Tax tips for the Office of Tax Simplification

Simon Sweetman outlines the concerns around income tax and corporation tax which need to be addressed by the new Office of Tax Simplification.

My last article, which looked at whether the Office of Tax Simplification’s idea of ‘simple’ matches the profession’s generated some interesting debate. Following on from that, let’s see what help we can offer the OTS by way of general principles, rather than chopping away at particular items (although some of them do need chopping at, as the response to my last piece suggested).

For the purposes of this article, PAYE can be left to one side, as a consultation document was launched today containing a general rumbling that perhaps a system designed in 1944 is no longer quite what we need. VAT is easy to return but burdensome in terms of record keeping, but it is unlikely that OTS can do much about that.

The real issues for debate at the moment are income tax and corporation tax (which can be looked at together), despite substantial changes to the corporation tax code in recent years, they have not impacted much on smaller companies (except – in theory – for loan relationships, although every small accountant I know completely ignores that legislation and carries on as they always have done). It might be noted in passing that the new rules for associated companies are a definite improvement, but are not a simplification.

The completion of the return itself may not be too difficult, but the income tax code – what is allowed and what is not – remains largely impenetrable to small businesses (and quite often to their advisers). Some common questions include: Why aren’t training costs allowable? What’s all this about clothing? What about travel costs?

The answer of course is that the legislation (at heart) is simple. Essentially, you only have to ask two questions for any item of expenditure:

• Is it capital or revenue?
• Is it incurred wholly and exclusively for the purposes of the trade?

The first has been part of accounting practice for centuries; the second goes right back to the beginnings of income tax in the UK in the early 19th century. These are simple questions, but they do not produce simple answers because of the accretion of 150 years of case law and of fine reasoning by judges (which can only be overturned by more legislation), possibly not helped by the introduction of a special reverence for accounting practice and UK or international GAAP.

It might seem logical to suppose that what worked in 1829 might be ripe for change in 2010, but how would you set about simplification?

There are two obvious approaches; one is to have a simple rule, but then that has been tried and judicial decisions grow all over it like barnacles. HMRC will feel it has a duty to interpret the law in its own interest, and taxpayers will want to appeal anything they think unreasonable.

The other approach is to attempt to legislate for every possible situation one by one, but that is surely a road to madness. That is what has led to the increase in the size of the Taxes Acts (consider, for instance, the rules for employee travel).

Is there another way? Is the important point (and this of course goes for avoidance as well) being able to demonstrate a commercial motive for any item of expenditure? Forget “wholly and exclusively”, which is a nitpicker’s charter - what matters is the primary motive. It is going to allow more expenditure than the current code, but would it give us a way forward?