OTS calls for radical reforms

"REAL" SIMPLIFICATION of the UK tax system could only result through an integration of the tax and National Insurance systems and a "radical" new approach to small business taxation, the Office of Tax Simplification has concluded.

The OTS small business tax review recommended that chancellor George Osborne should set out a timetable for reform by the end of this year. This is a further step than that set out in last week's OTS report on tax reliefs, which simply recommended a more detailed review of a merger of income tax and NI.

The report said: "Maintaining two separate systems leads to a number of anomalies that provide incentives to distort behaviour." An integration of income tax and NI would remove many of the anomalies, including "the pressure on the employment and self-employment boundary and should result in the IR35 legislation becoming obsolete".

It said that there were "significant administrative savings" possible for employers and HM Revenue & Customs, citing a Treasury report from 2007 that claimed that the compliance burden of operating two systems cost employers £759m and HMRC £300m. It estimated a one-off cost of £200m for alignment.

The report indicated there would also be a fall in the need for professional tax advice from the accounting and tax professions.

An overhaul of the small business tax system would consist of one of two approaches, the report said. There would be a tax based on turnover rather than profit or a fixed expenses deduction. Although there would be drawbacks with both approaches, they would remove the "relatively large compliance costs".

The problems associated with IR35, which defines who is classed as self-employed and who is an employee in tax terms, would be removed with these major structural reforms, the review said. However, until they are implemented, the government should consider suspending the anti-avoidance mechanism or reform its administration.