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Embargo: 00:01 Thursday 12 June 2008

Contact: Owen Williams 020 7219 8659

LORDS FINANCE BILL COMMITTEE CRITICISE HANDLING OF CAPITAL GAINS AND RESIDENCE AND DOMICILE TAX CHANGES

The changes to the rules on residence and domicile in the 2008 Finance Bill were poorly handled and may have damaged the UK's international competitiveness concludes today's report from the House of Lords Committee on the Finance Bill. Inadequate consultation on these changes and on those to capital gains tax is also criticised. The Committee state that the perception that the system is unstable and subject to severe shocks cannot be good for the competitiveness of the UK economy.

On competitiveness, the report recommends that the Treasury should publish its economic analyses on both CGT and residence and domicile so that everyone may see why officials are more optimistic than the private sector about the Finance Bill's potential impact. The Committee are particularly concerned by the weight of evidence that the proposals on residence and domicile seem likely to have a negative impact on the UK's competitiveness and think it is vital that all that is possible is done to retrieve the position. The Committee calls on the Government to reassure non-domiciled people that the move was not intended to discourage them from coming to the UK and to reassure investors of the advantages of investing in the UK. The Committee state that following the changes in the Finance Bill "the overall impression being given today is of a less competitive tax environment."

There was a widely held view amongst the private sector witnesses that the consultation on both CGT and residence and domicile had been very poorly handled and fell well short of the good practice they had seen on other issues. The Committee were not persuaded by officials that there had been a clear policy statement and see no reason why there could not have been earlier, better and more open consultation. It was particularly disappointed that the progress that it welcomed last year had not been maintained.

The report recommends that Treasury and Revenue and Customs should critically consider the consultative processes and why the private sector is so unhappy with what took place in these instances. The Committee recommend that officials should open discussions with interested parties to develop an agreed Code of Practice on consultation on tax policy initiatives

On CGT, private sector witnesses were concerned at the shock the changes had given to the system and cast doubt on whether the new regime met the Government's aim that it should be sustainable. The report makes a number of recommendations aimed at restoring the certainty and predictability which investors need. It concludes that there is a strong case for widening the new entrepreneurs' relief to include cases brought to the attention of the Committee.

The report looks at the changes to residence and domicile provisions and highlights the compliance difficulties which the changes will cause, particularly for lower income migrant workers, and recommends that the de minimis level should be raised to a level where the great majority of these workers are no longer troubled by the changes. The Committee point out that the new regime will lead to higher compliance costs for businesses employing more highly paid non-domiciled people and this is in sharp contrast to the programme to cut compliance costs which the Committee has previously praised.

Commenting on the report, Lord Vallance, Chairman of the Committee, said:

"We have heard harsh criticism from the private sector of the way in which the residence and domicile initiative was handled. It was claimed that the shocks which have been given to the tax system by these changes and those to capital gains tax may undermine the stability of the tax regime and UK competitiveness.

"Our general impression from the evidence we received was that this year the formulation of tax policy has been marked by uncertainty of direction.

"We feel that the Treasury and Revenue and Customs must now look carefully at how they have handled these policy changes and must do all that they can to make sure that this year's mistakes are not repeated".

Notes to Editors

1. The report The Finance Bill 2008 is available from The Stationery Office, House of Lords Economic Affairs Sub-Committee, 2nd report of 2007/08, HL Paper 117.

2. The report will be available online shortly after publication at: http://www.parliament.uk/parliamentary_committees/lfinbill.cfm

3. The members of the House of Lords Economic Affairs Finance Bill Sub-Committee are:

Lord Vallance of Tummel (Chairman)

Lord Barnett

Lord Blackwell

Lord MacGregor of Pulham Market

Lord Moonie

Lord Paul

Lord Powell of Bayswater

Lord Sheppard of Didgemere

Lord Wakeham

For more information, copies of the report or to request an interview with Lord Vallance, please call Owen Williams, House of Lords Head of Press and Media, on 020 7219 8659.

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