OTS interim report under the microscope

The Office of Tax Simplification (OTS) has today produced its interim report of the taxation of small business (defined in this case as micro-businesses with up to ten employees): in other words 95% of UK businesses.

This is in the form of recommendations to the chancellor for his Budget.

I have to declare an interest here as a member of the advisory panel, and I can certainly confirm that the debate about this report has been vigorous. It has also taken along most of the obvious stakeholders in the system: even where people do not agree with the conclusions they can accept that they had the chance to fight their corner.

The end result is not a bonfire of legislation. The review has shown what many of us knew, which is that the system is so complicated that it is very difficult to strip out individual parts.

The report suggests that the two key areas are:

• The integration of income tax and NIC
• A new approach for the very smallest businesses (talking nano- rather than micro- here)

Neither of these can be rushed, and both will need further discussion. There are huge questions about how much integrations of income tax and NIC is possible, with options from a realignment of thresholds, an alignment of rules, to a full merger – the last would save a great deal of administrative time and money but would be costly and potentially disruptive to carry through, needing a consideration of the international aspects – there are separate treaties with many countries.

As for the nano-business, possible changes would mainly involve various flat amounts for expenses, possibly easing the burden of record-keeping. 

There is also the question of IR35, specifically thrown to the OTS to deal with. There were and are very different views here, from instant abolition to various reforms. One possibility put forward is to suspend the legislation for a year or two, with abolition on the cards later if this causes no major upheavals or loss of tax. Another is for HMRC to improve its administration of the legislation. Some of us would see the latter proposal as requiring so much re-engineering as to be absurd: the problem is not in any case the administration but the way the law is shifted by a string of judicial decisions. A third possibility is a statutory “business test” but that would not exactly be a simplification.

Politicians, being politicians, will say “But what can we do now ?” and the answer is not much without altering the course of some bits of tax law or increasing somebody’s tax bill.

Nobody objects to a disincorporation relief (in some form) but the word seems to be that its impact would be small. There is talk of some (cautious) relief to the declaration of expenses by employers and perhaps of (more) changes to capital allowances. But the capital allowance regime is a good example of the kind of problems the OTS has to grapple with. For accountants it would make sense to allow depreciation and abolish the CA regime: but for the large number of very small businesses lying below the profession’s radar there is no such thing as depreciation, as they have no balance sheets, and the Annual Investment Allowance was the best thing to happen in a long time.

One could argue that the OTS has not done what it was set up to do. I think it is rather more to the point to say that it has shown up the complexity and just how difficult simplification is in the real world (away from the world inhabited by the lets-have-one-flat-tax-and-abolish-everything-else).

And as the economy sails on into the perfect storm of increasing world fuel and food prices at the same time as public sector job losses start to bite, the chancellor just may have other things on his mind.