Capital gains tax

79. The 2007 Pre-Budget Report announced proposals for a new capital gains tax (CGT) regime under which the previous structure of reliefs and allowances—principally, taper relief[290] and the indexation allowance[291]—would be abolished and replaced with a single universal rate of 18%.[292] During our inquiry into last year's Pre-Budget Report, we were told that tax simplification was the key aim of this policy.[293] We discovered that, although there had been consultation on tax simplification, there had been no discussion about the abolition of taper relief prior to its announcement in that Pre-Budget Report. We recommended that the Government clarify on which points it was prepared to consider the representations of affected parties and set out how it intended "to mitigate the effects of the withdrawal of taper relief … with especial reference to small businesses".[294] In the two months following the announcement, the Chancellor of the Exchequer signalled that he would not change his policy on abolition of taper relief and indexation allowance. In its response to our Report on the on the 2007 Pre-Budget Report, the Government stated that it did not generally consult on changes to tax rates, but went on to state that:

following the announcement of capital gains tax changes at the Pre-Budget Report a dialogue was entered into with a wide range of interested parties. HM Revenue & Customs immediately engaged with individuals in the accounting and tax professions in order to inform the eventual legislative approach. HM Treasury received representations from a number of groups and hosted constructive discussions with representatives of the business community on different aspects of the proposed changes.[295]

Following this consultation process, the Chancellor of the Exchequer made a further statement on 24 January 2008, when he announced the introduction of an "Entrepreneurs' Relief", designed to mitigate the negative effects of the abolition of taper relief for small businesses.[296] The Treasury explained in the 2008 Budget document that the entrepreneurs' relief would "be available on the disposal of a trading business or shares in a trading company … This will reduce the effective tax rate to 10% for up to the first £1 million of gains made over a lifetime."[297]

80. The Institute of Chartered Accountants in England and Wales (ICAEW), the Institute for Fiscal Studies and Mr Whiting all welcomed the relief, but drew attention to the problems that had been caused by the lack of consultation prior to the 2007 Pre-Budget Report and the confusion that had followed. Mr Whiting argued that the lesson to be learnt from the Budget was that "the way to do it is consult before and decide on the changes afterwards". He went on to say that:

in the end we may have got to a reasonable result, but it has not been a very good way of managing change … we have had a variety of clients and a variety of situations wanting to know what was going to happen … and taking action before or after 5 April to make the most of the possible changes or to avoid the tax increase. So it has distorted a certain amount of business decision-making … it has accelerated deals, it has decelerated deals, it has taken people's minds off perhaps just progressing the business they were doing.[298]

Mr Chote added:

Clearly there was scope for consultation here. The very fact the Chancellor said there will be time for people to arrange their affairs, implies this was not something which needed to be done at 6 o'clock on the day you announced it for fear of reaction. But then to basically give people time to arrange their affairs and then within a matter of days to cave in to concern from next door and from the CBI and then to throw up uncertainty about what the system will look like, promise clarification before the end of the year, not give it until January, is not a process designed to give a good planning environment for business or indeed for anybody else.[299]

81. As a result of these delays, there have been calls for either a postponement of the implementation of the new policy or for transitional arrangements. The ICAEW believed that "the move to a flat-rate CGT would have been assisted by improved transitional rules, either by grandfathering existing reliefs and/or providing taxpayers with a longer period to reorganise their affairs".[300] The Chancellor of the Exchequer rejected the case for a delay in implementation or for the establishment of transitional arrangements:

Some people said, 'Look, put the thing off' but a lot more were saying, 'Whatever you do, we would like to know what the position is'. When you think about it, if you have somebody in business who wants to make plans, if we had said we would not make our mind up until March 2009 I do not think that would have been desirable.[301]

