Draft Enactment of Extra-Statutory Concessions Order 2012
Value Added Tax (Land Exemption) Order 2012
The Committee consisted of the following Members:
Mark Etherton, Committee Clerk
† attended the Committee
As some members of the Committee may be aware, Her Majesty’s Revenue and Customs continues to review its extra-statutory concessions, which are commonly called ESCs. The two orders that we are considering represent a further step in that review by putting seven ESCs on to a statutory footing. Those ESCs provide for tax reliefs that need to be legislated for following clarification of HMRC’s administrative powers in the Wilkinson case. Both orders have been fully consulted on, and I am grateful to those who took the time to help the Government to improve them.
The Value Added Tax (Land Exemption) Order 2012 retains an ESC that exempts from VAT seasonal caravan pitches that are intended for use as an occupant’s principal private residence, provided they are not on a holiday site. The draft Enactment of Extra-Statutory Concessions Order 2012 will retain the effect of six ESCs. C16, which is perhaps the most well known, is concerned with distributing the assets of a company upon its winding up.
ESC C16—the legislation preserving it is at articles 16 to 18 of the draft order—is designed to allow shareholders in small businesses to withdraw the fruits of their investment at the end of a company’s life in a tax-efficient way. A company with straightforward affairs that has ceased business and paid off its creditors may not wish to incur the costs of a formal winding up. The provision applies when a company is informally dissolved, and it gives distributions to shareholders the same tax treatment as in a winding up, to a maximum figure of £25,000, which normally means that there is a considerable tax saving for the shareholders.
In response to concerns expressed during the consultation, the Government have raised the distribution ceiling from the £4,000 originally proposed. Some called for an even higher ceiling, but that would be irresponsible in the light of the attempts at avoidance that HMRC has already witnessed in this area. The ceiling of £25,000 adequately balances maintaining a valuable concession for the small and micro-businesses for which it was always intended with the need for effective anti-avoidance protection once the relief is legislated formally.
The other five concessions in the order are also important because they preserve the benefits of concessions that, although relevant to only a small minority of taxpayers, ensure that tax operates fairly and consistently. The decision to legislate to maintain the effect of those five ESCs was welcomed by consultees. For example, the Central Association of Agricultural Valuers said:
“We support the proposal to give legislative effect to ESC B11, thereby providing certainty and clarity to farming businesses as to their tax position when compensation is received for the compulsory slaughter of animals.”
Close followers of the ESC review might wish me to update them on concession A10, which deals with lump sums paid under overseas pension schemes. Legislation was deferred from the previous consultation and the concession has continued to operate in the meantime. When we last debated ESCs, I said that legislation would be brought forward in due course. I can tell the Committee that HMRC continues to work on the legislation to enact that concession and will expose it for comment in the next consultation on draft legislation, which is expected later this year.
HMRC continues to review its concessions. A further consultation on draft legislation and a note announcing certain withdrawals were published in December, and as I have already mentioned with regard to concession A10, there will be further such consultations in the future. If the two instruments before the Committee are agreed, the draft ESC order will be made quickly to ensure that it comes into force on 1 March. The VAT order will come into force on the same date.
The cost of retaining the ESCs for which we are legislating is small, and certainly less than £10 million a year. Given the cross-party support for HMRC’s ESC review, and the valuable benefits that ESCs provide—especially C16, which is widely supported in the business community—I am pleased to commend the orders to the Committee.
Chris Leslie (Nottingham East) (Lab/Co-op): Good afternoon, Mr Chope. First, may I first put on record the fact that although my hon. Friend the Member for Pontypridd (Owen Smith) would normally shadow the Exchequer Secretary in such a Committee, he is not able to attend today? It is a great privilege to have the honour of considering these extra-statutory concessions, and I apologise to the Committee for missing the previous occasion on which ESCs were debated.
As the Minister said, we are discussing seven extra-statutory concessions. We are broadly content with the five measures that replicate the full tax effects of the concessions as they currently stand: those relating to insurance premiums; to compensation for the compulsory slaughter of animals; to arrangements for corporation tax on groups of companies; to the sale of niches and memorials in crematoriums; and to payments for the private use of a shared company car. However, we have several questions about two concessions, so I would be grateful if the Minister would clarify a number of points.
The VAT order makes provision on seasonal caravan pitches. The substantive change is an attempt to distinguish more clearly in law between caravans that are used principally for seasonal or leisure purposes, and those inhabited on a residential basis. As many hon. Members know from their constituencies, some people live in
Has the Minister made an estimate of the number of customers in the UK who rent pitches that are currently deemed exempt but will be subject to VAT in the future? How much extra will that cost consumers on average? We need those figures in a more tangible form for those living in such circumstances or making such arrangements so that we can get a better sense of the scale involved. What dialogue has taken place with representatives of caravan sites about the impact of the changes? I understand that the National Caravan Council has responded, but what other comments have been made?
My second set of questions is about the snappily titled ESC C16, which relates to the dissolution of companies under the Companies Act 1985. As the Minister said, the arrangement treats distributions of assets to shareholders as capital and not income for personal tax purposes when a company is dissolved without the formal involvement of a licensed insolvency practitioner. We understand that the practical effect is normally a significant tax saving for shareholders through aligning the tax treatment of these distributions with those made in the course of a formal winding up.
