Category Archives: Uncategorized

Updated list of all tax reliefs

Now that the 2014 Finance Act has received Royal Assent, we have updated our list of tax reliefs, which we last published in October 2010. The spreadsheet sets out all the reliefs, including those that have been abolished following our 2011 report and all the new ones introduced since then. In 2010 we counted 1,042 reliefs; there are now 1,140. Since 2010, the Government has abolished 57 reliefs, but added 151 new ones. The numbers don’t quite tally because 4 of the abolished reliefs were not in our original list.

Many of the new reliefs are purely structural, and are an integral element of blocks of new tax legislation – such as the Bank Levy, or the Disguised Remuneration rules, with their many exemptions. However, there are several completely new reliefs, such as reliefs for high end television drama, computer games and animation, and theatrical productions.

When we published our review of tax reliefs in 2011, we had only reviewed in depth 155 of the 1,042 reliefs we had then found. We always envisaged returning to the area in the future, not least because one of our key findings was that there was a need to have a system that reviewed existing reliefs to test their operation and continuing validity. We have kept up our list of reliefs to facilitate a further review but at present it is not a project we have the resources to undertake properly.

Employee Benefits and Expenses Review: Final Report

Being provided with accommodation by your employer sounds like a nice ‘perk’. But why is it that two people doing the same job can find one is taxed on the benefit but the other is exempt? How can a low paid sheltered housing warden not receive exempt accommodation? How can four employees who live in four identical properties end up with significantly different values for their taxable benefit?

If you’re unlucky enough to lose your job, at least you can be cushioned by the first £30,000 of any payoff being tax free. Except that in many cases that exemption doesn’t apply – so why do some employees benefit from the £30,000 income tax exemption but others do not? Is it just down to good advice…how can employers get it right more easily and more often?

Today we have published our third report on the area of employee benefits and expenses (EBE) to tackle these concerns.

The report focuses on these two major and sensitive issues, accommodation benefits and termination payments. But it also covers some of the more minor issues that were set out in Chapter 8 of our interim report, and includes an update on the Quick Wins identified in the interim report. We’ve made a number of sensible and workable proposals that we believe the Treasury and HMRC can take forward in wider consultations. These are summarised below, but to fully understand why and how we’ve reached this stage, and the details of what we’re proposing, please refer to our full report.

With regards to accommodation, we recommend that the most basic accommodation is taken out of the tax charge entirely, and that we should reform the existing exemption tests with a definition based on:
1. Whether the employee is required to live in the accommodation to enable him/ her to protect, buildings, people or assets.
2. Whether the employee is regularly required to work outside normal working hours.
3. Whether he/ she is required to live in the accommodation as a result of regulatory requirements.
We also recommend that all accommodation is taxed on the basis of open market rental value, and that an index is applied to the value for say 5 years or (preferably) the valuation is only required every, say, 5 years.

With regards to termination payments, instead of the complexity surrounding the £30,000 threshold, such as when it is applicable and when it isn’t, we think the simplest way forward is for income tax relief to be only available in circumstances where the employee qualifies for a statutory redundancy payment. Under this new relief, we propose that the level of the exemption would be a multiple of the statutory redundancy payment that the relevant individual is entitled to (or alternatively, a flat amount). All payments linked to the termination payment received by the relevant individual (including his/ her statutory redundancy payment) would be aggregated and then the income tax exemption would be applied against the value of these. We also propose a government review of the existing exemptions, reliefs and reductions for termination payments, in order to establish in each case whether they should be retained. Moreover, we ask the Government to look at whether there should be a reform to the NICs treatment, so that the treatment of income tax and NICs are better aligned.

These changes will replace clunky, out-dated, complex, burdensome and often unfair rules, with rules that are more attuned to meet the needs of the modern day business environment. Ministers will respond to the report in due course, possibly at the Autumn Statement 2014, but why not have a look yourself and leave a comment.

Manchester Business School students’ visit

This year the OTS has been collaborating with Manchester Business School (MBS) on the competitiveness review.  Their class of third year accounting students contributed to the review by analysing the tax system of countries which do well in the World Bank’s paying taxes report 2014, and identifying lessons for the UK.

The OTS went to MBS to talk to the students and set the project in motion in February, together with PwC who manage the tax section of the World Bank’s report. The students made a return visit to the OTS in March to discuss their progress and the culmination was poster presentations in May at MBS encapsulating their findings.  An invitation to visit the Treasury was offered to the students that produced the best three projects, and was taken up by Nilay who co-produced a study on Rwanda and the Seychelles, and by Danielle and Farhana, who worked together to study tax administration in Finland. (The duo who worked on Ireland and Nilay’s colleague were unable to join us.) They were accompanied by lecturer Penny Clarke who leads the teaching of the module.

During the visit on the 25 June organised by the OTS, the students had a tour of the Treasury building, met with a technical tax director on secondment to OTS, and a civil servant involved in tax policy making. MBS visit

The highlight of the visit was meeting with David Gauke, the Exchequer Secretary. He quizzed them on what they enjoyed about the project and how they thought the UK tax system could be improved. The students asked some astute questions about the media and political impact on the ministers and tax policy. The Minister then presented the students with prizes to mark their achievements. 

The OTS will be reflecting on how it engages with organisations such as universities, with a view to strengthening networks so that both government and universities can benefit from future collaborative work. In addition, the analysis of some 20 countries’ tax systems is providing useful input to the OTS competitiveness review.

Links between tax avoidance and complexity workshop

On the 26 June, the OTS held a workshop involving a small but diverse group of renowned tax professionals and commentators. The aim was to discuss the links between tax complexity and tax avoidance, to help inform OTS thinking.

