A day devoted to tax consultations, the so-called ‘tax day’, had been much anticipated since it was announced by Jesse Norman, the financial secretary to the Treasury, in mid-February. The government took the decision to introduce this new event to disentangle the raft of forward looking consultations from Budget day measures, to allow greater focus on important measures that can often get lost in the mayhem of the Budget.
On the 23 March 2021, the Tax policies and consultations command paper was published accompanied by a series of other documents. These included eight consultations, six summaries of responses to earlier consultations, four research papers, two discussion documents, two calls for evidence and a number of other documents extending to interim reports and technical guidance.
For many in the tax community, the prospect of further announcements coming so closely after the Budget brought equal amounts of joy and distress. Expectations were even higher following the Budget that left many unanswered questions. Perhaps tax day was going to fill in the missing gaps? Reports in the press ahead of tax day were rich with rumours around aligning CGT rates with income tax, whether a new agenda on environmental tax would be presented or if the chancellor would tackle the taxation of the self-employed. However, as Jesse Norman stated in his letter to the Treasury Select Committee, the objective of the day was ‘to give a range of important but less high profile measures greater visibility’. Despite the hype, tax day was never going to overshadow the Budget.
The command paper and the accompanying documents were designed to set out a ‘future pathway’ for tax administration and tax policy. The announcements and publications were categorised into three areas: (i) modernising tax administration; (ii) tackling non-compliance; and (iii) further tax policy announcements, but one common thread running through a number of the publications highlighted how important tax data will be for a modern HMRC. Information will be used to calculate tax on a real time basis. Information will be used across taxes to not only pre-populate returns but help determine where other liabilities may exist. Information will be used to identify and resolve uncertain tax positions earlier. Information will be used to target compliance interventions more effectively. You get the picture. While a strategy for tax policy was not forthcoming, reading between the lines it is clear that HMRC will be more data driven, and continue to find further information sources to drive efficiencies and collect more tax.
The tax administration framework review presents a major opportunity to modernise the foundations of the tax system. Using data smarter on a real-time basis and from third parties are just some of the aspects under review, but in reality the call for evidence is much more ambitious. Under consideration are various procedures and interactions taxpayers have with the tax system with a desire by HMRC to rethink how taxpayers interact with the system from registration, dealing with agents, calculating the liability, collecting tax, through to the safeguards in place to manage disputes. Given the wide-ranging nature of the framework, covering all taxes and holding the ambition to reform fragmented legislation from TMA 1970 through to more recent legislation enabling digitalisation, it is likely to take some time. This is not sexy policy making, but fundamental changes here could make a lasting impression on the tax system.
Linked to the tax administration framework is a consultation on timely payment of tax. Here, the government wants to consider the timing of payments and potentially move to a more frequent basis of payment for income tax and corporation tax (for businesses outside of the quarterly instalment payments ‘QIPs’ regime). This would affect the vast majority of businesses, 99% of whom are not within the QIPs regime. In terms of the benefits, HMRC explains that paying tax more regularly helps taxpayers manage their cashflow as they can budget for their tax liability on a real time basis. The flipside to this is also highlighted. It may adversely affect cashflow if it is necessary to dip into working capital to pay tax earlier, essentially taking funds away from investment opportunities that may have presented themselves in any given year. Another key challenge is the transition to more regular payments as there is the potential for two years’ worth of tax due in the year of transition. HMRC recognises these drawbacks but is keen to find a solution. Of course, to deliver this type of real-time working, up to date information will be needed on income and expenses to estimate tax liabilities. This will inevitably tie into the making tax digital programme. The missing piece in this consultation is an objective review of whether the current tax system is fit to operate on this basis. The consultation acknowledges there are challenges given the annual basis upon which these taxes are calculated but does not question whether pushing individuals and smaller businesses to have more frequent interaction should first require a fundamental simplification of the tax system.
Sticking to the theme of additional tax information is the uncertain tax positions consultation. The second consultation published on tax day advances the proposal that will mean certain large businesses will need to notify HMRC in advance if they have taken a tax position that may be contrary to HMRC’s position. Whilst some aspects of the proposal have changed, the underlying objective to furnish HMRC with information to help them identify and resolve disagreements at an earlier stage has not. With more accurate and timely information, HMRC states it will help with their interventions, avoid drawn out and costly litigation and ultimately reduce tax losses. However, joining the dots on the aim to reduce the tax gap and this proposal to notify HMRC on uncertain tax positions is not entirely clear. The tax gap that can be attributed to differences in legal interpretation is £4.9bn for 2019/20; however, the amount of revenue that this proposal brings is miniscule, even over the projected five year period receipts total just £145m – less than 3% of the annual tax gap amount in question. It is difficult to conclude that this measure does much to tackle the tax gap, and it risks becoming an information gathering exercise that prolongs rather than shortens discussions.