82. The entrepreneurs' relief was intended to mitigate the unintended consequences of the abolition of taper relief on small businesses. However, as we noted in our Report on the 2007 Pre-Budget Report, there are other groups who may also be adversely affected by the changes to the CGT regime. Employee shareholders on Save As You Earn schemes were one group mentioned in our Report.[302] The Chancellor of the Exchequer confirmed in evidence that employee shareholders would not be able to take advantage of the entrepreneurs' relief.[303] The Association of British Insurers (ABI) has claimed that the changes to the CGT regime will have a severe effect on sales of insurance bonds.[304] The ABI claimed that "advisors could no longer safely propose the purchase of insurance bonds … This was due to insurance bonds being put at a real disadvantage, not just due to a problem of consumer perception."[305] Mr Whiting argued that this would lead to a higher tax levy for "an insurance-based product as against direct investment".[306] In response to such concerns, the 2008 Budget stated that "the Government does not see the need for any change to the taxation of life insurance bonds as a result of CGT reform".[307] When we asked the Chancellor of the Exchequer why he had listened to the concerns of small businesses but ignored other groups potentially affected by the reform of CGT he told us that:

I did not ignore it … whatever solution they came up with, whilst it might have sorted one particular category of life policies, it would have in some cases an adverse effect on others … When I looked at the amount of sales that were affected and at what was happening in the market generally, I do not think the position was quite as clear-cut. The real clincher is that what we were being asked to do could have run the risk of perhaps—and I only say perhaps—sorting one problem only to discover we opened up another problem. I think it is best to try and avoid doing that.[308]

83. Another aspect of the new CGT regime that was raised with the Committee was the challenge posed by the policing of the new entrepreneurs' relief. The main innovation of the relief is that it is limited to £1 million over the taxpayer's lifetime, rather than applying to a particular transaction. Talking about the "lifetime" element of the relief, Mr Whiting suggested that the

very interesting question … [is] how they are going to keep track of it, because we certainly see a practical problem in keeping track of where you or I in our own individual situations are on the £1 million allowance. Conceptually, it sounds easy, but there is a deal of record-keeping to be followed for this which does create an administrative burden.[309]

When we put this to the Treasury officials and pointed out that this was a considerable increase on the present requirement to hold records for six years, they stated that they did not see any problems with implementing this aspect of the entrepreneurs' relief:

The million pounds [limit] will be policed by having people who have used any part of the million pounds [keeping] a running tally of how much of the million pounds they have used … The reality in that situation is that both will keep records, the taxpayer and HM [Revenue & Customs] … [if] people who take advantage of the entrepreneur's relief … do not use up the full million pounds the first time they use it, then they will have to keep a tab of how much of the million pounds they have used.[310]

We welcome the announcement of the entrepreneur's relief, which responds to some of the concerns which we voiced in our Report on last year's Pre-Budget Report. However, we believe that significant new record-keeping challenges could be posed by the new relief, and that it is important that HM Revenue & Customs gives full and early advice to potential beneficiaries of the relief and their advisers about these challenges. We note that the entrepreneur's relief does not resolve all the problems created as side-effects by the changes to the capital gains tax regime. We believe that, if the Government is seeking further to simplify taxation for small businesses, it will need to undertake a broader review and consultation which examines the fundamentals of the tax regime.

The tax treatment of residence and domicile

84. In last year's Pre-Budget Report, the Chancellor of the Exchequer announced plans for a new series of measures relating to the tax treatment of residence and domicile. These included the levy of an annual charge of £30,000 and the loss of personal tax allowances for non-domiciled taxpayers using the remittance basis on their worldwide income and gains, where those income and gains total more than £1,000 annually.[311] As we noted in our Report on the 2007 Pre-Budget Report, it was somewhat unclear which areas of this policy were open to consultation and we recommended that discussion with interested parties should take place as soon as possible.[312] The Government's response to our Report stated that:

On 6 December the Government announced the launch of a consultation on the residence and domicile rules and practices that govern personal taxation … Paying a Fairer Share: A Consultation on Residence and Domicile considered whether more could be done to increase fairness without damaging competitiveness by looking at a number of approaches which would require people who have been resident in the UK for longer than ten years to make a greater contribution. The consultation closed on 28 February and the Government's response is published today [12 March 2008].[313]

