Finance Act 2015 – new tax reliefs

OTS stand

Now that the 2015 Finance Act has been passed, we’ve updated our master list of tax reliefs. One relief has been abolished – the £8,500 benefits threshold. But seventeen new reliefs have been added, bringing the grand total to 1,156.

OTS list of tax reliefs updated to March 2015

 

Employment status: what comes first?

Grand national

The OTS’s Employment Status report (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/408608/OTS_Employment_Status_report.pdf) is a lengthy document with some 28 recommendations. It is deliberately aimed at the longer-term reform of the area, though there are some improvements (for example in some HMRC procedures) that could be made more quickly.
With such an extensive report – though it is of course a gripping read – we have understandably been challenged by some people in terms of ‘OK, great stuff, but which are the most important recommendations?’ Our response – as might be expected – is ‘all of them’, on the basis that we want the report to be read and considered as a package that could pave the way to significant simplification.
It is also quite difficult to select the ‘most important’ recommendations because much will depend on the approach to simplification that is to be pursued. A discussion among the team that worked on the report couldn’t come to a consensus on a 1/2/3 rating but there was a definite front-runner, with a number of other fancied horses pressing hard.
Followers of the OTS’s work won’t be surprised to hear that we see progressing income tax/NIC alignment as the most important area, including looking at wider issues such as employers’ NICs. Those coming up on the rails are:
• Exploring the statutory employment test idea
• HMRC admin, particularly developing a ‘safe harbour’ approach, possibly using the Employment Status Indicator
• Developing a code of principles on what constitutes ‘employment’, involving all relevant departments (i.e. BIS, DWP as well as HMRC)
That still leaves 20+ other runners jockeying for position and we would stress that we’d ideally like them all to reach the finishing line (which in these terms means being properly considered and taken forward to consultation at least in part). But we’d welcome views on the most important of our recommendations.

What would your 1/2/3 be – or indeed any that you think should fall at an early hurdle? Let us know at ots@ots.gsi.gov.uk .

John Whiting, OTS Tax Director

Autumn Statement 2014 and the OTS

Autumn Statement

It was gratifying to hear the Chancellor give credit to Michael Jack and John Whiting of the OTS in his Autumn Statement speech today.

More importantly, he said the Government accepted “almost all” of the recommendations in our October report on improving the Competitiveness of UK tax administration. After the speech, we received a letter from the Financial Secretary, David Gauke MP, setting out the Government’s detailed response to this and other recent OTS reviews. We will put the letter on our website shortly.

Of course, many of the ideas in that review would be major undertakings with wide ranging impacts on businesses, and should rightly be considered fully in the next Parliament. Examples are closer alignment of accounting profit with taxable profit, and removing the distinction between trading and investment income. In the shorter term, HMRC has accepted our proposals to conduct a post implementation review of RTI (Real Time Information) and to improve assistance to businesses with greater use of email and better telephone services with appropriately trained staff along with many other administrative changes.

It is good to see such a positive reaction to our review of employee benefits in kind and expenses with four major reforms announced:
– abolishing the £8,500 taxable benefits threshold
– introducing a statutory exemption for benefits under £50
– a system of voluntary payrolling of benefits
– replacing the expenses dispensation regime with an exemption for paid and reimbursed expenses.
We expect to see these featured in the 2015 Finance Bill. The Treasury will also soon launch a major review of tax rules for travel and subsistence expenses.

On the downside, the government has decided not to take forward two radical ideas from our review of employee share schemes – the proposals for a “marketable security” and a new employee shareholding vehicle. There simply wasn’t enough interest in the recent HMRC consultation on these ideas, which disappointed us. But overall there has been a good programme of reforms in the share schemes area, so we mustn’t gripe too much.

We are busy carrying out our review of the tax rules for employment status and expect to publish that report in February. We are also putting the finishing touches to a sweeping up report on taxation of business partnerships. And of course, we look forward to seeing the draft Finance Bill when it comes out shortly. One small job will be to update our tally of tax reliefs – currently at 1140, but we noticed a few new ones announced today…

Jeremy Sherwood
Head of OTS

Canadian Discussions

The Canadian Minister of National Revenue, the Hon. Kerry-Lynne Findlay was in the UK this week for a series of meetings with UK Ministers and officials on a variety of tax issues. The OTS were very pleased to be included in the Minister’s schedule and we had a constCanadian flagructive meeting with the Minister and her officials.

The Minister was keen to understand what had led to the creation of the OTS, how we were constituted (the answer there being under the coalition agreement – so informally in many ways!) and how we operated – plus of course the lessons we had learned. We fed into the discussions our conclusions on the causes of complexity and the lessons for policymakers. We discussed issues such as how we selected our projects, how we reported them and how they were taken forward. Did we cover both technical and administrative matters? Very much so – and although in strictness policy is outside our remit, in practice it’s inevitable that we have to make policy suggestions but the driver is always simplification. They had a particular focus on lessons for small businesses – which has of course been a key area for the OTS.

 

Many will be aware that Canada is the one G7 country that is ahead of the UK in the World Bank Paying Taxes survey. We will be reporting on the lessons we have drawn from our researches in our forthcoming Competitiveness report but it’s clear from our discussions this week that Canada will not be resting on their laurels (or maple leafs).

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.