Steps towards simpler taxation?

This year's Budget outlined some encouraging changes to business taxation

In his Budget speech back in March, the Chancellor committed the Government to a tax system that should be ‘simple to understand and easy to comply with'. A fine sentiment that we would all agree with. Unfortunately he also had to point out that the UK now has the dubious honour of having the most voluminous tax legislation in the world, surpassing even India, so we have a long way to go.

The first major report from the Office of Tax Simplification (OTS) will help the Government embark on the road to reform.

Business leaders tell us they need a stable tax system so they can plan ahead. But how you raise taxes is at the very heart of politics, and politicians have an intense desire to be seen to be doing something -- the status quo does not generate much press.

In the last decade, the responsibility for complying with the regime has also moved firmly to the taxpayer, with an assumption that you will be able to get it right first time. HMRC has hardened its approach even where errors are not premeditated. It is not just the headline tax rate that has driven multinationals away from the UK of late, but the uncertainty about just how taxes will be imposed.

The Budget this year saw a welcome increase in the level of entrepreneurs' relief from a life time limit of £5m to £10m. At this level, most married owners can arrange their affairs to secure the 10 per cent tax rate on £20m of gains and, in reality, the Chancellor could now remove the limit -- probably with little impact on the tax yield -- and take a first step towards reforming this core relief.

The OTS report called for further simplification, removing the more complex qualification criteria. Let's hope this really is the first step.

The Enterprise Investment Scheme (EIS) was also improved. The scheme, which rewards investors in high-risk smaller businesses, had been in decline following changes introduced before the credit crunch. The Budget eased eligibility in the scheme, and raised the amount of investment permitted from £2m to £10m.

Increasing thresholds is one way of simplifying how tax relief operates, as the qualification covers more of the population. There was also a doubling in the level of individual investment allowed to £500,000 and an increase in the income tax relief from 20 per cent to 30 per cent.

All these changes have been welcomed by investors.
Yet IR35 remains untouched. This legislation was introduced to tackle the tax loss to HMRC from employees rebadging as self-employed consultants.

The OTS also questioned whether the legislation was costing more to police than it would ever recover; some figures put the yield at a mere £9m with collection costs to date of around £70m. HMRC has promised to clarify further the operation of these rules and to focus investigation work on those cases where material sums are at issue.

One outcome of a move to combine the income tax and NIC regimes could be to introduce a level playing field for any payments from business activities that would essentially make IR35 redundant. An aspiration to combine the two systems has been on the political agenda for some time, but the Chancellor has moved the debate up a gear.

The complexity of the two systems make this a mammoth and slow task -- but there does appear to be a real appetite to start on the project. If progress is made here, this would represent a major step forward and significantly affect the costs of administration for the Government and business alike.

On the corporate side, the programme of reductions in the headline rate to 23 per cent over the next four years can be seen as a more subtle move towards simplification. The small company rate now stands at 20 per cent. This brings the two rates very close together, and the differential could well be eliminated in the medium term, removing a raft of complex and confusing legislation for business.

The creation of the OTS and the publication of a roadmap setting out the Coalition's tax agenda for this parliament are both significant and welcome steps towards a system that takes focus away from the everyday tax affairs of the SME sector. The Budget contained some promising initial steps on this road - long may these continue.

Niki Dixon is head of technology at Grant Thornton