It is widely believed that the UK is the only country which has an Office of Tax Simplification. The Office was established in 2010 on an informal basis by the Coalition Government, essentially as a Conservative initiative, following a report by former chancellor Lord Howe. It owed a great deal at the start to its first tax director and chair – John Whiting and Michael Jack, respectively – and to its main sponsor in government, tax minister David Gauke.
The background to the OTS is set out in the landmark Making tax policy making: a new approach document, published in June 2010. The formal announcement of the OTS was made on 20 July 2010, when the initial framework document was published (see bit.ly/39z2Cyz). The document states that
‘The aim of the Office is to provide independent advice to the Chancellor on simplifying the UK tax system, with the objective of reducing compliance burdens on both businesses and individual taxpayers. To do this, the Office will:
The first two reviews were announced in July 2010. They were a report on tax reliefs, to ‘identify those reliefs that should be repealed or simplified ... The government is particularly interested in identifying reliefs that are largely historic, not frequently used, create distortions in the tax system or are complex for business or HMRC to administer.’ This first review is notable for several reasons. Firstly, it ended up with the first attempt to identify all UK tax reliefs (1,042 at the time – now 1,190) and to classify them as structural or non-structural. This work was then adopted enthusiastically by Parliament and especially the Public Accounts Committee. Managing tax reliefs has become an important part of the UK tax landscape, thanks to that initial piece of work. The second point to note is the instruction from the government to consider distortions in the tax system. This has formed a significant part of subsequent instructions to the OTS from the chancellor, notably in the recent reviews into inheritance tax and capital gains tax. Distortions – being encouraged to go down a non-intuitive path by the tax system – are an important cause of complexity.
The second review looked at small business tax simplification (including IR35, where the OTS was asked if it could identify alternative approaches). Again, this was a significant review as the whole area of small business taxation has preoccupied the OTS over its first decade. It also identifies the so-called IR35 problem, which continues today.
The first staff of the OTS were (free) secondees from the private sector. They joined head of office Jeremy Sherwood, who moved to the OTS from HMRC and two HMRC/Treasury colleagues. The model of a mixed private and public sector team working on tax policy was an important part of the design of the OTS and it continues today.
John Whiting was keen from the very start to consult as widely as possible. It was important to leave London and hear about potentially different issues in other regions. Going to visit was a much better way to engage hard to reach taxpayers and their advisers, who were less likely to write detailed reports on their challenges imposed by the tax system. Again, this philosophy continues today, although the pandemic has meant that video conferences rather than travel have become the norm.
There are a range of achievements from those early years. One of the biggest is the cash basis, now used by more than one million taxpayers. There are lots of detailed improvements to employee expenses and share schemes, including the trivial benefits allowance, standard rules for some share schemes and payrolling benefits in kind (although that has proved harder in practice to implement). The flagship national insurance project highlighted the major upheaval in merging the income tax and national insurance base and making national insurance cumulative and annual.
Arguably one of the bigger achievements of the early OTS was to build the case for the body to become a permanent part of the UK tax landscape. This came with statutory authority for the OTS in FA 2016 (ss 184–189 and Sch 25). The Act provides for an independent board being an independent chair, tax director, four independent board members and one member each from the Treasury and HMRC.
In 2016, a second former Treasury minister, Angela Knight, took over as chair and David Halsey was appointed head of office. In 2017, Paul Morton succeeded John Whiting as tax director. Paul and Angela both signalled they would be departing in autumn 2018. I was appointed tax director in January 2019 and the first non-political chair, Kathryn Cearns OBE, was appointed in March 2019.
Board appointments are all made by the chancellor after an open competition and are usually for five years, with the ability to extend. The Treasury Select Committee has the right to conduct a post-appointment hearing for the chair and tax director, which it has taken up for the chair.
The new OTS has an enhanced budget, managed by the Treasury, and paid for by both the Treasury and HMRC. It is required to publish an annual report, to be laid before Parliament. The enhanced budget meant that the OTS moved gradually to appointing permanent staff members, in place of the project appointments previously made. It currently has 9.5 full time equivalent staff (about 12 to 14 people in practice), plus the tax director (three days per week) and the board.
The framework agreement for the statutory OTS was updated in 2015 to reflect the changes (see bit.ly/3sAArIz).
The OTS has authority to conduct two types of review: those commissioned by the chancellor, and those it decides on independently. In practice, it is common for the Office to work on two reviews at a time and to produce something like four reports every year. The OTS has recently published a full index of all its reviews (see bit.ly/38LLjLK), with links to the underlying reports and government responses.
