Tax simplification: what now for the OTS?

It is often said that tax avoidance is an irregular verb – ‘I mitigate, you plan, he or she [aggressively] avoids’ – and, if a US multinational, ‘We pay all taxes we are required to pay by law.’ Similarly, an allowance here, an exemption there, a modified computational base and a reduced or zero-rate of tax – all intended to achieve particular outcomes – might suggest that tax simplification is a Sisyphean task. However, as the accomplishments of the Office of Tax Simplification (OTS) over the last five years have undoubtedly led to it being put on a permanent footing, as the Finance Bill 2016 proposes, what might be achieved by a properly resourced OTS?

 

In principle, huge possibilities are opened up by ‘making tax digital’ (MTD), particularly if operational and policy clarification go hand in hand. There is a paradoxical risk, however, that if the same desire for ‘quick wins’ evident from past OTS reports is factored into MTD, this might just close down simplification possibilities, particularly if the need to engage with multiple suppliers of software makes it harder to achieve change to the overall system.

 

Simplification can occur in many ways: from administrative efficiencies (e.g. bringing all relevant HMRC material into a Partnership Tax Manual); and legislation which is sufficiently clearly drafted that those not intended to be affected can readily satisfy themselves of that fact, ideally without professional advisers. It can also involve fundamental questions of the type posed in the OTS report The closer alignment of income tax and national insurance (CAITNI), examining the continuing value of the contributory principle.

 

We already know from a letter by David Gauke, Financial Secretary to the Treasury, dated 16 March 2016 (www.bit.ly/1MSaqrI), that the OTS is to review the computation of corporation tax. So we might anticipate whether making sundry tax adjustments (see the OTS Small company taxation review (SCTR) para 1.31); and streaming profits between income and investment, particularly in the light of the changes to loss relief from 1 April 2017 (see the Business tax road map, paras 2.56–2.58), need continue. Even more radical changes to computation might result were reliefs, even if long established, tested for their continuing effectiveness and value for money, e.g. do they reward behaviour that would have occurred anyway, and so does the deadweight cost outweigh the incentive effect? That, however, could be seen as trespassing into policy making and would any consequential simplification  generate sufficient benefits to justify the upheaval.  

 

Another issue identified by the SCTR was that businesses operating through companies after payment of corporation tax may have more funds available for investment than similar activities carried on by partnerships and sole traders after payment of income tax (hence the concerns captured at paragraph 1.45 of the SCTR over look-through tax treatment). That recognition in part drove the introduction of the mixed membership rules into partnership taxation – not a simplification; and prompts the question of whether the tax regime incentivises growing and investing businesses to incorporate or whether limited liability is the real driver. While it is unclear whether that issue will influence the direction of travel under the Business tax road map, we do know that the OTS will develop proposals on look-through tax treatment and evaluate the effectiveness of a ‘sole enterprise personal assets’ vehicle in achieving asset protection, mindful that the perceived benefit of incorporation, and hence some small businesses becoming corporation tax payers, is negated by banks’ requirements for personal guarantees.

 

Given the wholesale changes made to the UK CGT regime by the Budget, and the extension, in effect, of entrepreneurs’ relief (ER) to passive investors, the need to evaluate ER suggested by the OTS in the SCTR (para 4.24) may be regarded as premature because the evidence base will change. Alternatively such an exercise may be more timely because of the likely increased cost (not in absolute terms: 28% versus 10% is larger than 20% versus 10%) but because of that extension in scope. Indeed, the need to amend the transactions in securities rules to introduce a TAAR (see clause 35 of the Bill) rather supports the view recorded in the SCTR that ‘some … doubted whether ER encouraged entrepreneurs’.

 

The CAITNI report was very timely – and colloquial – in identifying the rise of a ‘gig economy’. This is not a new phenomenon: individuals providing their services via companies, against which IR35 was introduced to maintain the PAYE and NICs take without recognising in some cases the relative precariousness of the relationships formerly undertaken by employees, has been a long-term trend. However, the ability to connect service providers with customers via electronic platforms – whether Uber, TaskRabbit or others – means that this is only likely to accelerate.

 

If state benefits are to continue to rely on contributions, whether deemed or actual, it is critical to find ways by which a contribution record can be built, particularly by individuals only doing roles intermittently or part-time, whether employed, self-employed or both at different times. Further, while IR35 is ‘off the table’ (see CAITNI para 5.5), nevertheless some proposals in the CAITNI might reduce the loss of tax that IR35 was intended to stem such that IR35 becomes otiose. These include extending benefits to the self-employed in return for increased contributions, increased tax on dividends beyond the £5,000 exemption and the suggestion that the payroll levy is only borne by employers with meaningful pay bills. In response the OTS was asked to work up the proposal to move employee NICs to an annual, cumulative and aggregated basis, and to develop the reform of employers NICs.

 

There will be plenty for the OTS to do in responding to these requests, even without the scope for it to provide advice in other areas it considers ripe for simplification.