The consultation resulted in a number of changes to the initial suggested policies, including the doubling of the annual de minimis limit to £2,000, and the fixing of the annual charge at £30,000 for the duration of this Parliament and the next.[314] The CBI welcomed the fact that the Government had

recognised and acted on several of the concerns in this area. Worthwhile changes to core aspects of the proposals include leaving alone gains and income from assets in trusts kept offshore, and pledging to avoid double taxation issues. All of this will soften the impact.[315]

85. In looking at the revised policy on residence and domicile announced in the 2008 Budget, it is important to distinguish between the two key aspects of the change—the £30,000 annual charge and the loss of personal tax allowance. Both of these measures affect those who have over the de minimis limit of annual unremitted foreign income and gains over £2,000, but there are different qualifying periods of residence. The £30,000 charge is payable only by adults who have been resident in the UK for more than seven of the last 10 tax years and meet the de minimis limit. However, the loss of personal tax allowance affects all who meet the unremitted foreign income limit without reference to any minimum period of residence in the UK.[316] Consequently, anyone who has unremitted foreign income and gains of over £2,000 would lose the right to a personal tax allowance on their UK earnings. The Treasury implied that the only way in which a taxpayer could breach the de minimis limit would be to have savings capital of around £40,000 overseas.[317] However, as Mr Whiting pointed out, the limit does not only apply to interest on capital savings or investments overseas, but could also be breached from letting a property in a foreign country, or from relatively short periods of temporary work in the home country, for example, in a summer job.[318] For those non-domiciled taxpayers who are liable to pay the £30,000 annual charge, the choice of whether to pay the charge or remit all their worldwide income to the UK—hence, paying UK tax on all their income and gains—is made each year, and their decision will be made on the basis of how much foreign income and gains they have earned during that year. Therefore, as the Chancellor of the Exchequer noted, unless the taxpayers were remitting to the UK over £85,000 a year, it would not be worth their while to pay the £30,000 charge.[319]

86. Mr Whiting identified three separate groups of non-domiciled taxpayers who would be affected by very different issues: the extremely wealthy; the middle-income expatriate professionals often working for multinational companies; and the low-income non-professional workers.[320] For the first group, Mr Whiting argued that the £30,000 annual charge and loss of personal allowances were less likely to be a problem.[321] Instead, he thought that the main issue in relation to them would be the incentive it might provide for them to leave the United Kingdom. He said:

In all honesty, nobody knows exactly how many people will leave. People are undoubtedly considering leaving and some are leaving; the volume we do not know. Undoubtedly the changes announced in the Budget have reassured a cadre of people; they have been helpful. Whether they have gone far enough to really stem any exodus remains to be seen, because … one of the impacts there has been is a loss of confidence and a feeling amongst the non-domiciled community that the UK no longer wants them in the way they once did.[322]

In the case of the middle-income group, Mr Whiting was concerned that employers would bear the burden, thus making the United Kingdom a less attractive place to do business.[323] The group which has received the least attention in the debate over the residence and domicile policy is that of the low-income non-professional workers characterised by Mr Whiting as "the archetypal Polish plumber or Romanian farm-worker or sandwich-bar worker".[324] Such workers are often paid wages through the PAYE system, but are not registered as non-domiciles. As such, they could be considered as "non-domiciled taxpayers" and—after 6 April 2008—may well become unwittingly in breach of the de minimis limit. As Mr Whiting explained, this group are

paying their UK taxes but probably do not even know they are non-domiciled because they do not know the term, they do not realise potentially they are about to lose their personal allowance, they certainly do not have any advisers, and if they were to go to HM Revenue & Customs—and let us be realistic we are talking about potentially millions of them—I very much doubt whether HM Revenue & Customs are the least bit geared up to help them. In other words, what we are looking at is unwitting non-compliance by a large group of people at the bottom end of the income scale.[325]

Mr Whiting estimated that this group was the largest of the three cadres of non-domiciled taxpayers to which he had referred.[326]

