The Office of Tax Simplification has a very busy programme of work for 2018, including a review of capital allowances, savings, inheritance tax and the business life cycle. In addition, some broad topics are being examined, including the role of technology platforms, HMRC guidance and the opportunities arising from new technology. We are also considering the potential for work on issues affecting low and middle income taxpayers. Views from readers on the work programme are always welcome. In addition, we are addressing some interesting questions about simplification and complexity; and, in particular, how far technology and efficient tax administration can overcome complexity to present a simple view to users of the tax system.
What lies ahead for the Office of Tax Simplification (OTS)? Perhaps the greatest challenge of all is to work out which parts of the tax system should be prioritised this year when there is so much change both domestically and internationally, and in the world of work and society in general. Brexit will clearly continue to be a key priority for the government and there is also a strong focus on delivering an economy that works for everyone by embracing technology, improving productivity and safeguarding the tax base at a time when revenue needs to be collected.
These broad headlines are reflected in the OTS work programme for 2018, although we are always keen to hear from readers about any areas on which they particularly agree or disagree, both in terms of the general priorities and also in relation to specific reports or on particular issues.
Our approach continues to be based on three principles:
In practical terms, we will apply these principles by looking at the business life cycle and key events in the lives of individuals, seeking to ensure that our work touches every major part of the tax system. We also want to maintain both a short term and long term perspective, addressing practical areas which can be simplified in the very short term and difficult areas which need to be discussed more widely over the longer term.
We will continue to focus on the ‘user experience’ in priority to the quantity or complexity of tax legislation; that is to say, the impact on ordinary people’s day to day interactions with the tax system rather than more technical matters. We are also, of course, interested in the ‘user experience’ of professional advisers, as well as that of HMRC professionals.
We are constantly thinking about what simplification really means. One question which comes up frequently is: should we recommend changes that address a problem with the tax system, even in cases where the change introduces an additional element of complexity? We have always recognised that the process of change itself creates complexity, so any recommendations we make on any topic will have a cost. In our VAT review, after careful consideration, we recommended consideration of a smoothing mechanism to ease the overall passage for small businesses into the VAT system even though, taken by itself, this represents additional complexity. The benefit of smoothing the effect of a cliff edge has the potential to outweigh the cost of the complexity inherent in such a smoothing mechanism. We propose to be open to following this precedent in our future work, but we will always carefully weigh the cost of any change against the mischief it is designed to address.
There is a very important point which should be emphasised here. The purpose of the OTS is to advise the chancellor on ways of simplifying the tax system. It is not our role to comment on fundamental reforms or on tax policy making in general, and it is not for us to make decisions as to which recommendations should be taken forward. That is for the chancellor and ministers and implementation is for HM Treasury and HMRC. We take our work very seriously but, ultimately, we are simply advisers.
Another point which should be repeated is that we are independent. This means that we publish what we find, based on research and enquiry, and our recommendations are always supported by evidence and analysis. What we publish is, in the nature of advice, generally not government policy at the time, though we hope it either will be or that it will at least inform and influence future policy. We set out recommendations based on our best view of the evidence. It should also be emphasised, however, that we receive tremendous support from HM Treasury and from HMRC, including advice, information and data, as well as challenge and debate. We are very appreciative of the time and effort colleagues in the two departments spend engaging with us.
We also receive an extraordinary amount of support and input from professional bodies and advisers, business organisations, taxpayers, commentators, academics and many others. We are most grateful to everyone who contributes to our work and supports the simplification effort.
We will continue to publish various kinds of report, including formal reports requested by the chancellor, short focus papers which succinctly shed light on particular areas of complexity, and other papers which review particular parts of the tax system or which address major societal changes. We welcome comments from readers on the presentation of our reports, as well as their content. We aim to make even the most difficult topics accessible to the widest possible readership.
Our 2018 work programme is quite ambitious! It comprises the following:
1. Capital allowances and depreciation review
This is a formal review, requested by the chancellor. The question is whether accounts based depreciation can serve as a means of relieving capital expenditure for tax purposes, recognising that the transition from capital allowances to depreciation would be extremely challenging, with both gainers and losers, and would involve a good deal of transitional complexity. This review is progressing well and we expect to publish our report before the summer.