A key part of all reviews is the publication of a scoping document, which is agreed by the OTS with the Treasury and with HMRC. This leads to one of the debates about the OTS: how independent can the OTS be? Clearly the OTS has an independent board and it operates as an arm’s length office of the Treasury. However, the Office is not a think tank. Its duty is always to produce reports addressed to government, whether formally commissioned by the chancellor, or not. It is thus important for the OTS to work with the Treasury and with HMRC in designing the reviews it will undertake. This is for two reasons: firstly, a report without any official support is unlikely to be adopted. Secondly, the quality of the work depends on access to data from HMRC’s economics and statistics group, KAI, as well as debating possible changes in tax administration and law with both HMRC and the Treasury.
Following the scoping document, the OTS will publish a call for evidence and often publish a survey, particularly aimed at taxpayers. Team members will meet as wide a range of interested parties as possible, including naturally the main tax, accountancy and legal bodies, as well as representatives from business and specific industry sectors. There will be a range of meetings with policy and operational experts from HMRC and the Treasury. For chancellor reviews, the OTS asks experts in different areas to join a consultative committee, which is to help the team consider a wide range of potential ideas for improvement. Members of the consultative committee are invited as individuals, not as representatives, and the meetings are confidential. They are not responsible for the final report.
In July 2020, the chancellor asked the OTS to review capital gains tax. Just as with the very first review, the chancellor asked the OTS to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.’ The OTS decided first to consider the policy design and principles. It thus became convenient to publish two reports, with the first on policy principles being published on 11 November (see bit.ly/3oQDuKm). The report highlighted many features of capital gains tax which can distort behaviour, including its boundary with income tax and interconnections with inheritance tax. In that context, the recommendations were presented by reference to four areas where there are policy choices for governments to make: rates and boundaries, the annual exempt amount, capital transfers and business reliefs.
Surprisingly, there had been an element of professional criticism of the scope of the review on the basis that it could extend beyond simplification. Yet distortions do add complexity to the tax system. For example, the report highlighted that some employees were able to receive part of their remuneration in the form of shares, subject to the lower rates of CGT rather than the much higher rates of income tax. Advisers told the OTS that growth shares – shares with an initial low value, which enjoy a slice of future profits – probably would not exist without the tax advantage. In another area, a spike in those with gains just below the annual exempt amount suggested that financial advisers were helping rebase client share portfolios through using the relatively high exemption annually. If the annual exempt amount were intended to reduce administration alone, a lower level of £2,000–£4,000 would be needed.
The report thus set out a range of areas for the chancellor to consider if he wishes to reduce distortions, including interlinked changes. These choices are very much for the chancellor; as the report noted: ‘It is for government to determine the principles and role of the tax when framing policy and determining tax rates. In doing this, the government should carefully consider the economic implications, the implications for people with different levels of income or gains, the tax yield and the compliance costs for taxpayers and HMRC.’
A less high profile, but just as important, recent review has been into claims and elections (see bit.ly/3nLlT57). Almost all the UK’s 1,190 tax reliefs require a claim – and elections and nominations add to that number. The three most significant areas, which would benefit the most people, are for HMRC to improve the functionality of the personal tax account and the business tax account (including the forthcoming, merged, single digital account); the government to explore reducing the number of different categories and levels of employee flat rate expense claims; and for HMRC to improve its online forms and supporting guidance.
The latest review to be launched is a review into the smarter use by HMRC of third-party data (bit.ly/35Iu8IK). The UK tax system is based on a relatively small number of third parties (such as employers and pension providers) reporting information to HMRC (and sometimes withholding tax). The question this review will seek to answer is whether additional third-party reporting could help taxpayers by providing data directly to HMRC for incorporation into their personal tax accounts and potential self-assessment returns. The study is not about seeking additional data; rather it will seek to ask who is best placed to provide it. For example, a freedom of information request by Pensionbee revealed that ‘on average, 81% of higher rate and 54% of additional rate taxpayers failed to claim their tax relief in financial years 2016/17 and 2017/18.’ If the pension company provided the data in a suitable format to HMRC, this tax relief could be given automatically.
The team is continuing to work on the second part of the capital gains tax review, which is expected to be published in late spring.
In 2021, the Treasury must ‘conduct a review of the effectiveness of the OTS in performing its functions.’ It is likely that the Treasury will seek external input to its review and no doubt suggestions will be made for future changes. I suspect that there may be debate around two areas: how should more OTS recommendations be implemented, and should the OTS have a role in considering new tax measures? Hopefully there will be continuing support for the role of the OTS in offering chancellors’ options for future reform.