87. When we asked the Treasury how many non-domiciled taxpayers it had estimated would leave the UK, it responded that "at the time of the consultation our working assumption was that 3,000 people would leave. This is broadly still the case."[327] The Treasury also told us that not all the 3,000 non-domiciles would be wealthy individuals.[328] When we asked Treasury officials whether HM Revenue & Customs could cope with a very large number of foreign taxpayers seeking advice, particularly in view of the language barrier, they responded that they did not doubt the ability of HM Revenue & Customs to cope.[329] However, the Treasury subsequently stated that "Currently our data shows that around 80,000 remittance basis users have UK employment income. We expect this to stay broadly the same following the changes announced at Budget."[330] This contrasts markedly with Mr Whiting's estimate of "potentially millions", possibly due to the fact that the Treasury's figure relates to the 80,000 remittance basis users at present, rather than the "unwitting" non-domiciled taxpayers. When we asked the Chancellor of the Exchequer about potential risks of his new residence and domicile policy he stated that:

I do not want people to leave this country, far from it. Our country's wealth over the last few years, and especially over the last ten years or so, has been substantially enhanced by people coming from all over the world, choosing to live and work here. Some will come for a short period, and of course until you have been here for seven years this [£30,000] measure does not affect you at all and I think it would have been quite wrong to impose a charge from day one as some have proposed. These people contribute substantially.[331]

88. We are concerned that, as a result of the focus on wealthy individual non-domiciles, there has been insufficient consideration of the possible impact of tax changes announced in the Budget on the middle and lower income groups of non-domiciled taxpayers. Due to the complex nature of the policies on domicile and residence, and the distinction between how liability is incurred for the annual £30,000 charge and the loss of personal tax allowances, we are concerned that the new policies will create a group of non-domiciled taxpayers who would be unwittingly in breach of the new law. We are also not convinced that sufficient consideration has been given to the possible further burden that the measure will place on HM Revenue & Customs. We recommend that the Government, in its response to this Report, summarise the steps being taken by HM Revenue & Customs to deal with the potentially large number of foreign workers who may be seeking tax advice, following the implementation of the new policy. We intend to monitor the tax domicile regimes now proposed to be, or actually, created in a number of other tax jurisdictions. We believe that the Government should undertake a wider review of the off-shoring of both individuals and companies.

Environmental taxation

THE MOTIVES BEHIND ENVIRONMENTAL TAXATION

89. The 2008 Budget reiterated the Government's view that "Tackling climate change is the most serious and pressing global environmental challenge the world faces".[332] The Budget then went on to state that it set out "new policies to reduce emissions across all major sectors of the economy".[333] Mr Whiting accepted that there were a number of "good and worthy" environmental measures in the Budget, but considered:

What is lacking is a clear statement, a clear framework, by Government which says … 'Are we raising money by environmental duties or are we changing behaviour?' … to give business in particular the confidence that is the intention because, after all, business needs a little time to adapt and to follow what Government wants.[334]

The CBI believed that the Government was approaching environmental taxes "in completely the wrong way", arguing that the primary aim of environmental taxes should be to change behaviour, and not to raise revenue. Where revenues were raised as a side-effect of well-designed and objectively-justified tax reforms, continued the CBI, they should either be used specifically for environmental purposes, or balanced by offsetting tax reductions so that the overall tax burden is left unaffected. The CBI was "particularly disappointed" that the 2008 Budget measures were not revenue-neutral, and claimed that "revenue-raising appears to be a major motivating factor".[335]