Going forwards, the OTS team will gather further views and data on avoidance and complexity, and present some emerging themes and proposals at a longer workshop in the autumn, and then publish a report by the end of the year.

A comprehensive readout of the discussion, which highlights a number of interesting points, can be accessed in PDF format by clicking on the following link: OTS avoidance and complexity workshop – 26 June 2014 

The group began by discussing how poorly designed legislation provides opportunities for tax avoidance, regardless of whether the legislation is simple or complex.

Attendees discussed how avoidance is born of out of uncertainty or a lack of clarity or understanding in legislation, and when provided with a set of rules, people will interpret them in the way that is most beneficial to their circumstances. However, it was explained that there is a thriving market for people that do not want to take risks when it comes to dealing with tax, and are willing to pay for as much ‘certainty’ as is possible.

It was also explained that opportunities for tax avoidance originate because of badly designed boundaries in the tax system, in particular, boundaries between different taxes that can be crossed too easily to create a more advantageous tax position.

The group went on to talk about whether expressing the intention behind legislation better would help tackle avoidance. But there were mixed views as to whether it would help to state the policy intention in legislation as an aid to the Courts.

The group felt that there had always been a market for tax avoidance, but opportunities ebbed and flowed over the years in the light of legislation and case law (and public opinion).

If you want to join in the debate we’d love to hear your thoughts – email them to ots@ots.gsi.gov.uk

 

The PAC report on tax reliefs

The Public Accounts Committee (PAC) has today published a report on tax reliefs. We read it with interest, as we conducted a report into tax reliefs in 2011.

The OTS also contributed to the work that produced the PAC report, giving the National Audit Office an updated total of tax reliefs across the tax system. In our original report in 2011 we found there were 1,042 reliefs in the tax system; earlier this year we updated our list for intervening Finance Acts and came to a figure of 1,128. We’ll review the list further in the light of the current Finance Bill when that is passed by Parliament.

The OTS work on tax reliefs focussed on a sample of 155 reliefs. Our report recommended various abolitions and enhancements, but to us the main point we were making was that there was no systematic review and evaluation process of tax reliefs. The OTS report is referred to regularly in the PAC report, which is pleasing.

Our review went back to the original policy for each relief (which of course took some digging for some long-established provisions!); we looked at how the relief was operating today – and whether it seemed to be meeting those original aims. We were interested in the administrative costs – to taxpayers and HMRC – of its operation. Whether the relief was delivering value for money was something we tried to review but inevitably that gets more into policy judgments. We also recognised that some reliefs have been abused for tax avoidance, leading to complex anti-avoidance rules.

The PAC report picks up our theme of there needing to be more systematic review of the operation of reliefs, referring to a need for a ‘system of control’. We remain interested in the subject of reliefs and although we haven’t formally carried on our 2010/11 project, inevitably it’s a subject that crops up in all our projects (for example our current Competitiveness review has heard a lot about improving the operation of Research and Development tax relief). So we would welcome the chance to do further work in the area.

John Whiting

26 June 2014

 

OTS mentioned during the Finance Bill Committee

The Finance Bill Committee has been in full swing over the past few weeks. Now that parliament is in recess, it seems like a good time to look at what references the OTS has received in the midst of the debate so far.

On Partnerships, clause 68 and schedule 13 introduce changes to prevent tax avoidance through the use of certain partnership structures. The OTS review of the whole area of partnership taxation was noted twice, including the interim report published in January 2014. Partly, this was to bring to light the risk of “unnecessary complication while the results of the OTS review are still being considered”.

On share schemes, clause 49 and schedule 7 implement a number of recommendations made by the OTS to simplify the tax rules in relation to employment-related securities (ERS) such as employee shares or ERS options awarded to employees. The changes affect the tax treatment of internationally mobile employees and nil-paid and partly-paid ERS, and extend the corporation tax relief available to companies in relation to employee share acquisitions. It was noted that “This is just one of the provisions in the Bill that implements recommendations made by the OTS. It addresses issues indentified as priorities by the OTS and has been welcomed by consultation respondents as a valuable simplification of complex tax rules.”

OTS definitions project – Finance Bill 2014 measure

The OTS was delighted to see that Finance Bill 2014 contains a clause enabling the index of definitions included in an Act to be amended by secondary legislation (see clause 293 reproduced below). As a result of this clause, it should be possible for Parliamentary counsel to keep schedules of definitions up to date, without having to include legislation in future Finance Bills.

The OTS recommended something like this in its report “Definitions in tax legislation and their contribution to complexity” . This report referred to the schedules of definitions included in Acts produced by Tax law Rewrite Project being out of date (See ibid section 2.4.7) due to time pressure on parliamentary draftsmen. For example, Schedule 4 Corporation Tax Act 2010 does not contain the definition of “community amateur sports club” which was introduced in Finance Act 2012 (Finance Act 2012 s 52).

We are very pleased to see this welcome change.

293 Power to update indexes of defined terms
(1) The Treasury may by order amend any index of defined expressions contained in an Act relating to taxation, so as to make amendments consequential on any enactment.
(2) In this section—
“enactment” means any provision made by or under an Act (whether before or after the passing of this Act);
“index of defined expressions” means a provision contained in an Act relating to taxation which lists where expressions used in the Act, or in a particular part of the Act, are defined or otherwise explained.
(3) The power to make an order under this section is exercisable by statutory instrument.
(4) An order under this section is subject to annulment in pursuance of a resolution of the House of Commons.