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Here you can access summary of the key current tax developments in Ireland, the UK and internationally as reported by Chartered Accountants Ireland

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Office of Tax Simplification

1. Publishes Interim Report on Small Business Tax Review

As part of its original remit, the Office of Tax Simplification (OTS) was asked to provide an initial report to the Chancellor by Budget 2011 in order to identify areas of the UK tax system that cause the most day-to-day complexity and uncertainty for small businesses. As many readers will be aware, the OTS was also asked, as part of that review, to explore alternative approaches to IR35 (the intermediaries’ legislation). This interim report, published last month, also includes recommended priority areas for simplification.

The overwhelming conclusion of the report is that genuine and long lasting simplification can only be brought about through major structural changes to the UK tax system. A key recommendation therein is that the Government starts to look at reforming this structure and sets out a timetable for doing so by the end of this year.

The report identifies two key areas that require attention:

The OTS suggest that the integration of income tax and national insurance, including reducing the differential between rates applicable to different incomes and legal forms, could, for example, remove much of the pressure on the employment and self-employment boundary and result in the IR35 legislation becoming obsolete. The report clearly states however that the position of pensioners, who currently do not pay NICs will need to be considered thoroughly.

The OTS sees this route as an option for the smallest unincorporated businesses only, suggested as being those with turnover below £20,000, and presents three options for taxing those businesses as follows:

Greater detail on the possible benefits of this proposal is set out in Chapter 3, in addition to some of the issues that might need to be addressed. More specific detail on each of the above options is contained in Annex A to the report.

The report suggests that studies on how best to achieve the two key changes proposed could be carried out, for example, by setting up a working party and through consultation with advisers and professional bodies within a specified timeframe. This methodology is strongly recommended by the OTS as a means to address and identify many of the issues affecting small businesses.

If significant changes are made, the OTS clearly acknowledge that this can only be achieved through legislation which in itself would immediately add to the burdens on small businesses. One of the key findings of the review is that complexity for small business stems as much from the volume and frequency of change as from the complexity of legislation or procedures.

Thus, by deduction, simply curtailing change would deliver simplification in many ways. However, introducing the alternative (but simplified) approach for small unincorporated businesses is stated as still worth exploring, with a view to taking away many of their administrative burdens.

The OTS recognises that the timescale to introduce the major structural changes it has recommended is likely to be lengthy. Accordingly, the report also suggests some changes that could be introduced within a relatively short timeframe to help ease some of the burdens on small businesses.

These areas include:

These specific recommendations are set out in greater detail in Chapter 4 of the report.

The OTS was also tasked with addressing the complexities that exist within the IR35 legislation. As previously mentioned, the OTS believe that their recommended structural change of integrating income tax and NICs would address the perceived need for IR35 but, until structural changes are introduced, they recommend two options that the Government should consider adopting:

A third alternative is presented which considers the introduction of a new “business test”. Although this particular option would not represent an immediate simplification in itself (and would require more definitions and tests) it would aim to reduce radically the size of the population potentially caught by the IR35 legislation and thereby remove a large number of contractors from the worry of a potential IR35 enquiry. As such, this third option could be investigated during a period of IR35 suspension. Detailed commentary on this particular area is set out in Chapter 5 of the report.

Once the Government has considered this initial report, the OTS expects to receive a formal response from the Chancellor as part of Budget 2011 which will set the work programme and timetable for the final report of this OTS review of small business taxation. It is not expected that the Chancellor will formally respond to specific policy options at this stage, as the OTS intends to evaluate these in more detail as part of their final report.

The full report and associated press release can be accessed at http://www.hm-treasury.gov.uk/ots_smallbusinessreview.htm

2. Completes Review of Tax Reliefs

In addition to publishing its initial review of Small Business Taxation, the Office of Tax Simplification (OTS) has now published its final report on the review of UK tax reliefs.

The Chancellor and Exchequer Secretary launched the OTS last July and tasked them with carrying out two initial reviews including a review of all tax reliefs.

Following its interim report on Tax Reliefs published in December 2010, the OTS received comments and feedback from taxpayers, advisers, HMRC, HM Treasury, and other interested parties on methodology and on particular reliefs. Of the 1,042 reliefs originally identified, the final report looked in detail at 155.

The OTS starting point was to review individual reliefs with a view to identifying specific areas of tax that might lead to a wider review. The final report builds on the direction set out in the December interim report, measuring the reliefs against consistent criteria, and evaluating their effectiveness and relevance. Recommendations have now been made as to whether a relief should either be retained in its current state, simplified to ease administrative burdens, or be abolished altogether, with the aim of simplifying the often complex tax reliefs system with common sense proposals.

According to the report, during the review, a number of key themes emerged:

Merging income tax and NIC – this is viewed in the report as a long term project of structural reform that would deliver major simplification and was also an OTS recommendation as part of its initial review of small business taxation;

Employee benefits and expenses – the longer term aim would be to align the treatment of employee benefits, with shorter term aims of simplifying many minor benefits with a de-minims limit of £100/£500, or amending the current £8,500 threshold;

Inheritance tax and trusts – the reliefs for inheritance tax are integral to the Government's policy in this area and the report considers that a more appropriate approach would be to review the tax as a whole;

Capital gains tax, particularly as applicable to companies – the capital gains systems for individuals and companies is viewed as having drifted apart, with gains by individuals taxed at a lower rate than income to reflect inflation, whereas companies are still required to calculate indexation.

The OTS aim would be to realign the treatments and simplify the tax, but as there are changes in relation to corporate capital gains expected in Finance Bill 2011 due for publication on 31 March, the report views this as a longer term project;

Environmental taxes – both landfill tax and aggregates levy should be reviewed, as both regimes contain basic charging provisions with numerous exemptions, it may be more appropriate to define what is caught rather than what is excluded.

The initial review has suggested that these areas are particularly complex, for example due to the number and complexity of the reliefs involved. It is also mooted that whilst each area is deserving of a full review, the OTS recognises that these are complex and time consuming areas involving important matters of government policy that go beyond the current remit of the OTS.

The OTS cites other studies, in particular the Mirrlees Review, which has looked at the overall structure of taxes and stresses that it would be impossible for the OTS to try to emulate the Mirrlees approach given their timescale and resources.

Out of the total of 155 reviewed in detail, the OTS recommends that 54 remain unchanged, 37 be looked at in more detail, and 47 be abolished on the basis that they are either time expired, there is no ongoing policy rationale, the value is negligible, or the benefit is outweighed by the administrative burden.

It is also suggested that 17 reliefs be simplified, including:

In framing their recommendations, the OTS have borne in mind their original brief to arrive at ‘revenue neutral’ proposals and stress that as their resources do not permit a fully costed set of recommendations; the real work on revenue implications must be carried out along with consultations over those of the OTS recommendations that the Chancellor is minded to adopt.

The report concludes that the OTS believes it has achieved a broad balance: in their view, the costs to the taxpayer of the reliefs recommended for abolition are balanced by the cost to the Exchequer of widening some other reliefs.

The report also cites that a review of the remaining 883 reliefs they did not look at in detail is warranted in the belief that there is clearly scope for simplifying a number of these. They cite that whilst the OTS could start further projects to cover sections of these reliefs, such work would logically be part of wider projects reviewing specific taxes or the way taxes affect particular sectors.

The OTS has presented these recommendations to the Chancellor and expects a formal response as part of Budget 2011, followed by consultation on draft legislation with amendments possibly to be included in Finance Bill 2012.

The full text of the report can be accessed at http://www.hm-treasury.gov.uk/d/ots_review_tax_reliefs_final_report.pdf