Among the announcements made by the chancellor of the exchequer on 23 September, one which attracted relatively little attention was the decision to wind down the Office for Tax Simplification (OTS). In its place, tax officials at HMRC and the Treasury will each be given a mandate to focus on simplifying the tax code.
This announcement seems to have taken everyone by surprise. It raises the question as to whether the transfer of responsibility for simplification from the OTS to tax officials will lead to simpler rules or not.
The tax law rewrite
Calls to simplify the tax system are not new. Back in 1995 backbench MPs managed to pass an amendment to the Finance Act requiring the Inland Revenue (as it then was) to prepare a report analysing recent legislative developments and the causes of complexity, together with suggested solutions.
The report, entitled The path to tax simplification, was presented to Parliament on 12 December 1995 by Mr Michael Jack, the then financial secretary to the Treasury who later became the first chairman of the OTS.
The report concluded that tax law had become too long and complicated. Its central proposal was a major project to rewrite tax law in clearer and simpler language, without changing its underlying meaning. The project lasted for more than ten years, with a number of major rewritten acts covering capital allowances, income tax and corporation tax. Opinion is divided on whether the rewrite was a success: the new legislation is generally easier to read, but it is considerably longer than the legislation it replaced.
The project consumed a large amount of resources, however, particularly at HMRC, and whilst it addressed one aspect of complexity – the drafting of legislation – it did not address complexity due to policy choices. Indeed, it might be thought that the focus on drafting actually diverted resources away from more radical simplification activities.
The OTS
Shortly after the final rewritten bills were enacted in 2010, the government announced the establishment of the OTS as an independent body to advise the chancellor. Initially it was set up as an office of HM Treasury and later was put on a statutory basis by FA 2016. In its first year, it produced reports on tax reliefs and small business taxation, and many of its recommendations were accepted by the chancellor.
The OTS works through consultations with taxpayers, professional bodies, advisers and tax authorities, and invariably has a high level of engagement from its stakeholders. It has produced a number of insightful reports, with practical and balanced suggestions for simplification. The response from the government has been mixed, however, and whilst some of its recommendations have been accepted, many have been watered down or simply ignored.
Tax becomes more complex
The tax code has continued to grow: from 5,000 pages in 1995, to 10,000 in 2010 and more than 20,000 pages now. Of course, the length of the legislation doesn’t necessarily equate to more complexity; for example, the rewrite process led to longer, but easier to read, legislation, and also to a split between income tax and corporation tax legislation which resulted in some duplication, but whose overall result is easier to understand.
At the same time, technology has led to an improvement in experience for many taxpayers with relatively simple affairs, particularly employees. There are, however, concerns about the Making Tax Digital programme, which was originally heralded as bringing a more simple system, but looks likely to do the opposite. The current system doesn’t always work well for those with more than one job, pensioners with a number of pensions or those with part-time earnings, even when the overall level of income is relatively modest.
There have also been a wealth of new taxes, all introduced to achieve a stated policy intention but whose overall effect is to increase complexity. These measures include:
International developments
One area of tax which is bringing significantly increased complexity, relates to the largest groups. The BEPS initiative from the OECD has led to internationally agreed model rules relating to a global minimum tax rate (also known as Pillar Two). Achieving consensus on this scale was an impressive achievement, but comes at the price of complexity and lack of clarity. The UK government is expected to implement the rules in the next Finance Act, and the consultation about the technical implementation has just finished. This timetable is ahead of almost all other countries.
The new rules will require groups to compute global profits on a different basis from their UK profit computations, which will be onerous in practice and require large amounts of data to be gathered in order to comply. There are many uncertainties in the application of the rules, and differences of treatment between different jurisdictions.
At the same time, companies are having to deal with increased transfer pricing documentation requirements alongside other changes.
What will the future bring?
It is interesting to speculate as to whether the chancellor’s challenge to HMRC and the Treasury to focus on simplification will make a difference in practice. Regarding Pillar Two, officials have repeatedly said that the system will only work if all countries adopt broadly the same rules, so significant changes are thought to be unlikely. One possibility is to pull out of Pillar Two altogether, but there would be obstacles to that – not least as the UK was one of the leading voices in securing agreement. A further issue is that even if the UK decided not to apply Pillar Two, other countries are expected to adopt the rules; groups would have to comply and potentially face even greater burdens than if the UK had applied the rules directly.
In other areas, it also seems unlikely that officials will be bold in simplifying the rules. Experience from the OTS suggests that officials who were involved in framing existing rules will find it difficult to make changes, particularly given that there may well be trade-offs between simplification and other policy changes. It will be interesting to see what happens in practice.
