Tax simplification: Not so simple

EARLIER IN MARCH, the Office of Tax Simplification published an interim report on the taxation of pensioners. The report was long, measured in tone and, at first glance, not particularly controversial.

The 94-page report by the OTS, an advisory body set up by chancellor George Osborne in 2010, was part of an attempt to consider how “life could be made easier for the five million pensioners currently affected by the tax system.”

The report made 12 suggestions for how age-related allowances could be improved, including considering abolishing all age-related allowances for people over 65 “probably by allowing them to ‘wither on the vine’ as the main personal allowance is increased.”

Fast forward just over two weeks to Budget day and the government’s decision to freeze age-related allowances prompted headlines about a “granny tax” and a £2bn or-so “raid” on pensioners.

Some tax experts are surprised that the government acted so quickly on age-related allowances following the OTS report. Some suspect that the Treasury is more concerned with saving money by cutting tax reliefs, and less concerned with simplifying the tax system (although the more rather tax reliefs that are cut the simpler the tax systems tends to be be).

The OTS – run by chairman Michael Jacks, a former financial secretary to the Treasury, and John Whiting, tax policy director at the Chartered Institute of Taxation – has been surveying the UK’s fiendishly complex tax system for nearly two years.

What affect is it having? Is the tax system getting simpler? And what are the OTS’s priorities over the next few years?

Whiting, one of the UK’s most respected tax experts, admits to being “surprised” at the speed of the government’s decision on age-related allowances, but is keen to stress that the OTS is only an advisory body.

He adds that the OTS isn’t just focused on cutting tax reliefs. “Our brief is to be revenue neutral,” he says, noting that the extension to the enterprise allowance was something the OTS recommended.

When the OTS started, it identified 1042 tax reliefs. The OTS has since identified around 155 reliefs for review (around 15% of all reliefs). The government has scrapped some of the more obsolete reliefs.

The OTS has been good at “putting the spotlight” on areas of complexity in the tax system, says Richard Mannion, head of national tax directors at accountancy firm Smith & Williamson. However, on some big tax reliefs, such as main-residence relief and inheritance tax, which both need to be simplified, according to the OTS, little appears to have happened.

“I suspect that some OTS recommendations are on a big Treasury shelf marked ‘too difficult to deal with’,” says Mannion.

One way to measure tax simplification is whether administrative burdens for business have been reduced.

Here, the OTS has had some success. It’s recommendation for simpler accounting rules for small businesses (and therefore simpler tax returns) have been accepted by the government.

In the Budget, Osborne said that it would consult on proposals for cash accounting for small businesses with a turnover of up to £77,000. Around three million companies may be affected.

One of the OTS’s main priorities for the next few years is an alignment of rules on national insurance contributions and income tax.

To the disappointment of the OTS, the Treasury has ruled out a full merger of the two systems, which experts say would make things much simpler. However, Whiting says that there are still plenty of opportunities to harmonise the two systems and reduce admin for small businesses and payroll departments. A consultation will be published next month.

Integrating the two systems will be a big task. NIC and income tax are two different systems, which have developed separately. Income tax receipts are used to fund general public spending, while NICs are part of the UK’s social insurance scheme and provide entitlement to benefits including Jobseekers Allowance and the State pension.

The two tax systems have become similar over time but there are still significant differences. For example, NICs are calculated on weekly earnings, while income tax is based on annual earnings; NICs are calculated on all earnings but not on most benefits in kind – unlike income tax.

Calculating employees’ NICs can be tricky, particularly for small businesses that may not have payroll staff, says Francesca Lagerberg, partner at Grant Thornton.

Making tax simpler is a huge task and the OTS is a small organisation. To do more work the OTS would need more staff.

The Treasury itself also has limited time, resources and energy for streamlining the tax system.

Whiting is open to ideas. “I would be very interested in what the readers of Accountancy Age think we should look at in the next few years,” he says.


Related reading