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Pressing the pause button

Lindsey Wicks explains the theme behind the Tax Faculty’s budget submission.

CoverThe Tax Faculty team catches up at the start of every week. On Monday 14 October, following the initial excitement of a budget date announcement for 6 November – together with the uncertainty over whether it would actually be a budget or an economic statement – our conversation turned to the submission that we should make to government in advance.

A theme emerged around HMRC resources, Brexit and key priorities to keep the economy on track. While other policies had been announced and were a long way through the consultation process, would it be better to defer those in order to focus on new priorities in unprecedented times?

We made the Tax Faculty’s submission just a few days before the general election was announced and the budget cancelled. Having failed to leave the EU on 31 October, we are still no clearer on Brexit, but what of our budget submission? It seems the rationale for the messages that the team discussed on 14 October is unchanged.

HMRC resources

HMRC’s service standards have shown a significant decline during 2019, as evidenced by the experiences shared with us by our members. The diversion of HMRC staff to deal with Brexit-related matters has no doubt contributed to the unsatisfactory service levels.

Regardless of Brexit, HMRC’s current performance levels highlight that there are simply not enough resources to cope with significant projects and also deliver day-to-day services.

The Tax Faculty has called for an urgent review of the resources needed by HMRC to manage the UK tax system and deliver change when needed. Pending that review, we asked for changes to the system that might affect HMRC performance to be kept to a minimum.

Brexit

Even if the UK agrees a deal with the EU and enters into a transitional period, then many of the preparations that have been underway for a no-deal scenario may simply be deferred until the end of that period.

Postponed accounting

One sensible proposal made as part of the Brexit preparations was the reintroduction of postponed VAT accounting in the event of a no deal. Postponed VAT accounting means that importers can declare and recover import VAT in their next VAT return, rather than when their goods arrive at the UK border. This also benefits goods being imported from outside the EU.

The Tax Faculty has requested that consideration is given to reintroducing postponed VAT accounting whether or not a Brexit deal is agreed. The cash flow benefits to business would then be available on all imports, regardless of their origin.

VAT simplification

Remaining on the VAT theme, leaving the EU also provides opportunities to simplify the VAT regime that are not available to EU member states. HMRC recently issued a call for evidence on the operation of the VAT partial exemption rules and the capital goods scheme. The Tax Faculty suggested that the UK should adopt the principles in the Organisation for Economic Co-operation and Development (OECD) International VAT/GST guidelines. These guidelines state that the burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation. The ultimate simplification would be to remove the concept of exemption from VAT altogether, but that would need careful consideration. As a minimum, we would like to see VAT regulations being simplified to reduce administrative burdens for both business and HMRC.

Aiming DAC 6 at the right target

As Angela Clegg highlights in her article on page 26, the automatic exchange of information in relation to cross-border arrangements under what is known as DAC 6 is a requirement of a European Directive. Quite rightly, people have questioned the impact of Brexit on this legislation. While we support the fact that the government will want to receive and share information concerning aggressive tax avoidance arrangements, the Tax Faculty is concerned that the proposals are too widely targeted and are likely to impose considerable administrative burdens for businesses, ordinarily compliant advisers and HMRC.

Based upon the draft regulations, HMRC will receive reports of a large quantity of benign transactions. Identifying the arrangements that should properly be the target of this measure is going be like trying to uncover the needle in the proverbial haystack.

The Tax Faculty would like to see the UK reporting requirements amended to be more effective and less burdensome – perhaps through the introduction of a ‘white list’ of arrangements that do not require reporting.

Pausing for breath

Brexit and the current level of HMRC performance does call into question whether policies announced some time ago should remain a priority. The Tax Faculty considers there are clear reasons to take a pause on some of the measures.

A precedent for deferral was set by the delay of the introduction of the VAT domestic reverse charge for the construction industry by a year to 1 October 2020. The reason given for the postponement was that businesses were not ready and it would avoid the changes coinciding with Brexit. Arguably this came too late for those businesses who were underway with their preparations as the delay was announced less than four weeks before the reverse charge was originally set to come into force.

In the light of the current pressures on HMRC and businesses, the Tax Faculty has asked for the start date of the following measures to be delayed:

  • off-payroll working in the private sector;
  • the introduction of a digital services tax (DST); and
  • the payment of capital gains tax on residential property gains within 30 days of completion.

The draft Finance Bill clauses published in July have yet to be republished.

Off-payroll working in the private sector

The new off-payroll working rules are overcomplicated and operational issues need to be resolved. To give all stakeholders (including HMRC) time to prepare, the Tax Faculty has asked that the start date is put back until 6 April 2021. However, we would also like to see it go further.

The policy does not address the root cause of the problem; the very different tax treatment of the employed and self-employed. Whenever the off-payrolling rules are introduced, we will still need to find a solution whereby the tax system does not unduly favour one employment status over another, while keeping compliance burdens to a minimum.

Digital services tax

A multilateral solution appears to be developing at a pace that was not envisaged at the time that digital services tax (DST) was first proposed. Given HMRC’s commitment to achieving a multilateral solution, the Tax Faculty has asked the government to delay implementing DST for at least 12 months to allow the work of the OECD to be factored into any UK measure. The Tax Faculty is also concerned that the unilateral introduction of DST could now compound problems arising after the UK’s departure from the EU.

30-day payment window for residential property gains

Bringing forward the payment date of any tax creates a one-off windfall for HMRC. From that perspective, delaying the introduction of the 30-day payment window for residential property gains is likely to be unattractive for HMRC. However, the Tax Faculty understands that the development of an online system to allow taxpayers and their agents to report gains and pay the tax due is still at an early stage.

Given the current resourcing issues faced by HMRC, we are concerned that this leaves insufficient time for it to be properly tested and implemented by 6 April 2020. Furthermore, a major communications exercise is essential to properly prepare conveyancers and taxpayers in order to avoid a repeat of the costly experience on the introduction of the non-residents capital gains charge on residential property. The Tax Faculty has therefore recommended that this measure is delayed until 6 April 2021.

Final thoughts

Will we have any more political clarity by the time you read this article? I doubt it. We may of course be looking forward to a Christmas or New Year budget date. Whatever happens, the case for pressing the pause button is only likely to grow.

About the author 

Lindsey Wicks, technical editor at the Tax Faculty