PN200607FB

Embargo: 00:01 Wednesday 20 June 2007

Contact: Owen Williams 020 7219 8659

2007 FINANCE BILL DOESN'T DO ENOUGH TO SIMPLIFY COMPLEX BUSINESS TAX SYSTEM - LORDS ECONOMIC AFFAIRS COMMITTEE

The House of Lords Economic Affairs Committee has today criticised the 2007 Finance Bill for not going far enough to simplify Britain's complex corporate tax system.

They argue that the complexity of Britain's tax system combined with the uncertainty this causes business has led to Britain losing international competitiveness and discouraged international companies from basing themselves in the UK.

The Committee recommend that the Government consult widely with industry in moving forward with simplification of the tax system. They argue that small businesses need certainty and simplicity from the tax system as much as big business and should be widely consulted on proposed tax changes.

The Committee are critical of the frequent changes in small company's rate of corporation tax over recent years. This has led to small businesses making commercial decisions, such as whether to incorporate, for tax rather than business reasons. The Committee see this as a significant weakness in the way the Treasury and HMRC have dealt with small businesses.

The Committee also looked in detail at other aspects of the Finance Bill, the provisions to deal with Managed Service Companies, and measures introducing new criminal investigation powers and civil penalties for errors in tax returns. They also considered measures dealing with online filing and electronic payment.

On MSCs the Committee argue that the Government proposals are a 'sticking plaster'. They recommend a review to consider how far the differences in tax levels between employment, self employment and working through a company can be reduced. A more level playing field between the tax and national insurance paid by employees and the self employed would go a long way to eliminating the benefit of misrepresenting what is in effect employment as self employment. Such a review would compliment that of small businesses that is recommended elsewhere in the report. Consultation with business would be vital and the outcome would also help simplify the tax system overall.

On the new criminal investigation powers available to HM Revenue and Customs, the Committee argue there must be stringent monitoring of how these powers are used. They argue for an annual report to Parliament. And they see the early introduction of safeguards, with consideration of a taxpayers' charter, as important. On civil penalties for errors in tax returns, the Committee sees a need for clearer definition of culpability, stronger rights of appeal against imposed penalties and an informal dispute resolution process.

The Committee also criticise the Government attempts to make online filing mandatory for Corporation Tax and VAT. They argue that it would be better to encourage business to file returns online by better promotion and marketing of the scheme rather than compelling companies to do so. They take a similar approach to the online filing of PAYE and National Insurance returns which will be mandatory by 2010. The Committee point out this may cause considerable disruption and expense to small businesses that may not have the expertise to file returns online. They recommend small employers are permitted to file paper returns in 2010 and beyond.

Commenting Lord Wakeham, Chairman of the House of Lords Economic Affairs Committee, said:

"The Government must go further and move faster in simplifying the corporate tax regime. While there are some positive steps in the 2007 Finance Bill we are concerned that Britain is still losing international competitiveness.

"It is vital for small and large business alike that the tax system is clear, simple and not liable to rapid change. We are therefore concerned that the rate of corporation tax for small companies has changed so often in recent years.

"More action is needed to level out tax rates for employees and the self employed to discourage people misrepresenting their true employment status to achieve tax benefits. A close eye also needs to be kept on the Revenue's criminal powers and on the safeguards and remedies available to taxpayers.

"We also see no justification for compulsory online filing; instead HMRC should work harder to convince business of the benefits of moving to online filing voluntarily."

Notes to Editors

1. The report was produced by the Finance Bill Sub-Committee of the House of Lords Select Committee on Economic Affairs. The Sub-Committee's inquiry was the fifth since its establishment in 2003. Its terms of reference require it to focus on tax administration, clarification and simplification rather than rates or incidence of taxes.

2. The members of this year's Sub-Committee were Lord Wakeham (Chairman), Lord Barnett, Lord Blackwell, Lord Paul, Lord Powell, Lord Sheldon, Lord Sheppard and Lord Vallance.

3. The report is published by the Stationery Office: The Finance Bill 2007, House of Lords Select Committee on Economic Affairs, 4th Report, Session 2006−07, HL Paper 121.

4. The report will be available shortly after publications at: http://www.parliament.uk/parliamentary_committees/lords_economic_affairs.cfm

For further information or to request and interview with Lord Wakeham, please contact Owen Williams on 020 7219 8659.

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