OTS Review of Tax Reliefs

John Whiting CBE

Speed read

The Office of Tax Simplification (OTS) has published its final report on tax reliefs. 155 of the 1,042 tax reliefs have been examined. Of these, the OTS has recommended that 54 remain unchanged, 37 be examined more closely, 17 be simplified/extended and 47 be abolished. The OTS found that harmonising NICs and income tax would help simplify the tax system, as would streamlining employee expenses and benefits. Some taxes (especially IHT and corporate capital gains) need an overall review. While there may be a few immediate Finance Bill 2011 clauses as a result of the review, for any significant changes we expect further consultation.

John Whiting, Director of the Office of Tax Simplification, reflects on the OTS’s recommendations

On 3 March, the Office of Tax Simplification (OTS) published its final report on tax reliefs. Its 186 pages contain a lot of material and I hope show that the OTS has been far from idle in the first five months of work. I’ll try in this article to give an overview of what we have done – and those all important conclusions. Is this the bonfire of reliefs that some seemed to fear was going to be the result of the OTS’s project?

The results

Readers will recall that the OTS started its Reliefs project by cataloguing all the reliefs that we could find in the tax system. We found 1,042 – far more than anyone anticipated. The next step was to work out how to review them – so we developed a methodology and tested it on 13 of the reliefs. Then, to get a manageable project with our limited resources (the equivalent of six full-time people), we picked out 155 reliefs and worked on them. The report suggests:

54 remain unchanged;
37 be examined more closely;
17 be simplified/extended; and
47 be abolished.

How did we do it?

The starting point was to look back at the original rationale for introducing the relief: why was it there? Needless to say, some policy rationales were no longer valid or just seem unjustified in 2011. Then we looked at the take-up – was the relief being used? That led us onto the costs of the relief: not just the tax forgone (though that is undoubtedly relevant) but the key was the admin cost – for taxpayers, agents and also HMRC who have to manage it. Allowances have to be made for admin savings – after all, many reliefs keep taxpayers or specific transactions out of the tax system.

Then a bit of a ‘stand back’: is the relief really making a difference and influencing behaviours as intended? That may be a judgment call rather than strict evidential, but we did gather a good deal of input for this (and the admin costs stage) from all the people we talked to on our ‘roadshows’ and who came to see the OTS. Our consultative committee gave us valuable input throughout.
And so we concluded!

Themes

There were some clear, broad messages coming out. Harmonising NICs and income tax would help a lot; so would streamlining employee expenses and benefits (a possible de minimis limit and abolishing the £8,500 limit). Some taxes (especially IHT and corporate capital gains) need an overall review: it quickly became apparent that our ‘bottom up’ approach wasn’t going to do them justice. Taxes that are so complex and have so many reliefs deserve a ‘top down’ review.

Retentions

A large number of the reliefs we looked at clearly justified themselves, for example:

childcare reliefs;
security expenses;
short life assets;
small profits rate marginal relief;
dredging; and
Eurobonds.

Perhaps it is obvious to keep the marginal relief around the small profits rate (SPR), but that didn’t stop us pointing out the complexity that SPR brings. If SPR went, that would mean the associated companies and close investment company rules could go. Rate decisions are way beyond our remit – but we do have to flag up the simplification dividends that could result.

Eurobond interest may seem academic to some but it is a major issue for the City of London. The exemption is part of the City’s appeal and indeed the origins of the London Eurobond market stems from New York’s imposition of a withholding tax on bonds. Evidence from our meetings and researches convinced us that this remains important.

Could do better

Some reliefs, while valid and worth their place, are not working as well as they might do. The various reliefs that support enterprise (enterprise investment scheme, venture capital reliefs and entrepreneur’s relief) could benefit from fewer restrictions and conditions to help them work better. To give one example, the 5% shareholding requirement in entrepreneurs’ relief causes complexity in practice. We have suggested ways that these reliefs could be improved – but are conscious that we are straying into policy areas that are beyond our remit. At the same time, it would be wrong of us not to set out such findings.

Other candidates for improvement include principal private residence (surely all the conditions and deemed residence periods could be streamlined), chattels relief (that £6,000 limit would be around £12,000 now if it had kept up with inflation) and annual investment allowance (clearly valuable, but stop changing it and, if it is to go down to £25,000, how about allowing a purchase to be spread over two AIA years?).

Candidates for the chop? So which reliefs are the weakest links? Some small ones seem to be really in the ‘not worth it’ category. Who uses the ‘cyclists’ breakfasts’ exemption (surely there are better ways of encouraging cycling)? Haven’t luncheon vouchers, at 15p a day, passed their ‘sell by’ time? A number of old stamp duty reliefs that the OTS couldn’t see as being usable nowadays are also candidates for being quietly put down.

Some of the abolition proposals do need explanation. For example:

Late-night taxis: no, we are not banning staff from being sent home in a taxi, but the relief really is overcomplex and doesn’t help many of the staff that many people expect (shift workers etc).
Blind persons’ allowance: it’s the only ‘disabled’ tax relief; it’s only claimed by one third of the blind and severely sight impaired; so HM Treasury is only managing to give out £12 million of the £36 million it should be doing. Why not use that full amount in a better directed way to help those supposedly targeted by the allowance, perhaps through a component of the planned universal credit?

It will be appreciated that our proposals save HM Treasury money in some areas but will cause it to loosen the purse strings in other directions.

What next?

It is really over to the Chancellor: our report is a series of recommendations. We hope to hear something in the Budget and that might set us on the road to doing a proper review of a wider area (eg, employee expenses and benefits). There may be a few immediate Finance Bill 2011 clauses, where abolition is easy and obvious. But for any significant changes we expect consultation, not least to be certain we have bottomed out the impact of the proposals. Consequently, changes in FB 2012 are more likely.

It may also be that we are asked to go and look at a tranche of the 880+ reliefs we put to one side while we concentrated on the 155. Should we, for example, have a look at some of VAT, despite the European overrides?

Mind you, the OTS has plenty to do: by the time this article is out, you will have seen our Small Business & IR35 report, which will lead into more discussion and ideas. Then there is the small matter of our next projects. After all, I’d like to think that the OTS has shown it can make a difference – so I hope you agree we should press on with more simplification. But please do let me know what you think of it so far!

John Whiting, Director of the Office of Tax Simplification

Issue: 1069
Categories: Analysis , Tax policy , Tax policy & administration

Speed read

John Whiting, Director of the Office of Tax Simplification, reflects on the OTS’s recommendations

The results

54 remain unchanged;
37 be examined more closely;
17 be simplified/extended; and
47 be abolished.

How did we do it?

Themes

Retentions

A large number of the reliefs we looked at clearly justified themselves, for example:

childcare reliefs;
security expenses;
short life assets;
small profits rate marginal relief;
dredging; and
Eurobonds.

Could do better

Some of the abolition proposals do need explanation. For example:

Late-night taxis: no, we are not banning staff from being sent home in a taxi, but the relief really is overcomplex and doesn’t help many of the staff that many people expect (shift workers etc).
Blind persons’ allowance: it’s the only ‘disabled’ tax relief; it’s only claimed by one third of the blind and severely sight impaired; so HM Treasury is only managing to give out £12 million of the £36 million it should be doing. Why not use that full amount in a better directed way to help those supposedly targeted by the allowance, perhaps through a component of the planned universal credit?

It will be appreciated that our proposals save HM Treasury money in some areas but will cause it to loosen the purse strings in other directions.

What next?

John Whiting, Director of the Office of Tax Simplification

Author(s):

John Whiting CBE

Issue:

1069

Categories :

Analysis

Tax policy

Tax policy & administration