The substantive change that the Government are making is the imposition of a threshold of £25,000 on the capital that can be distributed under the concession. Previously, there was no ceiling. As the Minister suggested, some respondents to the consultation questioned that threshold. Some suggested that the amount was too low to be useful for many companies, while others expressed concerns that, at the margins, it might force smaller companies to incur additional costs through undertaking formal liquidation procedures, although ESC C16 would previously have allowed a simpler dissolution arrangement.
Will the Minister tell the Committee his estimate of how many additional companies each year will dissolve through formal liquidation that might otherwise have taken a route facilitated by C16? What will be the individual and collective costs to those companies? The Minister talked about existing evidence of avoidance arrangements as he justified the £25,000 cap, but will he expand on why that amount was chosen? I understand that it is intended to disincentivise abuse, but it would be interesting to know more about the rationale behind it.
Has the Minister made an estimate of the proportion of the 325,000 companies that dissolve in the UK each year that would traditionally have used the C16 route? How many of them might have done so illegitimately before this change comes into effect?
Finally, will the Minister confirm that one change that is not noted in the documentation is that the concession will be self-assessed? Traditionally, companies being wound up under the arrangement were obliged to inform their local tax office, but that will not be the case in the future. Will he explain why that change has come about? Is it because there are staffing pressures on HMRC that we need to know about, and is that one of the reasons behind the £25,000 threshold? I look forward to hearing the Minister’s answers to my questions.
John Hemming (Birmingham, Yardley) (LD): I have had the unusual experience of being lobbied about the particular issue of ESC C16. The one point that the Opposition did not raise, but which I am interested in, is the details of the avoidance that we are trying to prevent by introducing the £25,000 limit. I am almost certain that the Government are entirely right on this, but it would be nice to know what avoidance is going on and its cost to the Exchequer.
Mr Gauke: I thank the hon. Member for Nottingham East and my hon. Friend the Member for Birmingham, Yardley for their comments and questions. I am sorry that the hon. Member for Pontypridd is not here today, but it is always a pleasure to see the hon. Member for Nottingham East. Although he missed our previous outing on ESCs—I am sure that he will have read the Official Report—he was able to contribute to our proceedings with his usual fluency. I shall address the two aspects of our debate that have emerged.
The hon. Member for Nottingham East asked about the number of caravan sites that would be affected by a change in VAT treatment, and the number of people who rent such pitches. The HMRC analysis makes it difficult to come up with numbers, so there is no firm evidence of the number of caravan sites affected by the concession, although anecdotal evidence suggests that the number is small as a proportion of the overall number of caravan sites. The position is much the same for the number of individuals who benefit from the concession. To the extent that it is possible to characterise the people involved—it is a generalisation, but it appears to be the case from the evidence—they tend to be elderly people with low incomes. The caravan sector is keen to preserve the concession and, in response to the hon. Gentleman’s question, HMRC consulted the National Caravan Council and the British Holiday and Home Parks Association on the matter.
Let me turn to ESC C16. Perhaps it will be helpful for the hon. Gentleman and my hon. Friend the Member for Birmingham, Yardley if I set out some circumstances in which an avoidance opportunity might be created were there not some kind of upper limit. As the Committee knows, dividends are taxed at effective rates of 25% for higher rate taxpayers and 36.1% for those taxed at the additional 50% rate. In contrast, when the concession is available, the payments are treated as shareholders’ capital receipts, rather than dividends. The rate of tax for capital receipts is only 10% if entrepreneurs’ relief is available, so the concession can be used for avoidance schemes that seek to turn income streams into capital. A typical scheme could involve a transfer or sale by a company of its assets or business to another company with some or all of the same shareholders, followed by the liquidation of the first company. That would result in the extraction of available funds, which should be drawn down as an income distribution from the old company, in a capital form, while the business continued via the new company. Our belief is that a £25,000 monetary limit renders such schemes unattractive, so we can deal with that type of avoidance.
The hon. Member for Nottingham East asked about the number and proportion of companies that are dissolved and make use of the concession, and how many do so
The hon. Gentleman asked why the process is now self-assessed. Given the way in which our tax system works with HMRC, it is normal for self-assessment to apply. It is right that HMRC should direct its resources according to risk. It is simply not feasible to continue the arrangements that we have when HMRC’s risk-based assessment is that resources can be safely deployed elsewhere. Obviously, if there is any evidence suggesting a particular reason why a taxpayer could be seen as high risk, the self-assessment return would be looked at more closely than otherwise. However, taking such an approach across the board would not be a sensible or efficient use of HMRC resources.
As there is already legislation to prevent avoidance in this area, there is sometimes an argument as to whether we need a £25,000 limit. To touch on the question raised by my hon. Friend the Member for Birmingham, Yardley, I have set out circumstances in which there could be an attempt at avoidance. It is reasonable to have a £25,000 limit that preserves the current tax treatment for many
I hope that I have provided some clarification to the Committee and those who will read our deliberations—no doubt the hon. Member for Pontypridd will be doing so very shortly. I hope that we can accept the orders and make further progress on the review of concessions. The measures will put on the statute book important reliefs that are not only vital for those whom they concern, but widely supported by the business community. The orders will ensure the smooth operation of the tax system, so I commend them to the Committee.