The proposals to strengthen transfer pricing documentation will mean certain businesses will need to keep additional transfer pricing information in a standardised format ready to provide to HMRC on request and may also require businesses to provide further details in their annual tax return about material cross border transactions with associated enterprises. One of the primary objectives of this initiative is to provide HMRC with better quality data to enable ‘more efficient and targeted compliance interventions’. HMRC has consulted with other tax authorities who have introduced the OECD standards and has learnt that the additional information has had a positive effect on their enquiries. Although many businesses will have the information to hand, it will not necessarily be in the prescribed format. HMRC highlights that over the last five years (2015/16 to 2019/20) they have brought in over £6bn in additional tax from transfer pricing compliance activities. It is clear that transfer pricing will remain fertile ground for enquiries as the additional information and the ability to interrogate standardised information will support HMRC’s compliance activities in this field. The consultation states that this measure will also provide more certainty to taxpayers but offers no detail on how this will be achieved.
The measures identified above have shared a common theme around information collection to aid HMRC’s compliance activities; however, a number of other policy developments have been announced. While there is little strategy to discern from the other publications and announcements, they are notable in their own right.
The decision around reforming business rates has been deferred until autumn 2021, with the government citing the need for the ‘best possible information about the state of the economy and the public finances’ in order to guide its ‘long-term vision for the business rates system.’ In the meantime, the government offered some insight into the responses they had received to the call for evidence. The current system drew criticism for its complexity around reliefs and lack of responsiveness to economic fluctuations resulting in a more onerous tax burden and unpredictability. Several drawbacks of the alternatives to business rates (namely, the capital value tax or online sales tax) were highlighted; however, there was a hint that the government is interested to explore the online sales tax in more detail.
Overall, consultation day was light on environmental taxes, and some will say this was a missed opportunity ahead of COP26. That said, the government set out an approach to aviation taxation to not only support domestic connectivity but to also align the tax more closely with our environmental objectives. The concept of a frequent flyer feels like an anachronism in the middle of a pandemic, but the consultation welcomes views on whether the government should reconsider its initial position to not introduce a frequent flyers levy. A summary of responses to the consultation on carbon emissions tax was published and reconfirmed the government’s position that it was implementing a UK emissions trading system from 1 January 2021. Tax policy is likely to play a role in the road to net zero however it now appears that this will not become clear until there is agreement at COP26 on the coordinated action countries will take to tackle climate change.
Plans to introduce a new housing developers’ levy to pay for the costs of removal of unsafe cladding were reconfirmed in the command paper. The consultation will not be published for a couple of months, but the policy is intended to raise at least £2bn over ten years. Hypothecated taxes – where the revenue is directed to a specific purpose – are not particularly desirable from a long-term policy perspective, but it appears HMT has softened its approach and is willing to consider them where there is a clear short-term policy imperative. The current state of the public finances may encourage other policy makers to devise new hypothecated taxes; however, they do not offer a sustainable method to repair the damage from the pandemic. Linking spending to a specific source of tax collection over a longer period of time (in a truly hypothecated scenario) means that spending would fluctuate with tax receipts through the economic cycle causing great uncertainty.
The government provided some positive support to the financial services sector. Two consultations were announced, one focused on the tax treatment of superfunds and the second on the securitisation company regime. These both illustrate the government’s desire to ensure that the tax treatment reflects market practice and in the case of the securitisation company regime, a desire to ensure the regime is competitive. Taking these consultations as package with the recent asset holding company consultation and the wider funds review, it is possible that there is a hint of an underlying strategy to promote the strengths of the UK’s asset management industry.
When taken together, the consultations add little to our understanding of what the future might hold for the tax system. After a tumultuous period, taxpayers (and businesses in particular) are craving more than a pathway, they want to see what a roadmap for reform looks like. The Coalition’s corporate tax roadmap published in 2010 remains to this day a pivotal policy tool because in the aftermath of the financial crisis, the government was prepared to respond to the concerns presented by business that the tax system was no longer competitive and was prepared to set out a strategy to support business investment. A roadmap that acknowledges the challenges and opportunities presented by the pandemic and Brexit would provide a welcome degree of certainty – even where the policies are not unanimously welcomed.
After the excitement of a triple fiscal bill (the Budget, the draft Finance Bill and tax day), we will have to wait for the autumn Budget for more policy announcements. As the economy begins to repair, the chancellor is likely to feel more comfortable in his ability to set out a meaningful plan for the tax system. Besides, it is not often that a chancellor gets to hold two official Budgets a year. We can, therefore, expect him to want to use the second opportunity to set out more than a pathway. We might even get a roadmap.