2. Savings: an initial review
This area has already proved to be very worthwhile, even though we are again at quite an early stage. There are likely to be a number of specific opportunities to simplify the rules but the greatest benefit will be derived from a holistic review of the interaction of all parts of the system. A road-map might be a helpful approach. The interaction of various features of the taxation of savings with the personal allowance and other reliefs has resulted in it being very challenging for anyone to design a computer algorithm that can correctly calculate the tax liability of an individual in every possible circumstance.
3. Inheritance tax: a review
The chancellor has requested that we undertake a review of inheritance tax, and the publication of his letter to us triggered a considerable amount of interest in the mainstream press. We would like to make it very clear that, as usual, we will be considering ways of simplifying inheritance tax and, in particular, how we can improve the ‘user experience’. In other words, the administrative aspects will be a core area of focus, although we will also consider various aspects of the design of the inheritance tax system, including reliefs. All of our work will be in the context of simplification so we will not be considering fundamental policy change. We will publish a ‘call for evidence’ shortly and will publish our report later in the year.
4. Business life cycle
We have nearly completed an initial paper on the business life cycle and expect to publish it in the near future. We are looking, in this review, at the tax aspects of starting a business, financing a growing business, and disposing of a business or passing it on to the next generation. Once again, this has been very worthwhile and we have identified a number of areas where complexity may be standing in the way of growth or distorting decision making.
5. Platforms
The government has recently published its response to the Taylor Review on ‘good work’ and a great deal has been written about the gig and sharing economy. We are exploring the role of platforms in supporting ‘dependent workers’ (as described in the Taylor Review) in relation to their tax obligations, for example by withholding tax and reporting in a manner analogous to that of employers. There is a considerable amount of work ongoing in several government departments and a number of consultation papers are open, so this will clearly be an area which attracts a great deal of attention this year.
6. Guidance
HMRC is doing a great deal of work on improving guidance. It is not our intention to duplicate any of those useful efforts but, rather, we propose to take a more strategic view of guidance. Why do taxpayers need guidance? Are there alternative approaches that might reduce the number of instances in which specific guidance is needed? What are the approaches in other countries to addressing taxpayers’ questions? Are there opportunities through technology to provide guidance in new ways? What is it that would best enable businesses to make decisions with confidence? How can technology be deployed to provide guidance more effectively, in the right circumstances?
7. Technology
Many commentators believe that technology will change every aspect of society over the next few years, whether through the ‘internet of things’, distributed ledgers (blockchain), artificial intelligence or other developments. We are very grateful to a panel of technology experts who have joined our Technology Advisory Group to inform us about new technology and how it is changing the world. We see considerable opportunities, over time, for new ways of administering taxes; and also all kinds of threat to the tax base as set out last year in our ‘gig economy’ focus paper. HMRC is working on the application of technology in many areas, not the least of which is ‘making tax digital’, and we will continue to engage extensively with this work.
8. Low income and middle income taxpayers
We are also considering the potential for work on issues affecting low and middle income taxpayers, who face all kinds of tax complexity. It may be that we can apply our approach of looking at significant events in the lives of ordinary individuals to identify areas where complexity is a particular problem; and, importantly, where tax simplification can make a difference at an affordable cost and in a practical manner.
We anticipate that the current work programme will occupy much of 2018 but welcome views from readers as to whether there are other areas which we should be addressing and whether our prioritisation seems appropriate.
Finally, we would be interested in views from readers on a somewhat philosophical point. Some people suggest that technology can be deployed to ‘paper over the cracks’ of complexity. The argument is that it no longer matters if the underlying tax system is complex, if the experience of users is straightforward.
The analogy is with a smartphone. The underlying technology is so complex that no one in the world could understand it all. It requires huge teams of experts to create a smartphone. On the one hand, most users are very comfortable relying on a smartphone because it seems to do what it is supposed to. Can we aim for such a result in the tax system? On the other hand, others feel that everything should be capable of being ‘understood’ and therefore the underlying system needs to be simple enough for anyone affected by it to calculate their tax liability. Similarly, incentives will only be effective if those who could benefit understand how they work. It has been suggested that ‘the train has left the station’ as far as this is concerned but views would be welcome.
