Friday, March 4, 2011

Tax tease: OTS provides headline fodder re tax reliefs

The Office of Tax Simplification (OTS) has produced the first of two reports due in advance of the Budget later this month. Next week should see the much awaited interim report on possible simplification of small business taxation - including the IR35 rules and 'income splitting' between husbands and wives.

But first we have Recommendations to simplify UK’s “spaghetti bowl” of tax reliefs. And inevitably the media have sought out what they hope are issues that will cause most concern amongst their readers and viewers. For example:
  • BBC business news notes that the 15p a day luncheon voucher relief may be removed.
  • Money Marketing notes the calls for IHT and CGT reviews and the suggestion that merging income tax and national insurance would be a long term project that would deliver “major simplification”.
  • The FT headline writer went for: Call to scrap blind person’s tax allowance
In each case however the report explains the thought process behind the recommendation and none are made lightly.

It is also worth noting, from the executive summary, reference to a number of key themes that emerged during the OTS review of tax reliefs:
  • Merging income tax and NIC – this is a long term project of structural reform that would deliver major simplification;
  • 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 minimis limit of £100/£500, or amending the current £8,500 threshold;
  • Inheritance tax and trusts – the reliefs for inheritance tax are integral to the policy and we consider 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 have drifted apart, with gains by individuals taxed at a lower rate than income to reflect inflation, whereas companies are still required to calculate indexation. Our 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, this is clearly a longer term project; and
  • Environmental taxes – Both landfill tax and aggregates levy should be reviewed, as both regimes contain basic charging provisions with numerous exemptions and it may be more appropriate to define what is caught rather than what is excluded.
"Our review has suggested that these areas are particularly complex areas, for example due to the number and complexity of the reliefs involved. Whilst each area is deserving of a full review, we recognise that these are complex and time consuming areas involving important matters of government policy that go beyond the current remit of the OTS"
My observation is that commentators should ensure that they read the detail behind these headlines. The OTS team are neither stupid or naive. Each of the above themes is explored in the report and recommendations made that the related issues be the subject of consultations before any changes are made. This is as it should be. None of these suggestions is going to happen overnight and certainly not in the Budget on 23 March.

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