In search of the Holy Grail: Simplified taxes
Donald Drysdale sees the latest OTS consultation as an important opportunity to influence efforts to simplify the tax system.
For many years ICAS has called for simplification of UK taxes. It therefore welcomed the establishment in 2010 of the Office of Tax Simplification (OTS) – albeit as a temporary non-statutory office of HM Treasury – to make recommendations on how to simplify UK taxes. ICAS has worked closely with the OTS since then.
The OTS has a vision to make it easier for the millions of individuals, self-employed people and businesses who live and work in the UK to interact with the tax system, by playing a key role in making it simpler and so more understandable. It sees its strategy as threefold – to consider the tax issues arising in a changing world, address specific complex areas, and play a greater role in the public debate on tax.
Immediate operational priorities for the OTS are set out in a letter dated 16 March from the Financial Secretary to the Treasury, David Gauke MP.
The current Finance Bill contains welcome proposals to place the OTS on a statutory basis, enlarge its scope and enhance its independence. The OTS has now published a consultation document entitled Simplifying Tax for the Future, seeking views on how it should develop and operate as a statutory body.
Root causes of complexity in tax
In a developed economy such as that of the UK, taxes will always be complicated. While a fundamental purpose of tax is to fund government expenditure, politicians disagree on the way the tax burden should be distributed, the scale of revenues required and how they should be applied. This results in successive Chancellors tinkering perpetually with tax rules and rates.
Changes in tax law and practice are often quoted as the most pervasive cause of complexity in the UK tax system. Businesses and individuals seeking no more than to be tax compliant must study, understand and review the impact of changes. Chancellors have become adept at using their annual Budgets to heap masses of changes on to taxpayers and their advisers, making compliance a seriously demanding obligation.
Uncertainty about how to interpret tax law is also a key element of complexity in the system. For a multinational enterprise this might include difficulties in complying (for example) with transfer pricing rules that have changed as a result of the OECD’s base erosion and profit shifting (BEPS) project, or with the relatively new diverted profits tax (DPT). For a small business it might manifest itself as grave concerns about how it will be able to comply with the disproportionate demands of Making Tax Digital (MTD) on a mandatory basis. For an individual it might be worry about how to save for retirement in a tax-efficient way when governments keep altering the rules for national insurance contributions and the tax treatment of pensions savings.
Increasingly, choices of different ways to comply with tax law are offered on the pretext that these simplify the tax system at the point it impacts on the taxpayer, and here we may find the OTS partly responsible. An example is the OTS-designed alternative cash basis available to the smallest unincorporated businesses. Some such options have proved necessary or expedient because pre-existing tax law was designed and implemented without any thought for simplification, but do these options simplify or complicate things?
Other prospective examples of choices for taxpayers are outlined in the Small company taxation review published by the OTS on 3 March. A business start-up already has two principal options – to operate as an unincorporated business or through a limited company. The government now plans to explore three new ideas from the OTS – a trading status of Sole Enterprise with Protected Asset (SEPA), a cash basis for the smallest companies, and a ‘look-through’ basis for taxing a small company. If these emerged as three additional options for start-ups to evaluate, would starting in business be simplified?
An alternative way forward
Chancellors should be obliged to consult with the OTS at a much earlier stage. The OTS should work alongside others in HM Treasury to ensure that simplification is enshrined in the very foundations of tax policy making. The current Finance Bill proposes that the OTS should be required to provide advice to the Chancellor ‘on request or as the OTS considers appropriate,’ and the OTS might achieve more by taking the initiative and offering more unsolicited advice.
ICAS has spoken out against the excessive frequency of Budget changes and the uncertainties they cause. Governments need to take firm and decisive action in bringing forward tax changes only where they are absolutely necessary, and ensuring in every case that any new provisions are more than compensated for by the repeal of old and unsatisfactory rules.
Before enactment, all new tax provisions should be properly scrutinised by Parliament, with adequate time allowed for debates and stronger support given to MPs so that they can understand what is being debated. By contrast, when the coalition insisted on including a full programme of changes in the Finance Act 2015 as part of the ‘wash-up’ before the May 2015 general election, virtually no time was given for debate and some misguided changes that were made have since been reversed.
Responding to the consultation
The OTS wants feedback on its purposes and aims, and is keen to ensure that it has identified significant trends or issues that may change the tax landscape. It asks for suggestions on areas of the tax system that it should consider in the coming years, and how these should be prioritised.
The consultation invites comments, principles and ideas that the OTS should consider as it further develops its approach. It seeks input on whether there are pools of expertise it is not tapping into or particular skills and expertise it should aim to recruit on to its staff.
The OTS also asks how its success should be measured. There is some evidence that its work to date has shifted Treasury mind-sets towards simplification, but many might argue that this has not gone far enough. Too often the government thinks it can simplify tax by shifting compliance burdens from HMRC to taxpayers, when in fact the reverse is true. Perhaps the impact of the OTS might be measured more effectively by quantifying the annual compliance savings its recommendations achieve for businesses and individual taxpayers.
ICAS will be responding to the OTS consultation. If ICAS members have views on what the OTS should do and how it should proceed, they are invited to share these by emailing email@example.com.
Article supplied by Taxing Words Ltd