I received a number of emails from the Gov.uk website earlier this month outlining proposals for far-reaching changes to various aspects of UK tax by the Office for Tax Simplification (OTS).
I have summarised these changes with links to the support documentation. They make for interesting, and in parts, chilling reading. Where relevant I have flagged opportunities that I feel the OTS comments open up for practitioners.
And let’s not forget that the OTS are not a legislative body – changes proposed will need the approval of ministers and the Treasury before we would need to grapple with their impact.
Simplification of the corporation tax (CT) computation.
In their report the OTS conclude:
The conclusion the OTS has been drawn to is that for all but the very largest companies, and particularly for smaller ones, the simplest solution is surely that tax should follow the accounts, without adjustments being required.
The changes we can expect
- The OTS aim for CT – easier to understand and engage with and reduce the cost of compliance.
- Principles – tax follows accounts and commercial reality.
- Micro companies – simple accounts equals simple tax.
- All companies: a roadmap for Corporation Tax reform to align with Making Tax Digital, enhanced stability and certainty for complex businesses, relief for capital expenditure closer to accounts, potentially using depreciation, capital/revenue definitions aligned with accounting, deductions aligned across income streams, leading to Scheduler reform.
- Outcome – CT is simpler, compliance is easier and cheaper.
There are a few stand out points raised:
- The aim is to simplify and reduce the cost of CT compliance.
- CT to be based more on the accounts with fewer adjustments in the computation.
- For the smallest companies, the OTS seems to imply that CT will be based on the accounts, depreciation no CAs?
- When MTD rolls out to the collection of accounts data, it makes sense to base CT on accounting profits with as few add back and hybrid deductions as is possible.
Firms that rely on compliance activity to generate fees will not be enamoured of these proposals. If the OTC’s outcome is to make CT compliance “easier and cheaper” this translates to lower CT compliance fees.
Time to reposition ourselves as tax tacticians rather than tax technicians?
The formal OTS report can be downloaded here (123 pages).
Accounting depreciation or capital allowances?
The OTS summary includes the following quote:
If we were devising a system from scratch, depreciation could work perfectly well and would make eminent sense. However, our analysis has shown that the undoubted potential benefits are not worth the upheaval involved. Such an extension of the scope of relief would come with a big price tag, require lengthy transition periods, and involve all businesses in process change even though only around 30,000 businesses claim capital allowances in amounts exceeding the present Annual Investment Allowance of £200,000. That said, we consider there are important improvements to capital allowances which should be considered, alongside those we recommended in last year’s report, in particular that the scope of the Annual Investment Allowance be widened.
This is underlined on page 11 of the report:
This report also includes new recommendations on the simplification of CAs, which could be delivered in a cost neutral way:
- the scope of the Annual Investment Allowance (AIA) should be widened
- the scope of CAs generally should be widened
- a more radical reform of the structure of CAs should be considered if the scope of CAs cannot be widened, leveraging information used in accounts but not based on depreciation.
What can we expect?
It seems likely that the scope of the AIA will be widened, perhaps to make it easier for taxpayers to identify what is covered by the relief and what is not covered.
There may be future changes to the structure of CAs. It will be interesting to see if the OTS can devise a way to do this without replacing one complex set of rules with another equally complex arrangement.
The full report and conclusions can be downloaded here. (88 pages)
For practitioners unfamiliar with the term “lookthrough” the opening paragraph of the OTS report says:
As noted above the basic premise of lookthrough taxation for a small company is that direct profits taxes are not levied on the company; rather one looks through the company and levies taxes directly on the shareholders on their allocated share of the profits. Shareholders would be subject to income tax and class 4 NICs; however, all other requirements of the company will remain. This includes VAT compliance (if the company is registered) and accounting requirements.
If implemented, this would require a complete rethink of tax planning for smaller companies presently benefitting from the low salary, high dividend approach to avoid NIC.
How would lookthrough work in practice?
