The Office of Tax Simplification (OTS) has been working for over 18 months now and published a group of significant reports – on small business, pensioner taxation and share schemes – shortly before the March Budget. In the meantime, the OTS’s recommendations in its initial reports on tax reliefs and small business are being taken forward in the current Finance Bill and consultations. Here, John Whiting, Tax Director, Office of Tax Simplification, gives an update on the progress of the OTS’s work – and asks for your input.
Tax Journal and its readers have been good enough to take a regular interest in the work of the Office of Tax Simplification (OTS). With tax practitioners struggling to come to terms with the 670 pages of the current Finance Bill, some have asked what the OTS has been up to ... so an update on the progress of our work is perhaps timely.
New readers start here...
By way of brief recap, the OTS was established by the Coalition government in July 2010 with a mandate to study aspects of the tax system and develop recommendations for simplifying matters. We started work a couple of months later with a small team, mixing HMRC and HM Treasury people with private sector part-time secondees (we currently have the equivalent of six full-time people overall). Each project has a Consultative Committee – made up of industry experts and tax specialists – whose members have been enormously helpful in giving input, introductions, challenges and general support.
Over the past 18 months or so the OTS team has toured the UK, met with many groups, bodies and individuals and encouraged everyone to give us their views on the problems of the tax system and how to improve matters. That remains our stance: so if you (or your firm/association) have views, please do send them in or set up a meeting with us. This, crucially, makes sure our work is evidence-based.
We look at all taxes administered by HMRC. In principle, we are to come up with revenue-neutral ideas, though it is perhaps better expressed as saying we have to have regard to revenue implications. We are an independent body; our reports are addressed to the Chancellor and ultimately it’s up to him what is taken forward. Experience to date is certainly that Treasury Ministers are very willing to take forward most of our ideas – though no guarantees ... we have to put forward a good case. The key is that we gather evidence to back what we say.
The reliefs project
Our first two reports, in March 2011, were on Tax Reliefs and Small Business taxation. The reliefs project famously identified 1,042 reliefs in the tax system; we looked in depth at 155 and recommended abolition for over 40, but also identified a need to improve a number of others.
Many of the abolitions are going through the current Finance Bill (see Schedule 38), mostly from next April. Some are clearly no longer needed (eg, some sundry stamp duty reliefs); some haven’t worked so seem to be unnecessary clutter (eg, flat conversion allowance); some seem to be anomalies that can’t really be justified (eg, duty relief for angostura bitters – so stock up now!).
Many have asked why we didn’t go through the other c900 reliefs. Primarily it was down to needing a manageable package to work on; it was also clear that it would be better to wait and do an overall review of some areas rather than just pick off individual reliefs. We did actually do groundwork and categorisation on all of them, which can be picked up at a later stage.
The small business agenda
Ask any business, large or small, what are its biggest issues and tax is almost certain to be at or near the top. The first part of our small businesses project included asking businesses what caused them the greatest tax problems; businesses and their advisers gave us a definite ‘top three’:
The point about change was that businesses struggle to keep up with the pace of change: they have enough to do running their businesses. That helped influence the government’s Tax Policy Making: a new approach. As for our recommendation that the PAYE and NIC systems should converge, we have certainly started something: after the ‘call for evidence’ last year, we expect a condoc shortly.
On tax administration, the OTS and HMRC commissioned a survey of the smallest businesses over their problems. The Federation of Small Businesses surveyed its members for ideas, as did the main tax professional bodies. In all we had views of around 4,000 small businesses and their advisers, crucially including views from many small businesses that did not use advisers.
Some examples of the ideas flowing from this aspect of our work are:
HMRC responded to this report in the Budget and published Making tax easier, quicker and simpler for small businesses on 27 March, setting out its plans for taking forward the OTS’s recommendations.
IR35
Last year we also looked at the (in)famous IR35 and our recommendations led to a commitment to improve matters, a project that has been taken forward by the ‘IR35 Forum’. Announcements on changes are expected imminently.
Changing the system
The OTS has recommended that there should be a relief for ‘disincorporation’, ie, moving tax-free from limited company status to sole trader or partnership. This would make the choice of business medium easier for small businesses – and yes, we had regard to the legislation of ESC C16. The Budget included a commitment to take disincorporation forward, so expect a consultation document soon.
More radically, we looked at a possible simpler system of taxation for the smallest businesses. There are some 1.8 million unincorporated businesses in the UK with turnover under £20,000: can we devise an easier system for them? Our report contained two significant, potentially far-reaching recommendations:
Both of these, we argued, should be businesses with turnovers up to £30,000, with scope to extend their coverage. They should be the default basis – ie, these should be the ‘norm’ for eligible businesses, but if a business wants full accounts on an accruals basis and/or exact expenses claims, then that’s fine.
The Chancellor decided to go beyond the OTS recommendation and suggest the limit should be linked to the VAT threshold, currently £77,000. He also agreed with the idea of flat rate allowances for use of home, mileage rates and other areas. HMRC issued a consultation paper on these areas on 27 March. No doubt readers will have views on these ideas and it is important that many people respond. On cash accounting, HMRC’s proposals develop the OTS’s recommendations but take them off in a slightly different direction. Is the principle right? What about the threshold? On flat-rate allowances, some have suggested that these are good in principle but worry whether the amounts will be realistic – what do you think? Are they the right things – the OTS had suggested separate rates for mileage for cars and vans, which might mean it is easier to set appropriate rates ... would that be better?
Share schemes
The first part of the OTS share schemes project looked at simplifying and streamlining the tax-advantaged share schemes. Our report recommended abolishing the requirement to have HMRC approval for schemes – why not go onto a self-assessment basis? We queried whether Company Share Option Plans should continue – or whether it would be better to fold them into an Enterprise Management Incentive. The report also recommended many technical simplifications, such as harmonising definitions and reducing qualifying periods. An appropriate condoc is imminent.
The next stage of the project is to look at unapproved arrangements – whatever companies are doing to reward and incentivise staff in ways that link to shares/securities. So we’ll be looking at what goes on – and then what barriers or problems (technical and administrative) the tax system puts in the way.
Pensioners
As for pensioners, we found many complexities for the UK’s 5.3 million pensioner taxpayers in the first stage of our project. Chief among these were age allowances, the 10% savings rate and the problems faced due to the way the state pension is not within PAYE. Having documented the basis of the problems, we noted many possible routes to improve the situation, but made no recommendations.
Stage 2 of our pensioner project will be to evaluate the various options (and indeed to canvass views for other routes) and come up with clear recommendations. Though, as everyone has no doubt seen, the Chancellor has already decided on the route for age allowances.
Future projects
As well as the second stages of our work on pensioners and share schemes, the OTS is also doing work on the underlying causes of legislative complexity. Can we come up with some principles that might guide future legislators about how to avoid unnecessary complexity?
We will also be looking for new areas to study. For this – as for all our work – we want input from a wide range of people. What areas of the tax code do cause the most difficulty in practice? Readers must have nominations, and input on share schemes and pensioners, so please do let us know.
We can’t guarantee that your suggestions will make it into law as, ultimately, changes to the tax system are a matter for the Chancellor – but we want your input to help compile our reports and make sure they are based on what is really happening!
John Whiting, Director, OTS
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