Recommendations from the Office of Tax SimplificationFriday, March 18th, 2011
The Office of Tax Simplification (OTS) is tasked by the Treasury with simplifying tax reliefs and small business taxation (including the IR35 rules) and making recommendations to the Chancellor in advance of Budget 2011.
In November 2010 the OTS published the first ever comprehensive list of the UK’s tax reliefs and allowances on its website, and invited comments and views from those who use them. In total, 1,042 reliefs were listed, including 225 that relate specifically to income tax.
In March 2011 the OTS published its final report on simplifying tax reliefs and an interim report on simplifying small business taxation.
Simplifying tax reliefs
On 3 March 2011 the OTS published its final recommendations on 155 tax reliefs, of which some 27 relate to income tax and NICs, under two key themes.
- The mismatch between the rules for income tax and NICs is a major cause of complexity and was a common theme raised in stakeholder meetings. The issue is explored in more detail in the interim report on small business taxation.
- Most benefits are subject to income tax and Class 1A NICs but there are a number of exemptions from one or the other. Some exemptions depend on the benefit being made available to all employees, others only to certain employees. Some benefits have a de minimis value and others are either not taxable on lower-paid employees (the £8,500 threshold for P9D/P11D reporting) or taxable at their market value rather than at the cost to the employer. The OTS recommends the introduction of a de minimis value, below which benefits would not be taxable, and the abolition of the £8,500 threshold in order to bring consistent treatment of benefits to all employees.
The report observes that, when the idea of abolishing the £8,500 threshold was considered in the past (in the early plans for payrolling benefits), it was resisted on the grounds that it would penalise some low-paid employees. The OTS comments that “With the personal allowance nearing £8,500, and scheduled to reach £10,000 before long, surely that is an argument to tackle this outdated limit now”.
The specific recommendations for income tax-related reliefs are as follow:
- Seafarers’ earnings deduction, by making it dependent on the work performed by the individual and clarifying the type of vehicle served on to qualify for the deduction.
- Provision of meals on cycle to work dates – the value of the relief is minimal and generally outweighed by the time and cost in providing the benefit.
- Late night taxis – employees working late regularly fall outside of the exemption and is not available to a large proportion of the workforce.
- Trade union subscriptions – that part of subscriptions relating to superannuation, death benefits and funeral expenses through a life assurance policy qualifies for relief. The policy rationale is obsolete and the value is negligible.
- Police organisations – as above, for trade union subscriptions.
- Daily relief for the first 15p of luncheon vouchers – the value of this benefit is negligible and outweighed by the time and cost in providing it.
- Miners’ coal and allowances in lieu of coal – the majority claim the cash rather than coal and the value is minimal. A one-off buyout is recommended.
- Class 4 NICs exemption for divers and diving supervisors – prevents a double charge for NICs as they are treated as self-employed for tax but employed for NICs. The policy rationale is no longer valid.
- Payments by credit card provider for recovering lost or stolen cards – exempt from NICs. As the payment has to be recorded for tax purposes, there is virtually no administrative saving and the value is negligible.
- Welfare counselling – certain specified counselling facilities are exempt from Class 1A NICs. The benefit is negligible.
- Apprentices and students coming to the UK – no liability to Class 1 NICs for the first 52 weeks subject to certain conditions. The policy rationale is questionable and its use limited.
- Contracted-out rebate occupational pension schemes (3 separate reliefs) – abolition of contracting out for defined contribution schemes is already legislated, and abolition of contracting out for defined benefits schemes now would simplify the administrative burden.
- Blind person’s allowance – not used by the majority of blind people as they do not have sufficient earnings. Recommended for abolition if it can be replaced by an alternative and equivalent funding route.
- Payments to mariners – interim payments of advances of earnings, while sick overseas, and paid in part to another person, are exempt from Class 1 NICs. The exemption is no longer considered to be relevant.
- Payment for the benefit of spouse and children – tax relief up to a maximum of £100. The policy rationale is mostly obsolete, the value is negligible, and the number of claimants is very low.
- Relocation expenses other than removal expenses – exemption from Class 1 NICs. Now expired as it only relates to relocations before April 1998.
- Employer supported childcare
- Cycles and cyclists’ safety equipment
- Repair and maintenance of work equipment
- Loan to employees where interest qualifies for tax relief
- Security expenses
- Disregard for benefits subject to unauthorised payment charge
- Exemption from class 1A NICs on certain payments by way of securities
- Pension contributions – disregard for benefits referable to contributions paid before April 2006 and certain payments made on or after that date (2 separate reliefs)
- Disregard for benefits from a funded unapproved retirement benefit scheme where attributable to payments made before 6 April 1998
Simplifying small business taxation
On 10 March 2011 the OTS published its interim report on simplifying small business taxation. The proposals do not go as far as the simplification of tax reliefs – they are headline proposals and further work depends on feedback from the Chancellor and future consultation exercises.
The initial recommendations are as follows:
Major structural changes – longer term
- integration of income tax and NICs, including the employment and self-employment boundary
- introducing a radical new approach to taxation for the very smallest unincorporated businesses, for example, a tax based on turnover rather than profit, and fixed or flat-rate expense deductions.
Other changes – shorter term
- improving elements of HMRC administration, including simplified monthly payroll
- choice of legal form, i.e. self-employment, incorporation, partnerships
- simplifying reporting requirements on reimbursed expenses and benefits for employees
- improvements to the capital allowances regime
- considering a simpler VAT system for small businesses that undertake international activities.
Until structural changes are introduced,
- suspend IR35 with the intention of permanent abolition, using the period of suspension to investigate behaviours and costs,
- keep IR35 legislation unchanged, but improve the way it is administered by HMRC, or
- a new “genuine business test” to exclude most businesses affected by the IR35 legislation.