Tax: a City wish list

 

At the risk of stating the obvious, the City is a not a single ‘amorphous unit’. Different business activities even within a single sector will have different issues and concerns over the UK tax system. Also, the City cannot expect to be immune from the operation and implementation of tax measures designed to reduce the deficit.

 

A key issue, though – and not just for the City – is predictability and certainty. The Office of Tax Simplification’s review of the competitiveness of the UK system pithily highlighted this in the context of the lessons we can learn from Ireland: ‘legislation is changed only if it has to be’; ‘new legislation is kept brief’; and the GAAR has ‘worked as a deterrent and reams of complex anti-avoidance legislation are unnecessary’. A short Finance Bill 2015 would therefore be a good start.

 

Another step that would be really useful would be publication of a roadmap for the financial services industry. Like the Corporate tax roadmap (published in November 2010), this would give various sectors an indication of how the tax system could be expected to develop (even allowing for regulatory change to affect how businesses organise themselves).

 

Of course, the outcome of the BEPS process is likely to change parts of the UK corporation tax regime radically. Other developments could also affect the tax landscape, particularly the financial transaction tax (if the participating member states can ever reach agreement on its scope). In particular, the Commission’s proposals for a mandatory EU wide harmonised corporate tax base could have a significant impact, and not just on the City; and despite David Gauke’s initial response to the proposals, this largely depends how much traction the idea gains with other member states.

 

Turning to specifics, the mood music clearly suggests that the banking levy is likely to change so as not to penalise UK headquartered groups, as opposed to those operating in the UK through branches.

 

That raises two issues. First, whether, any changes be designed to maintain the same expected yield? Second, and more importantly, what will happen if the rate of the levy is not subsequently varied, even if that means that the levy raises less than forecast? (The current impression seems to be that whenever there is a glitch in deficit reduction, the banking levy takes up the slack.)

 

A particular concern for long established banks would be if any of the proposals prescribed for reducing ‘aggressive tax avoidance’ – of the type heralded in Tackling tax evasion and avoidance – required banks to supply significant amounts of data to HMRC. Recent developments affecting a well-known banking group illustrate the risk of overloading legacy systems. It will be important, too, that the definition of ‘enablers of offshore tax evasion’ does not encompass the mere use of the banking system; and that the acts or omissions required to amount to a ‘corporate failure to prevent or facilitate tax evasion’ cannot be triggered by inadvertence. Meaningful consultation will be crucial.

 

Turning to VAT, HMRC is currently consulting on how to reflect the Crédit Lyonnais decision (C-388/11) into UK law. The risk is that HMRC will seek to limit and prevent input tax recovery further than is strictly required by the decision and, not for the first time, will not act in accordance with the Principal VAT Directive. HMRC has invested heavily in understanding how the financial services industry works; however, perhaps because of the need to reduce the deficit, there is a perception that HMRC chooses to apply concepts – such as cost components meaning that the cost has to be recovered within a reasonable period of time – in a way which particularly affects partly exempt businesses.

 

Part of the City’s success has been based on the wide pool of talented individuals wishing to work in London, not all of whom are domiciled in the UK. Before the general election, there were varying proposals for changing the tax treatment of non-domiciled individuals, seemingly without reference to the likely impact on economic activities or tax revenues. Indeed, some aspects of the current non-domiciled rules militate against individuals investing in the UK (in order to prevent tax liabilities arising), whereas a more pro-investment ‘non-dom’ tax system might both increase overseas investment and raise tax revenue. As with any change to the tax system, the need is for a rigorous consultation process where the goals are clear from the outset.  

Also on the subject of individuals, a really elementary but important change would be to ensure that individuals with responsibility for policy within HMRC, whether centrally or with customer relations responsibilities, are not moved around too frequently just when they have developed a deeper understanding of the topic and can exercise judgement.  

 

There is also a perception that some individuals within HMRC are unwilling to provide certainty to institutions where unintended consequences could give rise to a large tax bill, because this might be regarded as a ‘ruling’. With a tax regime as complicated as the UK’s, however, self-assessment cannot always be the answer.

 

For example, the scope of the diverted profits tax changed during its introduction. There have been instances where people carrying on transactions using certain business models (for example, certain captive insurance arrangements), and seeking to obtain clarification that transactions are not affected by the DPT, have found that HMRC has indicated that the opposite of what was expected or has not been willing to provide a view on which reliance could be placed.

 

According to the 17th century politician Jean-Baptiste Colbert, ‘The art of taxation is plucking the goose to obtain the largest amount of feathers with the least possible amount of hissing.’ The wish must be for HMRC to allow some feathers to regrow.