartin.co.uk

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