Manufactured payments

June 21, 2012

I can’t pretend that I understand the legislation on Manufactured Payments.  In fact, I can’t actually pretend I have even *read* the legislation!  I barely managed to stay awake while I was reading the consultation document.

What I DO know something about, is what the government has promised to do when it contemplates making a change to legislation that will have an impact on business, and in this case it seems to me that it hasn’t done it.

First of all let’s look at what’s being proposed.  You don’t really need to know what a manufactured payment is for these purposes; let’s suppose you replace the words “manufactured payment” with the words “complicated thing”.

 1.5 In making these proposals it is the Government’s aim that as far as possible the changes to these tax rules should:

  • reduce the compliance burden on both payers and recipients of manufactured payments;
  • neither impede normal market transactions nor act as an incentive to transactions;
  • provide consistency of treatment between manufactured payments and similar payments made under derivative contracts such as swaps;
  • be consistent with the trend in recent years for taxation of financial instruments to follow the accounting treatment and for payments between UK companies to be paid without deduction of tax;
  • reduce the potential for tax avoidance.

What I take from this is that the government proposes to make the tax treatment of manufactured payments simpler, close down a tax avoidance loophole involving double taxation relief, reduce the potential for new loopholes to be thought up, and make life simpler for everyone.

As a TIIN specialist, I therefore turn next to the TIIN to see what that does to the numbers.

Page 22 of the document shows there will be no impact on tax receipts until the 2014/15 tax year, and that the effect after that is expected to be “negligible”.  I comment in passing that the TIA should begin when the legislation is due to be presented, not 2011/12 which is neither here nor there at this point when we are already in the 12/13 tax year!

The main question to be addressed in a TIIN is – why are you doing this?  Given that there is no exchequer impact from the change, then I would have expected the reason for change to be a saving in the administrative burden on companies involved.  However there is no attempt to quantify this: let’s look at the impact on businesses and civil society organisations:

Most businesses will not be affected. Those businesses involved in stock lending may benefit as the abolition of the need to deduct tax from some payments should lead to reduced administrative burdens. The prices of stock lending and repo transactions may need to be adjusted to reflect changes in the tax credits due to different participants in the market. There are likely to be transitional costs involved in changing IT systems and adjusting pricing models.

There’s no saving to HMRC either: “The impact on HMRC will be negligible as only a small number of staff are involved with manufactured payments.”

And there’s nothing else: “No other impacts are envisaged”

So why are we doing it?

Chapter 3 of the condoc, the “case for change” says:

3.6 More generally, there has been a trend in recent years towards the abolition of any requirement to deduct tax where payment is made by one UK company to another.

3.7 In addition the current rules are extremely complex and now run to over 100 pages of legislation. This complexity to some extent reflects the need which has arisen in the past for frequent changes to the legislation to defeat avoidance schemes.

3.8 HMRC continues to receive disclosures of avoidance schemes indicating that this area remains vulnerable to avoidance risk. Simplifying the legislation, and removing the need to deduct tax, will reduce this avoidance risk.

I’m interested in this idea that there’s a “trend” – sounds nice and organic, doesn’t it, as if we’re simply going with the flow.  But tax isn’t a force of nature, it’s a wholly manufactured (to coin a phrase) object, and we as citizens own its existence and – in the persons of our elected government – determine its design.  So a “trend” isn’t a reason to change.

Doing away with complexity is the only plausible reason given for change, and you might think that doing away with 100 pages of tax legislation was a desirable objective in itself.

But if that’s the case, then how much will it cost to do it?  What is the cost/benefit analysis of the change?

There must be some clue of what’s at stake if we don’t do anything at all, surely?  And there must be some idea of how much it costs to bring a piece of legislation before Parliament?  Maybe we should compare one with the other and see if the game is worth the candle?

Here’s the formal response I sent:

This is an individual’s response and is also posted online (with commentary) on my blog at https://tiintax.com/.
1.  The TIA begins its consideration with 2011-12 which is of course already in the past.  Surely the five year period under consideration should begin when the legislation is expected to be introduced, ie 2013-14 or at the earliest the current tax year, 2012-13?
2. There is no reasonable cost/benefit analysis in the TIA or elsewhere in the consultation document.  It is asserted that abolition of 100 pages of legislation will ease the administrative burden on affected businesses but the number of businesses affected is not given, nor is the administrative burden (measured by the standard cost model) calculated.  There are several forms and records listed for abolition and my understanding is that they should easily be capable of look up in the SCM and I am curious why this has not been done.
3.  Nor is there any reasonable consideration of the comparative costs of undertaking this change (the costs of the consultation itself and of the Parliamentary and other time required to pass the necessary legislation) as against the costs (the risks of tax avoidance) which would apply if there were no change.
4.  I can only therefore conclude that either this consultation document is seriously defective in its failure to present the cost/benefit analysis of making the change, or else the case for change is not made and the proposals should therefore be dropped.
5.  Sorry to give you what may seem an unhelpful reply but I would also be grateful if the consultation coordinator would look at this as a complaint at the failure to conduct a consultation in accordance with the government’s Code of Practice on consultations.  This says that “Estimates of the costs and benefits of the policy options under consideration should normally form an integral part of consultation exercises, setting out the Government’s current understanding of these costs and benefits.” and the Tax Consultation Framework additionally promises that, at each stage of the consultation, government will set out “its current assessment of the impacts of the proposed change and seek to engage with interested parties on this analysis.”  I cannot see that this has been done in this case.

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