For many years, the UK tax system has been becoming more and more complex. The UK tax code is one of the longest in the world and it keeps growing.
In part, this is to be expected as the UK has one of the largest economies in the world and is at the forefront of new ways of doing business and the digital economy. The government acted in 2010 to tackle this complexity by setting up the Office of Tax Simplification (OTS).
The OTS is the independent adviser to the Chancellor on ways of simplifying the tax system. Based in HM Treasury, and working closely with the Treasury and HMRC, the OTS carries out independent research and, based on the evidence, makes recommendations for simplification. The OTS is tasked only with offering recommendations. Decisions are ultimately made by ministers and implementation is for the Treasury and HMRC.
Previous reviews have focused on a particular tax or a particular issue. For example, the recently published report on VAT was the first review of this tax. Other areas covered over the years include employment taxes and the “gig economy”, stamp duty, national insurance contributions, corporation tax and many others. Two examples of its successes are the introduction of the cash basis for small businesses (in place of the normal accruals accounting) and a reduction in administration in relation to benefits provided to employees where, for most people, the annual form has been abolished.
Your views count
The key area of interest at present is the “user experience” – how it feels for a member of the public when dealing with tax obligations. The aim is to make that user experience as simple as possible and the office is asking businesses for their comments.
There is value in looking, for the first time, at all taxes across the whole of the business life cycle so that the interactions between these taxes and the impact of the tax system are explored more clearly. This has proven to be a useful perspective and it has become clear that someone starting and growing a business sees sustained complexity throughout the life cycle.
Start-up and incorporation
The first question a new business owner faces is when they may need to register, and with whom. For those starting a small incorporated business, the administrative burden of having to register separately with Companies House and HMRC could be reduced by introducing a “one stop shop”. This is work in progress, but it may become easier in the near future.
The OTS also noted, in passing, that while there are reliefs for those raising capital from third parties later in the business life cycle, there is no tax relief for those having to raise start-up capital on day one, particularly where that capital has to be raised from relatives, as is often the case. It is not clear, however, whether a relief is needed at this point or whether it would stimulate enough new business to be worth the cost. The OTS would like to hear views on this.
There are several areas where tax complexity adds to the challenges of raising finance
Financing
There are several areas where tax complexity adds to the challenges of raising finance. Firstly, to qualify for Entrepreneurs’ Relief (the 10 percent capital gains tax rate on disposal of qualifying business assets), it is necessary to hold a minimum of 5 percent of a company’s shares. We have heard that some business owners feel discouraged from bringing in external venture capital because there was a risk that their shareholding could be diluted below this level. The government launched a consultation at Spring Statement 2018 which the OTS fully supports; it will be interesting to see how much of a problem this is in practice.
The three main tax-favoured venture capital schemes are the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs). These have common features but also a number of differences, which means that they attract different types of investors who invest for different reasons. There are opportunities to remove some of the inconsistencies and to explore ways of simplifying some of the administrative procedures. These reliefs can be quite complicated for businesses to navigate.
Succession
When a business is disposed of by way of a gift, relief from capital gains tax may be available under either Entrepreneurs’ Relief or Gift Relief: these offer the option of paying 10 percent now (Entrepreneurs’ Relief), or potentially paying at the full rate at a later point in time (with the gain deferred under Gift Relief). These two reliefs are mutually exclusive but determining which is better to claim depends on the future plans of the recipient of the gift, which will often be uncertain at the time the choice needs to be made. Some simplification of the interaction of the reliefs would help to make the choice clearer and simpler for all parties, including HMRC.
Capital gains tax reliefs (Entrepreneurs’ Relief and Gift Relief) are available for transfers of shares in trading companies where the non-trading element of the business is not more than 20 percent of the whole. In contrast, Inheritance Tax Business Property Relief is available on transfers of a business, or shares in a business, where the non-trading element of the business (whether incorporated or not) is less than 50 percent. As well as the confusing effect that results from two different rules, this can lead to businesses adopting commercially unnecessary and complex structures to preserve their qualification for the reliefs.
Disposal
The cost of Entrepreneurs’ Relief is greater than that of any of the other reliefs considered by the OTS. While those other reliefs appear to be designed to encourage investment in young and growing businesses, or to preserve existing business from break-up in the event of succession, Entrepreneurs’ Relief does not seem to achieve either of those objectives. Its place in the range of reliefs, and its purpose, warrant a closer look (although for some, it is clearly very important).
When a business is sold there is a possibility of double taxation. Tax arises on the company on sale of its business and again on the shareholder on disposal of the shares (or receipt of a dividend). This is disadvantageous for the seller. In contrast, the purchaser of the business enjoys more
The availability of tax reliefs at various stages in the life of a business has evidently played an important part in creating a business climate that encourages entrepreneurial activity in the UK
favourable tax treatment and reduces their risks by buying assets from a company rather than buying the company. A conflict of interest is therefore created between vendors and purchasers, which must make successful business transactions more difficult to achieve. Aligning the tax treatments would help to reduce such difficulties.
What next?
The OTS warmly welcomes comments and views on all of these areas. How should this work be taken forward? There are some areas where the complexity is obvious, such as the venture capital reliefs. There are other areas, such as the possibility of relief for start-up capital, where the position is much less clear. Administrative aspects are known to be difficult for some businesses and the question, perhaps, is one of prioritisation.
The availability of tax reliefs at various stages in the life of a business has evidently played an important part in creating a business climate that encourages entrepreneurial activity in the UK. However, the overall picture is complex and clearly confusing. Some of the reliefs are not as well known or understood as they might be.
If, as the OTS has found, some eligible businesses are simply not aware of the availability of all of the reliefs, their advisers might be more proactive in drawing these facilities to their attention. There are examples of businesses which have started to investigate a tax relief but found the process too difficult and it should be possible to learn from these experiences.
The need to encourage innovation and support growing businesses, the economy and employment in the UK is more vital than ever. The business tax system must be fit for this purpose and support these aims.
The OTS believes that there is a pressing need to undertake a detailed review of the tax system as it operates on key events in the business lifecycle, helps the UK economy to maximise its opportunities and makes the system clear and simple for companies to understand and use.
Views on the Business Life Cycle Report and thoughts on where the work might most helpfully be taken forward are welcomed. The OTS also welcomes examples from practical experience and readers’ insights as to how some of the difficult areas might be approached. The office plans to undertake further work in this area and readers’ views will be very useful in setting priorities.