AVIATION

90. Aviation currently accounts for 6.3% of the UK's carbon dioxide emissions, but this is projected to rise to as much as 21% by 2050. The Government has repeatedly expressed its commitment to ensuring that the aviation industry expands in an environmentally sustainable way, and that it pays the external costs of its activities, as well as contributing fairly to public services.[336] The 2007 Pre-Budget Report announced that air passenger duty would be replaced by a duty payable per plane, from 1 November 2009.[337] We welcomed this announcement, urging the Government to ensure that freight and private planes be included in the new framework, and that the new duty offers clear incentives for the aviation industry to invest in cleaner fleets.[338] Details of the revised duty will not be finalised until the Government's consultation period ends on 24 April 2008, but the Treasury has already decided how much revenue it will collect when the duty is introduced in 2009. The Government announced in this year's Budget that revenues from the duty in the second full year of its operation would be 10% higher than had been forecast in the 2007 Pre-Budget Report "in order to strengthen the environmental signal".[339] Mr Chote commented that the 2007 Pre-Budget Report gave "a strangely precise amount of revenue … from what was a very vague plan at that stage, and now we have a very precise number increased by 10%, for reasons which do not seem very obvious.[340] The CBI questioned the motives of the Government more explicitly:

the Budget announcement that tax revenue from the new duty will increase by 10% in the second full year of operation seems to confirm fears that the government sees this primarily as a revenue-raising exercise, rather than a genuine attempt to change behaviour. This increase is likely to be less obvious to the individual consumer than it would have been had the existing 'per passenger' tax been retained, and as such can be thought of as another element of the government's 'stealth tax' agenda.[341]

VEHICLE EXCISE DUTY

91. The King Review of low-carbon cars, published alongside the 2008 Budget, suggested that drivers could reduce carbon dioxide emissions and fuel bills by up to 25% by choosing the most efficient vehicle within the relevant group. The Review concluded that the technology existed to reduce the average carbon dioxide emission of new cars to 100g per km by 2020.[342] In this year's Budget the Government announced a reform to the structure and rates of vehicle excise duty (VED) "in order to support this target, and strengthen the environmental incentive to develop and purchase fuel-efficient cars".[343] By 2010-11, there will be thirteen VED bands (instead of the current seven), with rates ranging from zero for the cleanest cars to £455 per year for cars emitting more than 255g per km of CO₂. The Budget explained that the differential in VED between the most and least polluting cars would increase, so that making a small change in car emissions had a greater financial impact. Newly-registered cars will be subject to a first-year rate from 2010 which, for the cars producing the most emissions will be £950. The Budget's rationale for this charge was "to influence purchasing choices".[344] Treasury officials confirmed that approximately 50% of new car buyers from 2009 would be better off, 20% of new car buyers will be neither better nor worse off and 30% would have to pay more to tax their cars.[345] The CBI welcomed the Government's broad approach on green taxation in relation to cars, but warned that the pace and scale of the proposed new car taxes would present "a sting in the tail" for some manufacturers. In their view, both business and the wider public would buy into the environmental agenda if 'carrots' as well as 'sticks' were used in the Government's attempts to force behavioural change.[346] Dr Weale argued that, if the Government really wanted to change people's actions, it would simply increase road fuel duty:

I find myself asking, 'Yes, there is some discouragement now to owning cars which use a lot of fuel' but actually what does the Treasury, what do HM [Revenue & Customs], think the implications would have been if instead vehicle excise duty had been abolished and the revenue entirely collected through fuel duty? My guess is that that change would do a lot more to reduce carbon emissions, perhaps not in the short run but in the medium term.[347]

ROAD FUEL DUTY

92. It is the Government's policy that "fuel duty rates should rise each year at least in line with inflation as the UK seeks to reduce polluting emissions and fund public services". In this year's Budget the Government announced a postponement of six months to the 2 pence per litre increase in road fuel duty scheduled for April 2008, but also announced an above-inflation increase for 2010-11.[348] The Chancellor of the Exchequer's reason for the delay was "quite simply because in the current circumstances when people are facing increased costs and given the fact that the price of oil is so high at the moment, I thought it was the right thing to do".[349] The CBI observed that the decision to delay the 2p increase in fuel duties would be a welcome relief to hauliers, businesses and other motorists, particularly in light of recent increases in fuel prices. The CBI urged the Government to keep under review the proposed further half a penny rise from 2010, and argued that "in the longer term the Government needs to level out the playing field for UK hauliers to compete with their foreign counterparts who enjoy far cheaper fuel prices".[350] Mr Chote did not agree that delaying the 2p increase would be of significant benefit to the economy: "The justification for delaying is that you are doing that to support the economy. But saying that in a £1.4 trillion economy whether you raise Fuel Duty by £500 million now or in October is going to make a great deal of difference seems to me at odds with experience."[351]

