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Tony Wickenden: Retrospective tax changes are unfair and discourage investment

The Treasury Select Committee has welcomed some of the Government’s recent tax reforms but has restated its warning about introducing retrospective taxation changes

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Last week I looked at the Treasury Select Committee’s views on pensions reform. This week I would like to stick with the TSC (just as Everton fans recommended in their song to their Salford resident friends to “stick with Moyes, stick with Moyes Man United …”  you know how it goes Evertonians!) with a look at their views on the developments in relation to Isas and pensions – taken together, and retrospective tax legislation.

On Isas and pensions, the TSC’s view is that the changes announced in the Budget to Isas, as well as the reforms to the taxation of defined contribution pensions at retirement, amount to a substantial increase in the flexibility available to savers.

As this flexibility increases, Isas and pensions may become increasingly interchangeable in their effect. In the light of this, the TSC recommended that the Government comprehensively sets out the approach it intends to take to the taxation of all forms of savings.

This should include an examination of the merits of moving further towards taxing savings once, the scope for bringing the tax treatment of Isas and pensions closer together, and the appropriateness of the present arrangements for the pension tax free lump sum.

The chairman of the TSC added: “For too long, double taxation has discouraged some forms of saving. These reforms take us towards only taxing savings once.

“The Budget has enhanced flexibility for those saving, whether in pensions or Isas. The Government should now look further ahead. The Mirrlees Review highlighted the complexity and distortions in the UK tax system’s treatment of savings.

“The Government now has the opportunity to build on its reforms and the expressions of cross-party support that they have attracted. In particular, there may be scope in the long term for bringing the tax treatment of savings and pensions together to create a “single savings” vehicle that can be used – with additions and withdrawals – throughout working life and retirement. This would be a great prize. The cross-party support for these savings and pensions announcements offers the prospect of a more stable and healthy environment for pension and savings taxation. This can only encourage savings and reduce dependency.”

Despite laudable calls for further simplification, consumers currently looking to make the choice between investing in pensions and Isas, bonds or collectives or any other choice of products are going to need informed advice to make the right choices – especially if larger sums are being invested.

Moving away from pensions specifically, the TSC also has some pretty interesting views on the principle of retrospective legislation.

It said: “Retrospective tax legislation conflicts with the principles of tax policy recommended by this Committee. In our Budget 2012 Report we recommended that the Government restrict the use of retrospection to wholly exceptional circumstances. Witnesses told us that the Government was not abiding by this recommendation.  Furthermore, the Red Book announced an additional retrospective taxation policy; an extension of the requirement for taxpayers to pay upfront any disputed tax associated with anti-avoidance schemes. This policy will retrospectively apply to some of the 65,000 outstanding tax avoidance cases. There may be a case for this policy but the Government has yet to explain what is wholly exceptional about these cases that justifies this retrospective measure. It should do so in response to this report.”

The chairman of the TSC reinforced the strongly put TSC view and said: “We have deep reservations about any extension of retrospection in the tax system.

“Retrospection runs counter to the Committee’s principles of tax policy. In particular, it undermines certainty.  Retrospection should be considered only in wholly exceptional circumstances. The latest measure would have to be justified on those grounds.

“Retrospection puts policy on a slippery path to arbitrary taxation, discouraging investment and innovation and creating the scope for great unfairness.”

Most would strongly agree with the TSC view. Many would go further and object to legislation that while not, strictly speaking, retrospective, applies a different (albeit future) tax outcome to transactions undertaken in good faith and based on the legislation as it was at the time.

An example of this could be the application of “anti-fragmentation” rules in relation to already established “Rysaffe” trust strategies.

The GAAR guidance notes even indicate that this type of planning represented “accepted practice”. We can only hope that when we see the latest development in the consultation on trust simplification (which may have been made public by the time you read this) the “reasonable expectations of settlors”, based on the accepted law as it as when they set up the trusts, will be respected.

Tony Wickenden is joint managing director at Technical Connection

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