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Small business tax review team seeks ‘quick wins’

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Several core areas of small business taxation have been raised and debated ‘time and again’ during the recent roadshows organised by the Office of Tax Simplification. But none of the possible alternatives to IR35 so far suggested offers a long term solution, according to minutes of a recent meeting.

The OTS is conducting a review of small business taxation and looking at suggestions raised during discussions at locations including Aberdeen, Belfast, Cambridge and Southampton. It has been looking at three categories of policy options – structural reforms, changes in HMRC administrative processes, and ‘quick wins’.

An interim report will be produced ‘in the coming weeks’, alongside a report on a review of tax reliefs. The ‘common areas’ identified at the roadshows included:

  • the volume and frequency of change;
  • difficulties caused by the different rules for income tax and national insurance contributions;
  • the ‘impracticability’ of IR35; and
  • problems over the dividing line between employment and self-employment.

OTS Tax Director John Whiting said the events had stimulated valuable debate. ‘That is exactly what we hoped for as we seek input to help us simplify Britain’s tax code as openly as possible.’ He invited anyone who could not attend the roadshows, or has further ideas, to share their views on ‘making small business taxation simpler for all’.

The point was made at a meeting of the small business review consultative committee that issues raised around HMRC administrative processes were ‘the same ones that people have been raising for years’.

Minutes of the meeting held on 12 January noted that ‘taxpayers seek reliable advice and wanted more clarity/certainty than currently, and with a greater degree of customer service (eg. answering phone calls, greater use of email)’.

They added, however, that any recommendations ‘need to be mindful of HMRC’s recent spending review settlement’.

The committee debated some specific simplification options for small business tax, including the relationship between tax and accounting profits and whether a simplified system could be introduced for very small businesses.

There were mixed views on most of the options, and committee members were invited to send in their further thoughts and ideas for “quick wins”.’

IR35 creates ‘too many uncertainties’
Suggestions for alternatives to IR35 were discussed, ranging from ‘simple abolition of IR35 to keeping the system as it is’. But there was ‘a unanimous view’ that none of those options should be considered to be a long term resolution of the problem.

The minutes noted that: ‘The point was made that IR35 is a consequence of the differential between the total tax and NIC due under different legal structures, especially use of corporate vehicles. However, incorporation is also driven by agencies and end clients.

‘Any policy change to IR35 ought to address the issue of defining the boundaries, ie. who is within and who is not. As it stands, IR35 creates too many uncertainties for all involved. As such, it is ignored by some who should be concerned, and is a worry for others who should not be concerned.

‘The committee agreed that in the long term, bringing tax and NIC together could remove the need for the IR 35 rules. But in the short term, it was clear that any replacement was likely to be a compromise between the various ideas being put forward, and the original policy intention for IR35.’

Terms of reference
The Small Business Tax Simplification Review will include an initial report, in time for the Budget on 23 March, which will:

  • identify areas of the tax system that cause the most day-to-day complexity and uncertainty for small businesses; 
  • recommend priority areas for simplification; and
  • consider the impact of any simplification in these areas on different business sectors, including large business.

The initial report will also:

  • identify and provide evidence of the complexity and uncertainty created by IR35;
  • consider alternative legislative approaches that would be simpler and create certainty ‘while ensuring that, where intermediaries are used to disguise employment, any income that is effectively employment income is taxed fairly’; and
  • consider ‘the scope for tax avoidance and the extent to which alternatives to IR35 would affect it’.

While the focus will be on exploring alternatives to IR35, the government will be interested in ‘issues in relation to the structure of the tax system and the employment status test more generally’. This may have a bearing on wider issues about employment status and the boundary between employment and self-employment, including the impact on larger businesses, the Treasury said.

Tax reliefs
The OTS published in December an interim report, looking at 13 of the UK’s 1,042 tax reliefs, as a test to gauge reaction to its methodology. To enable it to ‘analyse properly and report on a meaningful number of reliefs’, 74 reliefs were identified for the next stage of its work with a further 75 to follow.

This meant putting aside, for now, reliefs that are structural reliefs, a simplification and an integral part of the tax system, already subject to government consultations, or subject to international agreements.

The OTS’s provisional recommendations, following a review of 13 reliefs, included abolition of vaccine research relief, the exemption from an income tax benefit charge for late night taxis and the 15p exemption for luncheon vouchers.

On the basis of the criteria used for the initial review, the OTS would recommend retaining capital gains tax relief on disposal of a private residence; income tax relief for repair and maintenance of work equipment; and income tax relief for players in the UEFA Champions League Final 2011.

‘Plenty of talk’
Many SMEs will ponder quite how [the coalition government’s initiatives on tax simplification] will really impact on them,’ said Francesca Lagerberg, Head of Tax at Grant Thornton.

Writing in Tax Journal (20 December 2010), she added.’ We’ve heard plenty of talk about such things in the past but little positive action has resulted. But picking through the detail there is a clear policy commitment to “simplify” and reduce the complexities of the UK tax system. SMEs will not object to that turning into reality if it reduces the administrative burden upon them.’

More than half (57%) of small business owners responding to a recent survey conducted by the Forum of Private Business indicated that they would be willing to pay more tax in exchange for a simplified system. Fifty per cent would be prepared to pay more under a simplified system 'if that system cut down on tax avoidance among their competitors', the FPB said, adding that 'tax avoidance is typically carried out by bigger businesses with the resources to exploit geographic loopholes'.