Income shifting

93. In last year's Pre-Budget Report, the Government announced its intention to consult on draft legislation designed to prevent a person arranging "their affairs to gain a tax advantage by shifting part of their income, from dividends or partnership profits, to another person who is subject to a lower rate of tax", a practice referred to as 'income shifting' or 'income splitting'.[352] The Government argued that the vast majority of individuals could not shift their income and therefore income shifting was "unfair" and ran counter to the principle of independent taxation.[353] The legislation was intended to operate alongside the existing rules on business deductions and settlements, and would have sought to remove the tax advantage obtained from income shifting. The Government stated that the legislation was "intended to apply to two forms of income: profits from a partnership; and company distributions, most commonly dividends".[354] Income from employment, interest on savings and any other source would not be affected.[355] HM Revenue & Customs estimated in the 2007 Pre-Budget Report that the introduction of income shifting rules would generate about £260 million in 2009-10.[356]

94. The introduction of such legislation had been widely expected following the ruling of the House of Lords against HM Revenue & Customs on 25 July 2007 in the case of Arctic Systems involving Mr and Mrs Jones. HM Revenue & Customs had previously lost its case in the Court of Appeal and as a result had appealed to the House of Lords. The case concerned dividend payments made to Mrs Jones by a company through which Mr Jones provided IT consultancy services. The view of HM Revenue & Customs was that the settlements legislation deemed the dividends received by his wife to be Mr Jones's for income tax purposes. The House of Lords, however, ruled in favour of Mr Jones.[357] On 26 July 2007, the Exchequer Secretary to the Treasury, Angela Eagle MP, made a Written Statement to the House stating that the Arctic Systems case had "brought to light the need for the Government to ensure that there is greater clarity in the law regarding its position on the tax treatment of 'income splitting' … It is the Government's view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this. The Government will therefore bring forward proposals for changes to legislation to ensure this is the case."[358] The Government consulted on the draft legislation between December 2007 and February 2008, receiving over 260 responses.[359]

95. The 2007 Pre-Budget Report had announced the Government's intention to bring into effect from 6 April 2008 legislation to prevent a tax advantage being gained from income shifting. However, the Government announced in the Budget that, following the recent consultation on this issue, it had decided to undertake a further consultation and had postponed the introduction of legislation until the 2009 Finance Bill.[360] The delay was in order "to ensure that the legislation in this area provides clarity and certainty".[361] Treasury officials told us that there had been "a considerable misunderstanding as to the number of businesses that will actually be affected … the assumption [is] that 85,000 businesses will be affected."[362]

96. Mr Whiting thought that "the decision to postpone the impractical and unworkable income shifting proposals is very welcome". He hoped that the opportunity would now be taken to have a "proper review of the principles of small business taxation. The result should be a taxation system that rests on practical, workable rules for the small business community, rather than resorting to a sticking plaster solution to the perceived problem."[363] The ICAEW contended that the draft legislation had contained proposals that were "fundamentally flawed" and cautioned that "deferring the proposals for one year without a reconsideration of the underlying policy will merely defer the considerable implementation problems that will otherwise arise".[364] Furthermore, "the proposed legislation would have caused considerable administrative burdens upon businesses and a high level of uncertainty as to whether people were caught or not".[365]