It is widely believed that the UK is the only country which has an Office of Tax Simplification. The Office was established in 2010 on an informal basis by the Coalition Government, essentially as a Conservative initiative, following a report by former chancellor Lord Howe. It owed a great deal at the start to its first tax director and chair – John Whiting and Michael Jack, respectively – and to its main sponsor in government, tax minister David Gauke.
The background to the OTS is set out in the landmark Making tax policy making: a new approach document, published in June 2010. The formal announcement of the OTS was made on 20 July 2010, when the initial framework document was published (see bit.ly/39z2Cyz). The document states that
‘The aim of the Office is to provide independent advice to the Chancellor on simplifying the UK tax system, with the objective of reducing compliance burdens on both businesses and individual taxpayers. To do this, the Office will:
The first two reviews were announced in July 2010. They were a report on tax reliefs, to ‘identify those reliefs that should be repealed or simplified ... The government is particularly interested in identifying reliefs that are largely historic, not frequently used, create distortions in the tax system or are complex for business or HMRC to administer.’ This first review is notable for several reasons. Firstly, it ended up with the first attempt to identify all UK tax reliefs (1,042 at the time – now 1,190) and to classify them as structural or non-structural. This work was then adopted enthusiastically by Parliament and especially the Public Accounts Committee. Managing tax reliefs has become an important part of the UK tax landscape, thanks to that initial piece of work. The second point to note is the instruction from the government to consider distortions in the tax system. This has formed a significant part of subsequent instructions to the OTS from the chancellor, notably in the recent reviews into inheritance tax and capital gains tax. Distortions – being encouraged to go down a non-intuitive path by the tax system – are an important cause of complexity.
The second review looked at small business tax simplification (including IR35, where the OTS was asked if it could identify alternative approaches). Again, this was a significant review as the whole area of small business taxation has preoccupied the OTS over its first decade. It also identifies the so-called IR35 problem, which continues today.
The first staff of the OTS were (free) secondees from the private sector. They joined head of office Jeremy Sherwood, who moved to the OTS from HMRC and two HMRC/Treasury colleagues. The model of a mixed private and public sector team working on tax policy was an important part of the design of the OTS and it continues today.
John Whiting was keen from the very start to consult as widely as possible. It was important to leave London and hear about potentially different issues in other regions. Going to visit was a much better way to engage hard to reach taxpayers and their advisers, who were less likely to write detailed reports on their challenges imposed by the tax system. Again, this philosophy continues today, although the pandemic has meant that video conferences rather than travel have become the norm.
There are a range of achievements from those early years. One of the biggest is the cash basis, now used by more than one million taxpayers. There are lots of detailed improvements to employee expenses and share schemes, including the trivial benefits allowance, standard rules for some share schemes and payrolling benefits in kind (although that has proved harder in practice to implement). The flagship national insurance project highlighted the major upheaval in merging the income tax and national insurance base and making national insurance cumulative and annual.
Arguably one of the bigger achievements of the early OTS was to build the case for the body to become a permanent part of the UK tax landscape. This came with statutory authority for the OTS in FA 2016 (ss 184–189 and Sch 25). The Act provides for an independent board being an independent chair, tax director, four independent board members and one member each from the Treasury and HMRC.
In 2016, a second former Treasury minister, Angela Knight, took over as chair and David Halsey was appointed head of office. In 2017, Paul Morton succeeded John Whiting as tax director. Paul and Angela both signalled they would be departing in autumn 2018. I was appointed tax director in January 2019 and the first non-political chair, Kathryn Cearns OBE, was appointed in March 2019.
Board appointments are all made by the chancellor after an open competition and are usually for five years, with the ability to extend. The Treasury Select Committee has the right to conduct a post-appointment hearing for the chair and tax director, which it has taken up for the chair.
The new OTS has an enhanced budget, managed by the Treasury, and paid for by both the Treasury and HMRC. It is required to publish an annual report, to be laid before Parliament. The enhanced budget meant that the OTS moved gradually to appointing permanent staff members, in place of the project appointments previously made. It currently has 9.5 full time equivalent staff (about 12 to 14 people in practice), plus the tax director (three days per week) and the board.
The framework agreement for the statutory OTS was updated in 2015 to reflect the changes (see bit.ly/3sAArIz).
The OTS has authority to conduct two types of review: those commissioned by the chancellor, and those it decides on independently. In practice, it is common for the Office to work on two reviews at a time and to produce something like four reports every year. The OTS has recently published a full index of all its reviews (see bit.ly/38LLjLK), with links to the underlying reports and government responses.
