Monthly Archives: February 2013

Q&A on pensioner taxation

JW_OTS_bannerThe OTS’s report on pensioner taxation has aroused a fair amount of debate on some of its recommendation. Here’s a summary of some of the main questions – plus our responses.

When are the changes coming in?

That is up to the Chancellor. We have had a very extensive consultative process to develop our recommendations, including input from HMRC and HM Treasury.  Significant changes will be subject to consultation but we anticipate an initial general response in the Budget.

Are the recommendations going to raise money for the Treasury?

The OTS has to be revenue neutral in our package of recommendations but we have to balance that with a drive for simplification. We think the two recommendations are broadly revenue neutral but it does all depend on how the ideas are taken forward. If the administrative recommendations are taken forward, they will cost the government money initially to develop DWP60s and consolidated coding notices though we think there is a real efficiency gain possible as well as achieving our main objective – making life easier for pensioners.

Doesn’t abolishing the 10% savings rate penalise the poor?

Our research showed that few people actually benefit from this relief: the unrepresented in particular usually fail to claim their rebate. Many who do benefit do so via a self assessment tax return but it is complex and little understood. At today’s interest rates, anyone who gains an amount of any significance must have a fair amount of capital, though that isn’t a reason to scrap the rate of course. But we think those with savings would be better served by a pragmatic increase in the ISA limit – 0% tax rather than 10% on savings.

The DWP60 and P2C seem very sensible but they won’t actually mean that all pensioners’ tax bills are right, will they?

No, but it will mean that pensioners get better information about their tax affairs, understand more and have a better chance of making sure their bills are correct. Plus it will improve HMRC/DWP liaison.

How can you recommend abolishing a relief that helps blind people?

Do look carefully at our reasoning and recommendation. Our starting point is that only around a fifth of those potentially eligible actually benefit. It seems to us better that instead help is given by direct grant. That would cost more money of course, so if that is not taken up, we have suggested some improvements to the way the relief is organised which will help ensure more people benefit.

John Whiting
Tax Director, OTS

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Q&A on unapproved employee share schemes

JW_OTS_bannerThe OTS’s report on unapproved employee share schemes has been generally welcomed by those involved with share-based rewards. Here’s a summary of some of the points we have heard – plus our responses.

What are the chances of the changes coming in?

That is up to the Chancellor. We have had a very extensive consultative process to develop our recommendations, including input from HMRC and HM Treasury.  Significant changes will be subject to consultation but we anticipate initial responses in the Budget.

Will this be part of a general relaunch of employee share ownership?

Again that has to be up to the government. But it is clearly an area receiving a good deal of attention from the government – changes to tax advantaged share schemes stemming from our earlier report, the Nuttall report’s recommendation on widening employee share ownership and the ‘shares for rights’ proposals.

Are the recommendations going to raise money for the Treasury?

The OTS has to be revenue neutral in our package of recommendations but we have to balance that with a drive for simplification. We think the recommendations are broadly revenue neutral but it does all depend on how the ideas are taken forward. For example, changing the tax charging arrangements for share awards could raise money for the exchequer as income tax/NIC could be on higher values – though the tax would be somewhat delayed.

Is the employee shareholding vehicle a safe harbour employee benefit trust (EBT)?

Probably, but we do not want to badge it as such at this stage. As is well-known, HMRC have a serious problem with abuse of EBTs and are understandably nervous of opening up new avenues for avoidance. But we think that many companies would welcome a simple vehicle – probably a form of EBT – which operated under model rules and could be used to provide a market for employees’ shares. There would be restrictions such as not being able to own other assets and having to be UK-based, but it would be protected from the raft of tax traps we identified. We also think this vehicle will be needed for the Nuttall reforms and ‘shares for rights’ proposals.

Surely you should have just abolished Form 42?

This was probably the most frequent request at meetings and in our postbag! It is part of HMRC’s risk management procedures but we do think HMRC need to look at how much of the information they really need and justify it to taxpayers. We have suggested various improvements to ease the burden.

Have the OTS now finished with these areas?

In principle yes, though we are keenly interested in how the recommendations are taken forward and plan to stay involved. It may be appropriate to use our Consultative Committees and general contacts to help develop some of our ideas during any consultative process.

John Whiting
Tax Director, OTS

Comments on our complexity index

Finance Act 2012Following the publication of the OTS complexity index methodology we have received several responses which the authors have kindly allowed us to reproduce here. We are very pleased that the index has helped spark debate and as we look to refine the methodology over the coming months we welcome further views on our approach. Please email us at ots@ots.gsi.gov.uk if you would like to contribute.

 The first response is from Professor David Ulph of St. Andrews University and a former head of HMRC’s analysis unit. His paper provides an excellent discussion on the concept of complexity and how to measure it. Professor Ulph also provides a useful critique of the OTS methodology which we will be looking to refine over the coming months.

Professor David Ulph – Measuring tax complexity

The second response is from Richard Baron of the Institute of Directors (IoD). Richard gives a critique of the criteria in our index and raises some interesting questions about the validity of several of them. Richard also comments on our weighting methodology and whether these should be subjective, arguing that they should not. He also questions whether we could ever get to a ‘robust’ measure of complexity and whether we should really only use the index to spark and stimulate debate.

Richard Baron – The OTS complexity index 

The third response is from one of the members of our Consultative Committee for the Employee share schemes review, David Pett of Pett, Franklin and Co. David’s argument is that simplifications that level the playing field for smaller taxpayers should be given more weight, even if they increase the length of legislation. Larger taxpayers shouldn’t benefit from the tax system just because of their size and ability to pay for better advice.

 David Pett – Tax Complexity