97. Treasury officials believed that it was important to implement the income shifting rules correctly to ensure that "they act as a deterrent for those who are setting out to mitigate tax in a way which the Government does not intend and not as an administrative burden for ordinary small businesses".[366] The Chancellor of the Exchequer told us that he did not have "any problem with husbands and wives who are partners in a business and they are both working. It seems to me that it is absolutely right that we should recognise that through the tax system. Where you have the problem is where one of them is not doing any work at all."[367] We were concerned that Directors in other types of business were not required to justify their salary based on the work they had undertaken and that the draft legislation appeared to place an unfair burden on family business. We asked the Chancellor of the Exchequer to explain why the draft income shifting legislation specifically targeted small family businesses, given that those wishing to avoid being affected by the new legislation could presumably shift their income to a person outside their family. The Chancellor of the Exchequer conceded that "trying to draft that legislation is difficult".[368] However he maintained that he could not "allow a situation to develop where more and more people can take advantage of something that is not open to the majority of people in this country, because I think that becomes unfair".[369] We welcome the Chancellor of the Exchequer's decision to undertake a further consultation on the issue of income shifting. However, we are concerned that this proposed legislation would place an additional tax burden on small businesses and we note that it caused widespread concern during the previous consultation period. We recommend that the terms of the consultation be widened to constitute a full review of the principles of small business taxation to ensure that the taxation system rests on practical, workable rules for the small business community.

Double taxation treaties

98. In this year's Budget the Government announced that a measure would be introduced, with effect from 12 March 2008, to "clarify existing indefinitely retrospective legislation introduced in 1987 to counter double taxation treaty avoidance schemes. This will clarify that the wording of the UK's double taxation treaties does not allow UK residents to avoid paying UK tax on their profits from foreign partnerships."[370] It was also announced that a further, more general, measure would be introduced to prevent tax avoidance through the misuse of double taxation treaties by UK residents.[371] The double taxation treaties were designed to prevent UK residents from being taxed twice on overseas income. Mr Whiting told that abuse of these treaties had been widely known and that the practice had been popular with UK property developers who used the treaties to set up partnerships in the Isle of Man, with profits from UK developments made via the trust in order to avoid UK taxation. He told us that the abuse had "certainly been disclosed to HM Revenue & Customs" and he was surprised that HM Revenue & Customs had suddenly taken such far-reaching retrospective action to stop the abuse.[372] He was concerned that it would set "a dangerous precedent for the integrity of the UK's tax system".[373] He also told us that, if HM Revenue & Customs recovered tax on every case since 1987, the savings to the Exchequer would be in the order of "tens of millions" of pounds, but concluded that "to go back 20 years does seem to be a little too far".[374]

99. Treasury officials told us that:

Following the introduction of the disclosure rules in 2004, it was disclosed that a number of individuals, particularly in the property industry, had been taking a different interpretation from that which had been announced in 1987 and were continuing, without any active presence in the Isle of Man and only having income in the UK, to be claiming that 99% of their income was effectively covered by the Isle of Man double tax treaty. The action that has been announced here is retrospective. It confirms what was set out quite clearly in 1987 and what was intended by the Isle of Man treaty when it was entered into.[375]

We welcome steps taken by the Government to prevent tax avoidance through the misuse of double taxation treaties by UK residents. We are concerned by the suggestion that the Government has known about this abuse for some time and yet has failed to act. We recommend that the Government set out, in its response to this Report, when it was first alerted to the abuse, why action was not taken earlier and why it considers a 21-year period of retrospection appropriate. We expect the Government to move swiftly to close future abuses of the tax system that are disclosed to them.

291   The indexation allowance was introduced to reduce the taxable gain on the sale of an investment bought between 31 March 1982 and 5 April 1998. This was achieved by increasing the base cost of the asset/investment in line with inflation over the holding period. The allowance was replaced by taper relief after April 1998. Assets acquired between 1982 and 1998 would therefore have the taxable gain reduced by both the allowance and taper relief. Back

292   Pre-Budget Report and Comprehensive Spending Review 2007, p 90, para 5.79  Back

293   HC (2007-08) 54-I, para 45 Back

294   Ibid., paras 41, 56 Back

295   Treasury Committee, Seventh Special Report of Session 2007-08, The 2007 Pre-Budget Report: Government Response to the Committee's Second Report of Session 2007-08, HC 429, p 6 Back

