The OTS: Challenging tax complexity
As the OTS publishes its first statutory annual report, Donald Drysdale reflects on what has been achieved so far and how the influence of the OTS might be strengthened.
The Office of Tax Simplification (OTS) was established on a temporary non-statutory basis in July 2010, to advise government on simplifying the UK tax system. This was widely welcomed by the tax profession, and strongly supported by ICAS and other professional bodies. Today, influencing tax simplification remains one of the fundamental objectives of the ICAS Tax Board.
In the seven years since the OTS was set up, it has had a big impact. It has made over 450 recommendations. More than half of these have been accepted, and another quarter are being considered by HMRC.
A new statutory basis
Provisions in Finance Act 2016, brought into effect on 28 November 2016, put the OTS on a statutory footing with a broader remit.
The OTS must now advise the Chancellor of the Exchequer on simplification of the law and administration of all taxes and duties which HMRC are responsible for collecting and managing. For this purpose, simplification includes improving the efficiency of the administration of relevant taxes. Interestingly, however, administrative ease does not always lend itself to simplification of the underlying tax law.
The OTS must report on the performance of its functions in each financial year, and each annual report must be published. Its first annual report was issued on 26 June.
First annual report
The OTS ‘annual’ report is to 31 March 2017, and covers both the four months from its statutory formation on 28 November 2016 until 31 March 2017 and the work done since July 2010.
The OTS lists key successes during its non-statutory phase as including:
- a detailed review of 155 of the 1,042 reliefs it identified in the tax system, leading to abolition of over 40 and improvements to others;
- a new cash basis now used by over a million small businesses, to be extended under HMRC’s plans for Making Tax Digital;
- reforms to largely eliminate P11Ds, including pay-rolling employee benefits and a trivial benefits exemption;
- abolition of Class 2 NICs; and
- streamlining the administration of share schemes.
The report also sets out details of work undertaken since the OTS was put on a statutory footing, and explains that it responds too to HMRC consultations on a variety of proposals.
You can never please everyone all of the time. The activities of the OTS – even its claimed successes – are not without controversy.
Complicated taxes cannot be simplified without creating winners and losers. For example, the abolition of Class 2 NICs, hailed as a simplification measure, will make life easier for many taxpayers; however, it will leave many low earners facing greatly increased costs in ensuring that they qualify for state pension, and to date the government has shown no interest in their plight.
Has recent progress towards tax simplification been fast enough? No – almost certainly not. The volume of tax legislation – regarded by some (though not the OTS) as a clear indication of complexity – continues to expand inexorably. The Finance Bill published on 20 March 2017 was, until curtailed by the wash-up before the recent General Election, the longest Finance Bill in history.
Has the OTS blocked the creation of unduly complex new tax law? Not really. Typically, the OTS becomes involved after the event, looking at tax law already on the statute book and how it is administered. It is refreshing that the government has heeded many OTS recommendations, and encouraging that the OTS responds to certain HMRC consultations. However, vast swathes of new tax law are introduced without detailed input from OTS.
How might the tax simplification agenda be pursued with greater success? As I have written previously, politicians and civil servants developing tax law should be required to do so in a way that produces the simplest possible outcome. The OTS, with strengthened resources, should have an independent, proactive role in influencing new tax laws and changes to existing tax laws all the way from the drawing board. In this way new provisions might be in better shape before they reach the statute book.
The OTS’s final budget for the year April 2016 to March 2017 was £770,000, of which the pay element was £588,000. This seems unduly modest, and one is tempted to question priorities when we are told (for example) that the aggregate annual deficit on the members’ bars and restaurants in the Houses of Parliament amounts to some £3 to £4 million.
Given that the complexity of taxes is crippling many business initiatives and making life very hard for countless vulnerable individuals, the OTS should be expected to achieve more and should be given greater resources.
Changing the guard
There’s a new team at the OTS. Angela Knight, former Economic Secretary to the Treasury, became chair in January 2016, succeeding Michael Jack. On 1 March 2017 John Whiting was succeeded as Tax Director by Paul Morton, a former tax inspector who went on to gain wide-ranging tax experience first in public practice and then in senior industrial roles.
A significant emphasis of OTS work is on the administration of taxes, so it is worth noting too that Teresa Graham, a member of the OTS Board since 2010, is its Senior Independent Director. She chairs HMRC’s independent Administrative Burdens Advisory Board, helping HMRC to help make tax easier, quicker and simpler for small business, and in this capacity she has proved that she is no shrinking violet.
OTS plans for the coming year include further work on VAT, the corporation tax computation and stamp duty. It also expects to engage further on Making Tax Digital, employment status and the gig economy.
Looking ahead, it expects to do more on corporation tax, owner managed businesses and measures designed to support investment and the raising of capital. It may also address savings and tax reliefs. The challenges of the digital economy and how new technology might be harnessed to simplify the tax system will certainly feature.
The OTS is also likely to refine its ‘complexity index’, a spreadsheet tool for analysing and measuring the relative complexity of the UK tax system to assist in identifying future tax simplification projects.
The OTS team always welcomes views and suggestions. If you wish, these may be channelled through ICAS by emailing firstname.lastname@example.org
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