Following a somewhat turbulent three or so years, we find ourselves with a new Budget shortly to be delivered by a new Government with a healthy majority, and a certainty, on Brexit day, that the UK is leaving the EU. Many will be breathing a sigh of relief that a reasonable measure of certainty can now return to UK politics and - for our purposes - tax and tax policy.
Indeed, it is a fantastic opportunity for Sajid Javid, to walk the walk as well as talk the talk and persuade investors that the UK is open for business, welcomes non doms and remains a stable jurisdiction with a fair but attractive tax regime. Many will see the loosening of the UK’s ties to the EU as a chance to revisit and reaffirm these objectives.
So without further ado what are the key priorities?
Stability and tax policy
We can all agree that there is vast amount of tax legislation, with more being regularly drafted and enacted. It is entirely appropriate that we have sophisticated and thorough tax laws, and this is best achieved by a careful policy framework which drives that legislation.
In practice, what tends to happen is that the Chancellor pulls a ‘rabbit out of the hat’ at each Budget, which often leads to very quickly drafted legislation and policy that is developed in a piecemeal way and which often has unintended consequences. For example the loan charge – which imposed draconian charges on many employee loans made as far back as 1999 and was introduced in 2019 – has had to be dramatically amended.
We would urge the Chancellor to adopt a general tax policy roadmap – taking inspiration from the corporate tax roadmap introduced by the coalition government in 2010 – and outline the objectives for tax policy for the next five years.
We would also urge him to ensure the commitment to consultation – again launched by the coalition government in 2010 – is reinvigorated and followed. This was confirmed in the Protocol on Unscheduled Announcements of Changes in Tax Law in the Tackling Tax Avoidance policy paper of March 2011 and more recently in December 2017. Regrettably, the reality in recent years has been that complex tax legislation has been rushed through with inadequate time for checking and that lip service has been paid to the need to consult. The result, inevitably, has been legislation containing mistakes, sometimes with significant adverse implications for taxpayers.
One annual fiscal event
Making good tax laws will be much more achievable if we stick to the annual fiscal event which was introduced in 2016 – away from the cycle which had developed of an autumn statement and a spring budget. The idea of a single budget means that – assuming it is kept in the autumn – a policy can be announced then, with consultation for a six month period through to the spring, followed by (if the policy is to be implemented) draft legislation, with reasonable opportunity for input from the professional bodies and key interested stakeholders, so that problems can be spotted early on.
There have been a number of recent examples of legislation being rushed and failing to achieve the intended effect – resulting in taxpayers being promised one thing and given another. One notorious example (although there are many to choose from) concerns particular kinds of gains realised by offshore trusts created by non-UK domiciled individuals. A drafting defect means that, on one view, such gains are in certain circumstances immediately taxable for the settlors of such trusts, whereas the clear intention was that there would be no such immediate tax charges for settlors. The problem arose because various details of the draft legislation were left until the last minute, despite the policy having been announced over two years before. Had the draft legislation been released in its entirety for review by advisers, with sufficient time for it to be digested and commented on, it is highly likely that the problem would have been spotted and could easily have been corrected.
This has caused real problems and has led to a number of UK resident non doms losing faith in assurances/statements made by HMRC and the Treasury. The UK cannot afford to lose the support of these economically significant taxpayers.
Now more than ever it is imperative that this trust is restored and we need to avoid piecemeal reactive legislation as much as possible if we are to restore that trust. Brexit day should remind us and the government of just how important staking the UK’s position as a stable, modern and tax competitive economy is. There are lots of excellent non tax reasons for people to wish to invest in and live in the UK – the English legal and court system, the rule of law, a vibrant financial centre and cultural hub in London and other cities, first class educational institutions at every level and dynamic, energetic and multicultural towns and cities, offering a very appealing lifestyle – and we urge the government to actively look at the UK tax system to ensure it is competitive and promotes investment, as well as ensuring non doms and wealth creators feel welcome. A strenuous effort now needs to be made not only to ensure that tax policy does not drive these people away, but also that the implementation of that policy is effective. The devil is in the detail, and the best-laid plans can backfire if there is insufficient care taken in getting the legislation right.
What should the objectives be?
At a very simple level, the tax legislation is in many places somewhat piecemeal. Of course where tax avoidance is in issue it is important that legislation directly targeting this can be introduced in short order. However, the more complex the legislation, the more overlapping reliefs and anti-avoidance rules there are, the less competitive the UK is.
We therefore urge a general policy review of key areas including investment into the UK and especially UK businesses. Without going into detail here, some of the available reliefs include Seed Enterprise Investment Relief, Enterprise Investment Relief, Investors Relief, Business Investment Relief and Entrepreneurs Relief. Each relief is differently targeted with various complex rules to be met – which rather complicates the aim of encouraging entrepreneurship and reliefs at a very early stage in the business cycle as well as on sale.
As part of the aim to simplify and provide stability, there are a number of consultations and reports, including the Trust Tax Review and the Office of Tax Simplification report on Inheritance Tax released in July last year, which are on the stocks. Again on IHT there is very recent report published by the All Party Parliamentary Group which adopts a more radical suggestion than the OTS report (see my colleague Catrin Harrison’s article Reform of inheritance tax: an end to heavy petting?). The government can create certainty by using the Budget to set out what, if any, proposed changes will follow, and committing to proper consultation on those changes.
We have already said how important focussing on the UK’s tax competitiveness is, and at the risk of stating the obvious, committing to ongoing tax reductions, so for example aiming to reduce corporation tax to the 17% which had been anticipated for the 2020-21 tax year, would be very attractive.
As ever, there are plenty of rumours doing the rounds before the Budget – and committing to a policy roadmap massively reduces the scope for this and avoids the uncertainty these trigger.
Alongside policy rationalisation, simplicity and stability it is vital that tax is used to ensure the UK retains its place as a key financial centre. One aspect of this is the fund management industry. There have been a number of changes to the taxation of carried interest for some fund managers in recent years, and again further amendments will simply add to concerns about whether the UK is really open for business – so again we would urge not introducing further complexity to an already very complex area.
To sum up
Brexit day has arrived. Whatever one’s feeling on this, it is more important than ever that the UK is and is seen to be a thoroughly modern and competitive jurisdiction. We would urge the Government to grasp the opportunity and to focus on the tax policy making process as part of this, to ensure that the UK continues to be regarded as an attractive, welcoming jurisdiction in which to invest, live, work and play.