296   HC Deb, 24 January 2008, cols 1627-1628 Back

297   Budget 2008, p 67, para 4.42 Back

298   Qq 100, 102 Back

299   Q 102 Back

300   Ev 75. See also The Green Budget 2008, pp 229-232. Back

301   Q 397 Back

302   HC (2007-08) 54-I, paras 51-52 Back

303   Qq 400-402 Back

304   "Insurers warn of £35bn life sales under threat", The Financial Times, 13 March 2008, p 18 Back

305   Association of British Insurers, Letter to the Chancellor of the Exchequer, 14 February 2008, p 1 Back

306   Q 104 Back

307   Budget 2008, p 67, para 4.42 Back

308   Q 399 Back

309   Q 103 Back

310   Qq 250, 252-253 Back

311   The remittance basis is a method of paying tax on overseas earnings, available to Non-domiciled residents, whereby income and gains originating overseas are taxed only when they are remitted back to the UK in whatever form. Back

312   HC (2007-08) 54-I, paras 67-72 Back

313   HC (2007-08) 429, p 9 Back

314   Budget 2008, p 68, Box 4.3 Back

315   Ev 81 Back

316   Budget 2008, p 68, Box 4.3 Back

317   Ev 61 Back

318   Ev 64 Back

319   Q 302 Back

320   Q 107 Back

321   Ibid. Back

322   Q 105 Back

323   Ibid. Back

324   Q 107 Back

325   Ibid. Back

326   Ibid. Back

327   Ev 61 Back

328   Q 264 Back

329   Q 265 Back

330   Ev 61 Back

331   Q 302 Back

332   Budget 2008, p 89, para 6.1 Back

333   Ibid., p 92, para 6.4 Back

334   Q 112 Back

335   Ev 81 Back

336   Budget 2008, p 99, para 6.38 Back

337   Pre-Budget Report and Comprehensive Spending Review 2007, p 123, para 7.56 Back

338   Treasury Committee, Fourth Report of Session 2007-08, Climate change and the Stern Review: the implications for Treasury policy, HC 231, para 115 Back

339   Budget 2008, p 99, para 6.38 Back

340   Q 113 Back

341   Ev 81 Back

342   Budget 2008, p 96, para 6.27 Back

343   Ibid., p 96, para 6.28 Back

344   Ibid. Back

345   Qq 257-258 Back

346   Ev 81 Back

347   Q 108 Back

348   Budget 2008, p 97, para 6.30 Back

349   Q 408 Back

350   Ev 81 Back

351   Q 60 Back

352   Pre-Budget Report and Comprehensive Spending Review 2007, p 93, para 5.99 Back

353   HM Treasury, Income shifting: a consultation on draft legislation, December 2007, p 3, para 1.1 Back

354   Ibid., p 13, para B.6 Back

355   Pre-Budget Report and Comprehensive Spending Review 2007, p 93, para 5.99 Back

356   Ibid., p 11, Table 1.2 Back

357   Income shifting: a consultation on draft legislation, p 5, para 1.12; HM Revenue & Customs, Arctic Systems Ltd (Jones v Garnett): HMRC guidance, available at http://www.hmrc.gov.uk/practitioners/sba.htm. Back

358   HC Deb, 26 July 2007, cols 89-90WS Back

359   Income shifting: a consultation on draft legislation, p 9, para 2.1; Q 278 Back

360   Budget 2008, p 126, para A.142 Back

361   HM Treasury, Budget 2008 Press Notice No. 3: Income shifting Back

362   Q 278 Back

363   Ev 64 Back

364   Ev 74 Back

365   Ibid. Back

366   Q 280 Back

367   Q 416 Back

368   Q 427 Back

369   Ibid. Back

370   Budget 2008, p 126, para A.140 Back

371   Ibid. Back

372   Q 119 Back

373   Ev 64 Back

374   Qq 118-119 Back

375   Q 245  Back