A day devoted to tax consultations, the so-called ‘tax day’, had been much anticipated since it was announced by Jesse Norman, the financial secretary to the Treasury, in mid-February. The government took the decision to introduce this new event to disentangle the raft of forward looking consultations from Budget day measures, to allow greater focus on important measures that can often get lost in the mayhem of the Budget.
On the 23 March 2021, the Tax policies and consultations command paper was published accompanied by a series of other documents. These included eight consultations, six summaries of responses to earlier consultations, four research papers, two discussion documents, two calls for evidence and a number of other documents extending to interim reports and technical guidance.
For many in the tax community, the prospect of further announcements coming so closely after the Budget brought equal amounts of joy and distress. Expectations were even higher following the Budget that left many unanswered questions. Perhaps tax day was going to fill in the missing gaps? Reports in the press ahead of tax day were rich with rumours around aligning CGT rates with income tax, whether a new agenda on environmental tax would be presented or if the chancellor would tackle the taxation of the self-employed. However, as Jesse Norman stated in his letter to the Treasury Select Committee, the objective of the day was ‘to give a range of important but less high profile measures greater visibility’. Despite the hype, tax day was never going to overshadow the Budget.
The command paper and the accompanying documents were designed to set out a ‘future pathway’ for tax administration and tax policy. The announcements and publications were categorised into three areas: (i) modernising tax administration; (ii) tackling non-compliance; and (iii) further tax policy announcements, but one common thread running through a number of the publications highlighted how important tax data will be for a modern HMRC. Information will be used to calculate tax on a real time basis. Information will be used across taxes to not only pre-populate returns but help determine where other liabilities may exist. Information will be used to identify and resolve uncertain tax positions earlier. Information will be used to target compliance interventions more effectively. You get the picture. While a strategy for tax policy was not forthcoming, reading between the lines it is clear that HMRC will be more data driven, and continue to find further information sources to drive efficiencies and collect more tax.
The tax administration framework review presents a major opportunity to modernise the foundations of the tax system. Using data smarter on a real-time basis and from third parties are just some of the aspects under review, but in reality the call for evidence is much more ambitious. Under consideration are various procedures and interactions taxpayers have with the tax system with a desire by HMRC to rethink how taxpayers interact with the system from registration, dealing with agents, calculating the liability, collecting tax, through to the safeguards in place to manage disputes. Given the wide-ranging nature of the framework, covering all taxes and holding the ambition to reform fragmented legislation from TMA 1970 through to more recent legislation enabling digitalisation, it is likely to take some time. This is not sexy policy making, but fundamental changes here could make a lasting impression on the tax system.
Linked to the tax administration framework is a consultation on timely payment of tax. Here, the government wants to consider the timing of payments and potentially move to a more frequent basis of payment for income tax and corporation tax (for businesses outside of the quarterly instalment payments ‘QIPs’ regime). This would affect the vast majority of businesses, 99% of whom are not within the QIPs regime. In terms of the benefits, HMRC explains that paying tax more regularly helps taxpayers manage their cashflow as they can budget for their tax liability on a real time basis. The flipside to this is also highlighted. It may adversely affect cashflow if it is necessary to dip into working capital to pay tax earlier, essentially taking funds away from investment opportunities that may have presented themselves in any given year. Another key challenge is the transition to more regular payments as there is the potential for two years’ worth of tax due in the year of transition. HMRC recognises these drawbacks but is keen to find a solution. Of course, to deliver this type of real-time working, up to date information will be needed on income and expenses to estimate tax liabilities. This will inevitably tie into the making tax digital programme. The missing piece in this consultation is an objective review of whether the current tax system is fit to operate on this basis. The consultation acknowledges there are challenges given the annual basis upon which these taxes are calculated but does not question whether pushing individuals and smaller businesses to have more frequent interaction should first require a fundamental simplification of the tax system.
Sticking to the theme of additional tax information is the uncertain tax positions consultation. The second consultation published on tax day advances the proposal that will mean certain large businesses will need to notify HMRC in advance if they have taken a tax position that may be contrary to HMRC’s position. Whilst some aspects of the proposal have changed, the underlying objective to furnish HMRC with information to help them identify and resolve disagreements at an earlier stage has not. With more accurate and timely information, HMRC states it will help with their interventions, avoid drawn out and costly litigation and ultimately reduce tax losses. However, joining the dots on the aim to reduce the tax gap and this proposal to notify HMRC on uncertain tax positions is not entirely clear. The tax gap that can be attributed to differences in legal interpretation is £4.9bn for 2019/20; however, the amount of revenue that this proposal brings is miniscule, even over the projected five year period receipts total just £145m – less than 3% of the annual tax gap amount in question. It is difficult to conclude that this measure does much to tackle the tax gap, and it risks becoming an information gathering exercise that prolongs rather than shortens discussions.