The Office of Tax Simplification has a very busy programme of work for 2018, including a review of capital allowances, savings, inheritance tax and the business life cycle. In addition, some broad topics are being examined, including the role of technology platforms, HMRC guidance and the opportunities arising from new technology. We are also considering the potential for work on issues affecting low and middle income taxpayers. Views from readers on the work programme are always welcome. In addition, we are addressing some interesting questions about simplification and complexity; and, in particular, how far technology and efficient tax administration can overcome complexity to present a simple view to users of the tax system.
What lies ahead for the Office of Tax Simplification (OTS)? Perhaps the greatest challenge of all is to work out which parts of the tax system should be prioritised this year when there is so much change both domestically and internationally, and in the world of work and society in general. Brexit will clearly continue to be a key priority for the government and there is also a strong focus on delivering an economy that works for everyone by embracing technology, improving productivity and safeguarding the tax base at a time when revenue needs to be collected.
These broad headlines are reflected in the OTS work programme for 2018, although we are always keen to hear from readers about any areas on which they particularly agree or disagree, both in terms of the general priorities and also in relation to specific reports or on particular issues.
Our approach continues to be based on three principles:
In practical terms, we will apply these principles by looking at the business life cycle and key events in the lives of individuals, seeking to ensure that our work touches every major part of the tax system. We also want to maintain both a short term and long term perspective, addressing practical areas which can be simplified in the very short term and difficult areas which need to be discussed more widely over the longer term.
We will continue to focus on the ‘user experience’ in priority to the quantity or complexity of tax legislation; that is to say, the impact on ordinary people’s day to day interactions with the tax system rather than more technical matters. We are also, of course, interested in the ‘user experience’ of professional advisers, as well as that of HMRC professionals.
We are constantly thinking about what simplification really means. One question which comes up frequently is: should we recommend changes that address a problem with the tax system, even in cases where the change introduces an additional element of complexity? We have always recognised that the process of change itself creates complexity, so any recommendations we make on any topic will have a cost. In our VAT review, after careful consideration, we recommended consideration of a smoothing mechanism to ease the overall passage for small businesses into the VAT system even though, taken by itself, this represents additional complexity. The benefit of smoothing the effect of a cliff edge has the potential to outweigh the cost of the complexity inherent in such a smoothing mechanism. We propose to be open to following this precedent in our future work, but we will always carefully weigh the cost of any change against the mischief it is designed to address.
There is a very important point which should be emphasised here. The purpose of the OTS is to advise the chancellor on ways of simplifying the tax system. It is not our role to comment on fundamental reforms or on tax policy making in general, and it is not for us to make decisions as to which recommendations should be taken forward. That is for the chancellor and ministers and implementation is for HM Treasury and HMRC. We take our work very seriously but, ultimately, we are simply advisers.
Another point which should be repeated is that we are independent. This means that we publish what we find, based on research and enquiry, and our recommendations are always supported by evidence and analysis. What we publish is, in the nature of advice, generally not government policy at the time, though we hope it either will be or that it will at least inform and influence future policy. We set out recommendations based on our best view of the evidence. It should also be emphasised, however, that we receive tremendous support from HM Treasury and from HMRC, including advice, information and data, as well as challenge and debate. We are very appreciative of the time and effort colleagues in the two departments spend engaging with us.
We also receive an extraordinary amount of support and input from professional bodies and advisers, business organisations, taxpayers, commentators, academics and many others. We are most grateful to everyone who contributes to our work and supports the simplification effort.
We will continue to publish various kinds of report, including formal reports requested by the chancellor, short focus papers which succinctly shed light on particular areas of complexity, and other papers which review particular parts of the tax system or which address major societal changes. We welcome comments from readers on the presentation of our reports, as well as their content. We aim to make even the most difficult topics accessible to the widest possible readership.
Our 2018 work programme is quite ambitious! It comprises the following:
1. Capital allowances and depreciation review
This is a formal review, requested by the chancellor. The question is whether accounts based depreciation can serve as a means of relieving capital expenditure for tax purposes, recognising that the transition from capital allowances to depreciation would be extremely challenging, with both gainers and losers, and would involve a good deal of transitional complexity. This review is progressing well and we expect to publish our report before the summer.
