THE UK TAX CODE is in crisis. This is not simply a question of the volume of legislation, even though that is striking enough (by common consent, this has more than doubled since 1997).
It is not even due solely to the complexity of the code, although that too is an undoubted feature of the fiscal landscape.
It is rather the fact that the code has developed in such an unsystematic, unpredictable and generally unfriendly manner that many taxpayers have chosen to remove themselves altogether from the jurisdiction – whether that is companies relocating to Ireland or hedge fund managers moving to Switzerland and elsewhere.
Those that remain in the UK are unable to go about their normal business without regular recourse to expensive professional advice, in order to deal with an ever increasing compliance burden and to avoid anomalous tax charges in straightforward commercial transactions.
Against that background, the interim report by the Office of Tax Simplification (OTS) issued in December 2010 is a major disappointment.
At a time when the UK tax system requires root and branch reform, what the OTS offers is no more than a superficial spring cleaning. What the OTS proposes is the abolition of a number of reliefs, many of which are so peripheral to the working of the UK tax system that whether or not they remain in existence will hardly be noticed by the vast majority of the taxpaying population.
As an example: it is no doubt true, as the OTS points out, that it would be fairer if late night taxis were taxed as a benefit in kind. By providing an exemption for employees who work regular hours, the current regime does indeed discriminate against shift workers.
Equally, the OTS make a valid observation when they say that the rules on millennium gift aid relief have little point remaining on the statute book a decade after the new millennium dawned.
But whether either of these reforms – or many of the other 75 or so reliefs identified by the OTS as being candidates for inclusion in their final report in early spring 2011 – will do anything to make Britain a more attractive place to do business is a very moot point.
In Berwin Leighton Paisner’s submission to the OTS “Ensuring business is open for business”, we identify five specific reliefs where we believe reform would make a major difference to the tax landscape:
* taking a range of enterprises outside the scope of the controlled foreign companies legislation and limiting the application of that legislation to tax havens;
* reforming the income tax code to ensure that the government’s desire for financial services firms to reward staff in ways which incentivise them over the long term is not undermined by the tax rules on employment related shares;
* relaxing some of the detailed rules for real estate investment trusts (REITs), such as the requirement to be an open listed company) which has so far prevented more than a couple of start ups;
* improving the capital allowances regime for environmental incentives which is essential for the growth of the green economy; and
* restricting the scope of the current anti-avoidance rule in the stamp duty land tax legislation that has caused serious problems in the proper functioning of the commercial property market.
While we can appreciate the political constraints in which the OTS is required to operate, and while we have some sympathy with the OTS’s desire not to tread on the toes of other initiatives (such as the current consultation on controlled foreign companies legislation), it is only by addressing reliefs of this type – reliefs that matter to business – that the positive changes to the UK tax code urgently needed to promote economic growth will come about.
Of our suggested five reforms, only the REIT legislation has been identified by the OTS as a possible candidate for reform. We therefore encourage the OTS to be bolder in its recommendations. It must seize the opportunity it has been offered to propose more radical and far reaching changes than those that are on its current agenda.
Neal Todd is senior tax partner at Berwin Leighton Paisner
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