October 22, 2012

Twin proposals today, sharing one consultation document, the attribution of gains to members of closely controlled non-resident companies.  Apparently the EU has, in its wisdom, decided that some of our anti-avoidance legislation is a bit TOO effective, so we have to level the playing field.  It’s an overworked metaphor, I know, but personally I always like to think of that playing field being levelled UP… if you level it down you’re going to get bogged down.  I don’t insist on the metaphor but you know what I mean – let’s not (and oh goodness it’s so hard to find a way of saying this that isn’t a cliche!) race to the bottom!


The thing about this one is that it seems to involve two different teams (as two different lead contacts are named) and it looks as if they have come to slightly different conclusions.  Now both may well be valid conclusions, and I don’t know enough about the intricacies of the particular bits of anti avoidance legislation to know whether there were any other sensible alternatives, but essentially it looks as if the first provision includes a motive test where there wasn’t one before, and the second provision introduces an objective test where there was only previously a motive test – in other words each provision started with either a belt OR some braces, but finished up with both!  (I really MUST stop mangling my metaphors)

So here’s what I sent the team.  In my haste to hit the consultation deadline I made a mistake in the first paragraph and misread the consultation as if it said that they were removing the motive test in the case of transfers of assets abroad where in fact of course the proposal is to back it up with an alternative, more objective test – but that doesn’t quite undermine my point about whether this is a simplifying or a complexifying measure!

You are consulting on two different anti-avoidance provisions and, as there are two lead officials named in the consultation, I deduce there are two different teams working on them. The thing that jumps out at me about your consultation document, then, is that you appear to be reforming gains attributed to members of non-resident closely controlled companies by introducing a new motive test… and to be reforming transfer of assets abroad by, er, removing the motive test. While I’m sure each of you has thought through his or her own proposals, is there the possibility that these changes will cumulatively make the tax code more, rather than less, complex?

In particular, both changes seem to use similar concepts of “genuine establishment” which read, from the consultation document, as though they are capable of objective verification. It is only in the context of non-resident closely controlled companies that you are introducing a “motive test”. You say this is “designed to give an immediate and convenient exclusion for any taxpayer who can show there is no tax avoidance motive at all…” Forgive me, but aren’t you suggesting your “convenient” way for a taxpayer to exclude themselves from this legislation is to prove a negative? I’d strongly suggest dropping this suggestion and using the same “genuine establishment” test for each provision.

I also see that your consultation does not seem to set out any alternatives to the proposals you have put forward in the draft legislation: have you considered and tested what alternatives there are? Your tax impact assessment does not “anticipate” any equality impacts and I would be interested to know on what evidence you have reached this conclusion. You also consider that the changes will make “operations slightly easier for a small number of businesses”. However the government has committed itself not to introduce any new regulation on small businesses in the life of this parliament – will there be any small businesses in the small number of businesses caught by these changes and, if so, will the slight ease you anticipate be greater than the deadweight cost of researching and understanding the changes you propose?

Until you can answer these questions I would suggest that the case for change is not made.

I also notice that the nice straightforward explanation of the impacts in the form of answers to seven questions that we saw earlier this month hasn’t carried through to this consultation document – and nor has the commitment to post-implementation review!

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