The OTS conclusion as to how profits would be allocated to proprietors is:
The working assumption that we have tested is that all profits – including trading income, investment income and capital gains – would be allocated according to shareholdings. There would be nothing left in the company to tax. Some prior items that we identified in our discussion paper, such as preference share dividends, would stand, but all remaining profits would be allocated. This implies some form of additional return being required, presumably a schedule along the lines of a partnership allocation which would be centrally generated by the company or its advisers and given to each shareholder to help with their tax return.
Thankfully sanity is likely to prevail
In their conclusion the OTS say (and in bold):
Our conclusion is that lookthrough does not offer sufficient simplification to justify its introduction. On balance we feel that it would actually be more complicated than the current corporation tax system, given the additional rules that would be needed.
And so, thanks but no thanks…
The full report and conclusions can be downloaded here. (88 pages)
The closer alignment of income tax and national insurance – a further report
This further report on the old chestnut of income tax and NIC alignment is best summarised by quoting the OTS summary at the beginning of their report:
Our March report concluded that alignment was both possible and desirable and set out a 7-stage programme to achieve it:
- move to an annual, cumulative and aggregated (ACA) assessment period for employees’ NICs on employment income, similar to PAYE IT
- base employers’ NICs on whole payroll costs to make it easier to understand and reduce distortions created by the current system,
- more closely align the NICs position for the UK’s 4.8 million, and rising, self-employed with that of employees
- to help make closer alignment possible, NICs needs to be a more transparent system, better understood by taxpayers
- align the legislation for IT (relating to employment income) and NICs so that the scopes of the charges are the same, and taxpayers benefit from identical reliefs for IT and NICs purposes
- bring taxable benefits in kind (BiKs) into Class 1 NICs and abolish Class 1A NICs
- a fully joined up approach to the two taxes across policy and administration with alignment of legislation and procedures, and where possible the matrix of rates and thresholds.
Given the scale of this programme, which we have always been clear would be a long term project, there were many aspects that would require further investigation. We were asked to do more work on the first two of them by the Chancellor, under formal terms of reference (see Annex E), and this report now sets out our findings on those two areas:
- moving employees’ NICs to an annual, cumulative and aggregate basis (ACA)
- changing employers’ NICs to a payroll levy.
We have been particularly focussed on analysing in fuller detail the impacts of such reforms. For ACA this has meant a great deal of digging into the numbers affected and the monetary impacts. On employers’ NICs we have developed further options beyond the simple flat-rate payroll levy we showed in the March report. For both aspects we have been probing the administrative implications: what costs and savings could result?
What changes can we expect?
The OTS recent report underscores the recommendations in their previous March report on this topic, that the time is ripe for change. Considering all the other changes our government needs to attend to, and in the case of Brexit with some urgency, don’t hold your breath on this one being adopted any time soon.
The full report and conclusions can be downloaded here. (94 pages)
Sole Enterprise with protected assets (SEPA)
The principle behind SEPA is that it will allow an individual to continue to trade as a sole trader whilst offering protection for their primary residence against claims arising from the business. The primary residence will not be protected from personal claims nor will any other asset be protected.
In essence, SEPA offers a limited, limited liability vehicle for sole traders.
In conclusion the OTS report says:
The case for SEPA’s introduction is not by any means cast iron. But our work indicates that SEPA has the potential to be a useful simplification for those that would otherwise consider incorporation. Furthermore, it could provide a boost to enterprise.
Accordingly, we recommend that it should be developed into a formal proposal. While doing so, one would have to address some of the issues that we have raised in this report as well as fully assessing any impact on the creditor and debt collection markets.
Will we see a change in the law?
Maybe is perhaps the most appropriate response. Oddly, this OTS report is not a commentary on tax change. No doubt, if enacted, the ability to ring-fence your home from creditor claims would tend to encourage the risk-averse to give their business ideas a go. We shall see.
The full report and conclusions can be downloaded here. (30 pages)
My conclusions summarised
If the OTS recommendations eventually impact legislation, the drive towards simplification of tax compliance – especially as the impact of MTD develops – are likely to continue. In which case tax compliance as a realistic and significant income stream for practitioners will be diminished.
As quoted in the body of this piece, we need to become tax tacticians (tax planners) rather than tax technicians.