The proposals to strengthen transfer pricing documentation will mean certain businesses will need to keep additional transfer pricing information in a standardised format ready to provide to HMRC on request and may also require businesses to provide further details in their annual tax return about material cross border transactions with associated enterprises. One of the primary objectives of this initiative is to provide HMRC with better quality data to enable ‘more efficient and targeted compliance interventions’. HMRC has consulted with other tax authorities who have introduced the OECD standards and has learnt that the additional information has had a positive effect on their enquiries. Although many businesses will have the information to hand, it will not necessarily be in the prescribed format. HMRC highlights that over the last five years (2015/16 to 2019/20) they have brought in over £6bn in additional tax from transfer pricing compliance activities. It is clear that transfer pricing will remain fertile ground for enquiries as the additional information and the ability to interrogate standardised information will support HMRC’s compliance activities in this field. The consultation states that this measure will also provide more certainty to taxpayers but offers no detail on how this will be achieved.
The measures identified above have shared a common theme around information collection to aid HMRC’s compliance activities; however, a number of other policy developments have been announced. While there is little strategy to discern from the other publications and announcements, they are notable in their own right.
The decision around reforming business rates has been deferred until autumn 2021, with the government citing the need for the ‘best possible information about the state of the economy and the public finances’ in order to guide its ‘long-term vision for the business rates system.’ In the meantime, the government offered some insight into the responses they had received to the call for evidence. The current system drew criticism for its complexity around reliefs and lack of responsiveness to economic fluctuations resulting in a more onerous tax burden and unpredictability. Several drawbacks of the alternatives to business rates (namely, the capital value tax or online sales tax) were highlighted; however, there was a hint that the government is interested to explore the online sales tax in more detail.
Overall, consultation day was light on environmental taxes, and some will say this was a missed opportunity ahead of COP26. That said, the government set out an approach to aviation taxation to not only support domestic connectivity but to also align the tax more closely with our environmental objectives. The concept of a frequent flyer feels like an anachronism in the middle of a pandemic, but the consultation welcomes views on whether the government should reconsider its initial position to not introduce a frequent flyers levy. A summary of responses to the consultation on carbon emissions tax was published and reconfirmed the government’s position that it was implementing a UK emissions trading system from 1 January 2021. Tax policy is likely to play a role in the road to net zero however it now appears that this will not become clear until there is agreement at COP26 on the coordinated action countries will take to tackle climate change.
Plans to introduce a new housing developers’ levy to pay for the costs of removal of unsafe cladding were reconfirmed in the command paper. The consultation will not be published for a couple of months, but the policy is intended to raise at least £2bn over ten years. Hypothecated taxes – where the revenue is directed to a specific purpose – are not particularly desirable from a long-term policy perspective, but it appears HMT has softened its approach and is willing to consider them where there is a clear short-term policy imperative. The current state of the public finances may encourage other policy makers to devise new hypothecated taxes; however, they do not offer a sustainable method to repair the damage from the pandemic. Linking spending to a specific source of tax collection over a longer period of time (in a truly hypothecated scenario) means that spending would fluctuate with tax receipts through the economic cycle causing great uncertainty.
The government provided some positive support to the financial services sector. Two consultations were announced, one focused on the tax treatment of superfunds and the second on the securitisation company regime. These both illustrate the government’s desire to ensure that the tax treatment reflects market practice and in the case of the securitisation company regime, a desire to ensure the regime is competitive. Taking these consultations as package with the recent asset holding company consultation and the wider funds review, it is possible that there is a hint of an underlying strategy to promote the strengths of the UK’s asset management industry.
When taken together, the consultations add little to our understanding of what the future might hold for the tax system. After a tumultuous period, taxpayers (and businesses in particular) are craving more than a pathway, they want to see what a roadmap for reform looks like. The Coalition’s corporate tax roadmap published in 2010 remains to this day a pivotal policy tool because in the aftermath of the financial crisis, the government was prepared to respond to the concerns presented by business that the tax system was no longer competitive and was prepared to set out a strategy to support business investment. A roadmap that acknowledges the challenges and opportunities presented by the pandemic and Brexit would provide a welcome degree of certainty – even where the policies are not unanimously welcomed.
After the excitement of a triple fiscal bill (the Budget, the draft Finance Bill and tax day), we will have to wait for the autumn Budget for more policy announcements. As the economy begins to repair, the chancellor is likely to feel more comfortable in his ability to set out a meaningful plan for the tax system. Besides, it is not often that a chancellor gets to hold two official Budgets a year. We can, therefore, expect him to want to use the second opportunity to set out more than a pathway. We might even get a roadmap.
