Compare the tax reliefs.com as the new OTS completes its review

Tuesday, April 12, 2011 | Posted by: Francesca Lagerberg
Categories: Business advice, Tax | Tags: tax, income tax, budget, NIC, tax policy, legislation, exemptions, OTS, tax reliefs, budget2011, national insurance contributions, venture capital trusts, allowances, enterprise investment schemes, Office of Tax Simplification, entrepreneurs’ relief

In his 2011 budget speech, Chancellor George Osborne announced several changes to the UK tax regime following the advice and recommendation of the Office of Tax Simplification (OTS). This is the first view we have of the new department’s effectiveness – has it made tax simpler?

The OTS was launched in July 2010, tasked with providing the Government with independent advice on how the UK tax system could be improved and simplified. It subsequently set about drawing together expertise from across the tax and legal professions, the business community and other interested parties, in order to provide ‘real world’ advice to the Government on its options for reform. In fact, I am a member of one of the consultation committees.

First on the agenda was to compile a complete list of all of the tax reliefs, allowances and exemptions available in today’s tax system. This was published in November 2010, confirming the astonishing fact that there are currently 1,042 such reliefs. Subsequently, the OTS decided to focus on 155 of these reliefs, releasing its final report (PDF) on 3 March 2011, which set out its recommendations to the Chancellor. The report concluded that 45 reliefs should be abolished (questioning the influence that these have on taxpayer’s actions and the actual benefit they provide) and a further 17 reliefs requiring simplification. 

Simples!
Included within the 17 reliefs needing simplification were a number of reliefs available for investors, including enterprise investment schemes, venture capital trusts and entrepreneurs’ relief. The report suggests that these are too complicated in their current form, recommending that the conditions for reliefs be written in a much simpler form, such as an interactive checklist or flowchart, which the taxpayer could then use in order to determine eligibility.

Whether or not the Government will respond to these suggestions is yet to be seen, although investors were rewarded by an increase in the amounts eligible for relief in the recent Budget announcement.

Compare the tax rules.com?
Also, while the main objective was to review each of the identified tax reliefs individually, the report makes several more general recommendations on a number of specific areas of tax.

For example, the report sidesteps offering any specific suggestions with respect to the various inheritance tax (IHT) and trusts reliefs identified, instead recommending a separate review of IHT as a whole.

There have been many murmurings in the last few years over the topic of IHT, with rumours of increases in the nil rate band resurfacing now and again. This is undoubtedly an area that will continue to draw comment, with any potential review likely to be subject to much debate and deliberation.

Another significant reform placed on the table by the OTS is the idea of merging income tax and national insurance contributions (NIC). This has certainly been raised before, but the review takes this idea further, highlighting those areas where a mismatch between the rules can give rise to unnecessary levels of complexity (particularly around the area of employee benefits and expenses).

This point is considered in more detail in the sister report, the Small Business Review, and following the Chancellor’s announcement at the 2011 Budget, will now be subject to serious consideration.

So is the end nigh for NIC?

Well, I think this is unlikely, especially in the short-term. The Government also specifically said it would keep the so-called ‘contributory principle’, which is the concept that underpins the idea of NIC. This suggests the merger may be more of an alignment.

NIC is a tax in all but name, and this discrete difference has allowed governments to increase revenues in recent years without increasing ‘tax’. Although only a psychological difference, it will be a brave government that, on removing national insurance, just sets an income tax rate of 32% for basic rate taxpayers.

Image: © Trisha Shears

To find out more or to understand how the new tax changes affect your financial position, contact your local Grant Thornton office.

You might also find these posts useful:

* The kindest tax cut - Mike Warburton on the OTS
* Budget 2011: Is Britain open for business? (video)
* Are you paying too much tax on imports and exports?