Among the announcements made by the chancellor of the exchequer on 23 September, one which attracted relatively little attention was the decision to wind down the Office for Tax Simplification (OTS). In its place, tax officials at HMRC and the Treasury will each be given a mandate to focus on simplifying the tax code.
This announcement seems to have taken everyone by surprise. It raises the question as to whether the transfer of responsibility for simplification from the OTS to tax officials will lead to simpler rules or not.
The tax law rewrite
Calls to simplify the tax system are not new. Back in 1995 backbench MPs managed to pass an amendment to the Finance Act requiring the Inland Revenue (as it then was) to prepare a report analysing recent legislative developments and the causes of complexity, together with suggested solutions.
The report, entitled The path to tax simplification, was presented to Parliament on 12 December 1995 by Mr Michael Jack, the then financial secretary to the Treasury who later became the first chairman of the OTS.
The report concluded that tax law had become too long and complicated. Its central proposal was a major project to rewrite tax law in clearer and simpler language, without changing its underlying meaning. The project lasted for more than ten years, with a number of major rewritten acts covering capital allowances, income tax and corporation tax. Opinion is divided on whether the rewrite was a success: the new legislation is generally easier to read, but it is considerably longer than the legislation it replaced.
The project consumed a large amount of resources, however, particularly at HMRC, and whilst it addressed one aspect of complexity – the drafting of legislation – it did not address complexity due to policy choices. Indeed, it might be thought that the focus on drafting actually diverted resources away from more radical simplification activities.
The OTS
Shortly after the final rewritten bills were enacted in 2010, the government announced the establishment of the OTS as an independent body to advise the chancellor. Initially it was set up as an office of HM Treasury and later was put on a statutory basis by FA 2016. In its first year, it produced reports on tax reliefs and small business taxation, and many of its recommendations were accepted by the chancellor.
The OTS works through consultations with taxpayers, professional bodies, advisers and tax authorities, and invariably has a high level of engagement from its stakeholders. It has produced a number of insightful reports, with practical and balanced suggestions for simplification. The response from the government has been mixed, however, and whilst some of its recommendations have been accepted, many have been watered down or simply ignored.
Tax becomes more complex
The tax code has continued to grow: from 5,000 pages in 1995, to 10,000 in 2010 and more than 20,000 pages now. Of course, the length of the legislation doesn’t necessarily equate to more complexity; for example, the rewrite process led to longer, but easier to read, legislation, and also to a split between income tax and corporation tax legislation which resulted in some duplication, but whose overall result is easier to understand.
At the same time, technology has led to an improvement in experience for many taxpayers with relatively simple affairs, particularly employees. There are, however, concerns about the Making Tax Digital programme, which was originally heralded as bringing a more simple system, but looks likely to do the opposite. The current system doesn’t always work well for those with more than one job, pensioners with a number of pensions or those with part-time earnings, even when the overall level of income is relatively modest.
There have also been a wealth of new taxes, all introduced to achieve a stated policy intention but whose overall effect is to increase complexity. These measures include:
International developments
One area of tax which is bringing significantly increased complexity, relates to the largest groups. The BEPS initiative from the OECD has led to internationally agreed model rules relating to a global minimum tax rate (also known as Pillar Two). Achieving consensus on this scale was an impressive achievement, but comes at the price of complexity and lack of clarity. The UK government is expected to implement the rules in the next Finance Act, and the consultation about the technical implementation has just finished. This timetable is ahead of almost all other countries.
The new rules will require groups to compute global profits on a different basis from their UK profit computations, which will be onerous in practice and require large amounts of data to be gathered in order to comply. There are many uncertainties in the application of the rules, and differences of treatment between different jurisdictions.
At the same time, companies are having to deal with increased transfer pricing documentation requirements alongside other changes.
What will the future bring?
It is interesting to speculate as to whether the chancellor’s challenge to HMRC and the Treasury to focus on simplification will make a difference in practice. Regarding Pillar Two, officials have repeatedly said that the system will only work if all countries adopt broadly the same rules, so significant changes are thought to be unlikely. One possibility is to pull out of Pillar Two altogether, but there would be obstacles to that – not least as the UK was one of the leading voices in securing agreement. A further issue is that even if the UK decided not to apply Pillar Two, other countries are expected to adopt the rules; groups would have to comply and potentially face even greater burdens than if the UK had applied the rules directly.
In other areas, it also seems unlikely that officials will be bold in simplifying the rules. Experience from the OTS suggests that officials who were involved in framing existing rules will find it difficult to make changes, particularly given that there may well be trade-offs between simplification and other policy changes. It will be interesting to see what happens in practice.
