The UK tax system is be streamlined and made simpler in an effort to boost levels of investment in business, the government has announced.
The Treasury has set up the promised Office for Tax Simplification (OTS) with the aim of reforming the current tax regulations.
The new body has been briefed to look at the system of reliefs, allowances and exemptions, and to recommend areas where changes can be made.
Initially, the OTS will carry out two reviews, which will see a streamlining of some 400 tax reliefs, allowances and exemptions, along with an overhaul of the tax system for small businesses, including a proposed alternative to the IR35 code.
The panel will also be entrusted to recommend changes to the personal tax system.
However, the OTS remit does not cover tax credits, which are regarded as part of the benefits system.
Michael Jack, the former Treasury minister, will head up the OTS and will be helped by leading figures drawn from the tax and legal professions.
As well as examining the existing tax laws, the OTS will consult with various stakeholders on how best to reduce the complexity of the regulations.
The hope is that a simpler regime will allow firms, particularly smaller enterprises, to become more competitive and will make business investment a more attractive proposition.
At the launch of the OTS, the Chancellor, George Osborne described the UK’s 11,000 page tax code as “one of the most complex and opaque” in the world.
He introduced the OTS as a “permanent body to push against the forces of complication” so that people “might actually understand the tax laws with which they are being asked to comply”.
Mr Jack commented: “Entrepreneurship should never be stifled because of an overly complex tax system. That’s why I am delighted that the government have committed themselves to looking at ways to simplify the tax system, with an initial focus on small businesses.
“Simplification in a complex world is a real challenge but it’s one that has to be addressed if the tax system is not to hinder the economy’s ability to grow.”
David Gauke, the Treasury Minister, added: “The tax system created by the previous government was overly complex and has made the tax affairs of millions of families and businesses across the UK extremely complicated.
“We need to reduce the complexities in our tax system and the coalition is committed to delivering that goal.
“The OTS will provide important advice that will help inform us in making the right reforms to the tax system that will help to pave the way to bringing more international business to the UK, which will give our economy the boost it so urgently needs in the years ahead.”
The areas which will be subject to the OTS reviews include taxes and duties administered by HM Revenue and Customs (HMRC) but will not extend to taxes that fall under the control of other bodies or to tax credits.
It is already known that the government intends to pay for part of the graduated reduction in headline corporation tax – from 28 per cent to 24 per cent over the next four years – out of savings made on the capital allowances that are available to firms that invest in new plant and machinery.
As far as the tax reliefs review is concerned, the OTS has been commissioned to examine a list of all reliefs, allowances and exemptions within the taxes and duties administered by HMRC and identify those reliefs that should be repealed or simplified.
The government said it is particularly interested in identifying reliefs that are largely historic, not frequently used, create distortions in the tax system or are complex for business or HMRC to administer.
The OTS will produce an interim report by late autumn 2010 and a final report, with recommendations, to the Chancellor ahead of the 2011 Budget.
On the small business tax system, an initial report will be delivered to the Chancellor by the time of the 2011 Budget, highlighting areas that cause the most day-to-day complexity and uncertainty for small businesses.
Once the government has considered the initial report, the OTS will next produce specific recommendations on tax simplification for small businesses.
IR35, which has attracted controversy in its time, will come under the microscope as part of the initial report, and the OTS will put forward alternative proposals.
The IR35 regime was introduced in 2000 to counter avoidance of tax on employment income where workers receive payments from a client via an intermediary (usually a personal service company) and the relationship between the worker and the client would otherwise be one of employment.
The Institute of Directors (IoD) welcomed the announcement but warned that the new body must have “teeth”.
The IoD spelled out three conditions that need to be met if the OTS is to be effective.
It must be genuinely independent and must take evidence from the Treasury and HMRC Revenue, and from outsiders, on the same basis, the IoD argued.
It must report publicly on all the ideas it has looked at that are worthy of serious consideration, including those that contradict government policy.
And ministers must be required to respond in detail to all the OTS proposals, setting out the precise economic or technical reasons why each rejected proposal is being rejected.
Richard Baron, head of taxation at the IoD, commented: “We warmly welcome the new government’s decision to set up the Office of Tax Simplification. It is a long overdue initiative.
“The important thing now is to make sure that the Office achieves some early successes, and that it goes on achieving. Its recommendations must not end up stamped ‘too difficult’ or ‘maybe in the longer term’.”
David Frost, director general of the British Chambers of Commerce, said: “The creation of the OTS is a necessary and long overdue response to the relentless chop and change of tax law. The business community, and the economy, will benefit from the recently announced lower rates of tax, and now from the drive towards a simpler system.
“It is entirely right for the OTS to concentrate its initial work on small business. Complying with an ever expanding and complicated tax code only succeeds in taking resources away from core business activity, and subsequently growth and wealth creation. The government needs to continue with measures that foster entrepreneurship in order to secure a sustainable economic recovery.”