2. Savings: an initial review
This area has already proved to be very worthwhile, even though we are again at quite an early stage. There are likely to be a number of specific opportunities to simplify the rules but the greatest benefit will be derived from a holistic review of the interaction of all parts of the system. A road-map might be a helpful approach. The interaction of various features of the taxation of savings with the personal allowance and other reliefs has resulted in it being very challenging for anyone to design a computer algorithm that can correctly calculate the tax liability of an individual in every possible circumstance.
3. Inheritance tax: a review
The chancellor has requested that we undertake a review of inheritance tax, and the publication of his letter to us triggered a considerable amount of interest in the mainstream press. We would like to make it very clear that, as usual, we will be considering ways of simplifying inheritance tax and, in particular, how we can improve the ‘user experience’. In other words, the administrative aspects will be a core area of focus, although we will also consider various aspects of the design of the inheritance tax system, including reliefs. All of our work will be in the context of simplification so we will not be considering fundamental policy change. We will publish a ‘call for evidence’ shortly and will publish our report later in the year.
4. Business life cycle
We have nearly completed an initial paper on the business life cycle and expect to publish it in the near future. We are looking, in this review, at the tax aspects of starting a business, financing a growing business, and disposing of a business or passing it on to the next generation. Once again, this has been very worthwhile and we have identified a number of areas where complexity may be standing in the way of growth or distorting decision making.
5. Platforms
The government has recently published its response to the Taylor Review on ‘good work’ and a great deal has been written about the gig and sharing economy. We are exploring the role of platforms in supporting ‘dependent workers’ (as described in the Taylor Review) in relation to their tax obligations, for example by withholding tax and reporting in a manner analogous to that of employers. There is a considerable amount of work ongoing in several government departments and a number of consultation papers are open, so this will clearly be an area which attracts a great deal of attention this year.
6. Guidance
HMRC is doing a great deal of work on improving guidance. It is not our intention to duplicate any of those useful efforts but, rather, we propose to take a more strategic view of guidance. Why do taxpayers need guidance? Are there alternative approaches that might reduce the number of instances in which specific guidance is needed? What are the approaches in other countries to addressing taxpayers’ questions? Are there opportunities through technology to provide guidance in new ways? What is it that would best enable businesses to make decisions with confidence? How can technology be deployed to provide guidance more effectively, in the right circumstances?
7. Technology
Many commentators believe that technology will change every aspect of society over the next few years, whether through the ‘internet of things’, distributed ledgers (blockchain), artificial intelligence or other developments. We are very grateful to a panel of technology experts who have joined our Technology Advisory Group to inform us about new technology and how it is changing the world. We see considerable opportunities, over time, for new ways of administering taxes; and also all kinds of threat to the tax base as set out last year in our ‘gig economy’ focus paper. HMRC is working on the application of technology in many areas, not the least of which is ‘making tax digital’, and we will continue to engage extensively with this work.
8. Low income and middle income taxpayers
We are also considering the potential for work on issues affecting low and middle income taxpayers, who face all kinds of tax complexity. It may be that we can apply our approach of looking at significant events in the lives of ordinary individuals to identify areas where complexity is a particular problem; and, importantly, where tax simplification can make a difference at an affordable cost and in a practical manner.
We anticipate that the current work programme will occupy much of 2018 but welcome views from readers as to whether there are other areas which we should be addressing and whether our prioritisation seems appropriate.
Finally, we would be interested in views from readers on a somewhat philosophical point. Some people suggest that technology can be deployed to ‘paper over the cracks’ of complexity. The argument is that it no longer matters if the underlying tax system is complex, if the experience of users is straightforward.
The analogy is with a smartphone. The underlying technology is so complex that no one in the world could understand it all. It requires huge teams of experts to create a smartphone. On the one hand, most users are very comfortable relying on a smartphone because it seems to do what it is supposed to. Can we aim for such a result in the tax system? On the other hand, others feel that everything should be capable of being ‘understood’ and therefore the underlying system needs to be simple enough for anyone affected by it to calculate their tax liability. Similarly, incentives will only be effective if those who could benefit understand how they work. It has been suggested that ‘the train has left the station’ as far as this is concerned but views would be welcome.