A key part of all reviews is the publication of a scoping document, which is agreed by the OTS with the Treasury and with HMRC. This leads to one of the debates about the OTS: how independent can the OTS be? Clearly the OTS has an independent board and it operates as an arm’s length office of the Treasury. However, the Office is not a think tank. Its duty is always to produce reports addressed to government, whether formally commissioned by the chancellor, or not. It is thus important for the OTS to work with the Treasury and with HMRC in designing the reviews it will undertake. This is for two reasons: firstly, a report without any official support is unlikely to be adopted. Secondly, the quality of the work depends on access to data from HMRC’s economics and statistics group, KAI, as well as debating possible changes in tax administration and law with both HMRC and the Treasury.
Following the scoping document, the OTS will publish a call for evidence and often publish a survey, particularly aimed at taxpayers. Team members will meet as wide a range of interested parties as possible, including naturally the main tax, accountancy and legal bodies, as well as representatives from business and specific industry sectors. There will be a range of meetings with policy and operational experts from HMRC and the Treasury. For chancellor reviews, the OTS asks experts in different areas to join a consultative committee, which is to help the team consider a wide range of potential ideas for improvement. Members of the consultative committee are invited as individuals, not as representatives, and the meetings are confidential. They are not responsible for the final report.
In July 2020, the chancellor asked the OTS to review capital gains tax. Just as with the very first review, the chancellor asked the OTS to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.’ The OTS decided first to consider the policy design and principles. It thus became convenient to publish two reports, with the first on policy principles being published on 11 November (see bit.ly/3oQDuKm). The report highlighted many features of capital gains tax which can distort behaviour, including its boundary with income tax and interconnections with inheritance tax. In that context, the recommendations were presented by reference to four areas where there are policy choices for governments to make: rates and boundaries, the annual exempt amount, capital transfers and business reliefs.
Surprisingly, there had been an element of professional criticism of the scope of the review on the basis that it could extend beyond simplification. Yet distortions do add complexity to the tax system. For example, the report highlighted that some employees were able to receive part of their remuneration in the form of shares, subject to the lower rates of CGT rather than the much higher rates of income tax. Advisers told the OTS that growth shares – shares with an initial low value, which enjoy a slice of future profits – probably would not exist without the tax advantage. In another area, a spike in those with gains just below the annual exempt amount suggested that financial advisers were helping rebase client share portfolios through using the relatively high exemption annually. If the annual exempt amount were intended to reduce administration alone, a lower level of £2,000–£4,000 would be needed.
The report thus set out a range of areas for the chancellor to consider if he wishes to reduce distortions, including interlinked changes. These choices are very much for the chancellor; as the report noted: ‘It is for government to determine the principles and role of the tax when framing policy and determining tax rates. In doing this, the government should carefully consider the economic implications, the implications for people with different levels of income or gains, the tax yield and the compliance costs for taxpayers and HMRC.’
A less high profile, but just as important, recent review has been into claims and elections (see bit.ly/3nLlT57). Almost all the UK’s 1,190 tax reliefs require a claim – and elections and nominations add to that number. The three most significant areas, which would benefit the most people, are for HMRC to improve the functionality of the personal tax account and the business tax account (including the forthcoming, merged, single digital account); the government to explore reducing the number of different categories and levels of employee flat rate expense claims; and for HMRC to improve its online forms and supporting guidance.
The latest review to be launched is a review into the smarter use by HMRC of third-party data (bit.ly/35Iu8IK). The UK tax system is based on a relatively small number of third parties (such as employers and pension providers) reporting information to HMRC (and sometimes withholding tax). The question this review will seek to answer is whether additional third-party reporting could help taxpayers by providing data directly to HMRC for incorporation into their personal tax accounts and potential self-assessment returns. The study is not about seeking additional data; rather it will seek to ask who is best placed to provide it. For example, a freedom of information request by Pensionbee revealed that ‘on average, 81% of higher rate and 54% of additional rate taxpayers failed to claim their tax relief in financial years 2016/17 and 2017/18.’ If the pension company provided the data in a suitable format to HMRC, this tax relief could be given automatically.
The team is continuing to work on the second part of the capital gains tax review, which is expected to be published in late spring.
In 2021, the Treasury must ‘conduct a review of the effectiveness of the OTS in performing its functions.’ It is likely that the Treasury will seek external input to its review and no doubt suggestions will be made for future changes. I suspect that there may be debate around two areas: how should more OTS recommendations be implemented, and should the OTS have a role in considering new tax measures? Hopefully there will be continuing support for the role of the OTS in offering chancellors’ options for future reform.
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