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Business tax manifesto: Simplify
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Business tax manifesto: Simplify

A new manifesto for business taxation

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26th Apr 2017
Editor at large AccountingWEB
Columnist
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This spring’s surprise election campaign and the impact it has had on HMRC’s plans presents an opportunity to take a longer, deeper look at how to reduce the tax burden on business.

One of the arguments surrounding the beleaguered Making Tax Digital (MTD) project has been that the government would be better advised to simplify the tax regime first before digitising it. Now that the enabling legislation has been dropped from the Finance Bill, politicians have a chance to address those broader business concerns in their manifestos.

They have a wealth of research and policy work to draw on, ranging from the output of the Office of Tax Simplification (OTS), to business organisations and professional advisers. To set the scene for the debates ahead, AccountingWEB delved into those archives for ideas worth of inclusion in our own business tax simplification manifesto.

Underlying problems

According to the Institute of Fiscal Studies, the government that takes office in June faces a structural problem with its tax base. Taxable profits have been falling since the global financial crisis to reduce the corporation tax base, and losses accumulated over that time continue to diminish the amounts collected.

The recovery from recession has also been “employment heavy”, the IFS notes, with a visible shift towards self-employment. Meanwhile, low wage inflation and the 82% rise in the personal allowance since 2010/11 has narrowed the income tax base

The UK’s poor growth is also a feature of poor productivity, which reflects the reluctance of companies that have cash to put it into expansion projects, and the difficulty those without cash have in gaining access to funding.

CBI economist Anna Leach looked into the sources of the UK’s productivity problem across a number of sectors. Poor infrastructure, planning regulations, workforce skills, investment, innovation and R&D all play a part in the country’s poor productivity - but increasing regulatory burdens have not helped, with new compliance regimes for financial services, transport and construction eating into available resources.

During the past few years businesses everywhere have also had to wrestle with pensions auto-enrolment and real time information for PAYE, with Making Tax Digital looming on the horizon.

Tax complexity

The central issue for business tax is crystal clear. “Taxation in the UK is more complicated than it need be,” the IFS told MPs on the Treasury select committee in a written submission last year - and few accountants would argue with the institute’s assertion.

The unnecessary complexities and opportunities they present for tax avoidance stem from the urge to use taxation as a tool to stimulate or impede certain kinds of economic activity. A legion of buy-to-let landlords and personal service company owners will attest to some of the drawbacks of this approach.

The IFS explains that the problems arise when tax policy makers attempt to draw distinctions between different activities by offering preferential tax treatment for certain products, assets or income sources. Each of these targeted measures demands clear and detailed definitions as to what qualifies for support and what doesn’t - a simple, but deadly recipe for unnecessary complication.

“Moving towards a more neutral underlying tax policy, which taxes similar activities more similarly, would be the biggest step towards simplification,” the IFS argued.

This principle is not new. It goes back to the epic Mirrlees Review (and beyond) which emerged in 2011 with an agenda for tax reform. The proposals included:

  • Taxes on earnings should be based around a progressive income tax with a transparent and coherent rate structure, with all income subject to the same rates
  • Indirect taxes should be largely uniform – VAT on almost everything – with a small number of targeted exceptions on economic efficiency grounds
  • A single rate of corporation tax with no tax on the normal return on investment
  • Equal treatment of income derived from employment, self employment and running a small company

The Office of Tax Simplificiation, a child of the Tory/Lib Dem coalition, carried some of these ideas forward, but has so far achieved “small improvements around the edges”, according to an IFS review in 2014. The slow progress is down to a lack of resources and its focus on the existing tax system rather than policy formulation. Which brings us back to the dreaded tax policy short-termism - or “hyperactivity” driven by the need to pull headline-grabbing rabbits out of the Budget hat.

A truly business-friendly Chancellor would go back to some of the Mirrlees proposals and give the OTS a wider remit to dig into the principles underlying tax policy and set the Treasury on course for true simplification. 

Practical proposals from the profession

Some of these points are patently obvious to accountants, who like the OTS are often asked by the Treasury and HMRC to comment on proposals that have already been formulated rather than being asked for what they would really like to see from the tax system.

A 2016 collaboration between accountants Grant Thornton, Prelude Group and the Insitute of Directors resulted in a report entitled Britain unlocked that drew on the experience of successful entrepreneurs to suggest ways of removing barriers to growth.

Britain is good at producing new businesses, with over 600,000 started in 2015, the report noted. But it falls down when it comes to scaling up their operations. One of the barriers to SME progress, the report suggested, was the UK’s punishingly complex tax system.

The tax system starts to bite when firms take on more staff, move to larger premises or solicit bigger deals. At each stage, the growing business will often lack the resources and time to overcome the new administrative hurdles. As well as endorsing the idea of merging income tax and national insurance, Britain unlocked suggested a few more proposals for simplifying business tax:

  • Expand reliefs to encourage entrepreneurial investment
  • Raise the small business rate relief cut-off point to £25,000
  • Restore the annual investment allowance to £500,000 a year following last year’s reduction back to £200,000.
  • Allow companies to pay Corporation Tax annually rather than quarterly until their profits reach £5m (up from the current £1.5m threshold)
  • Consolidate the various employee share schemes into one share allocation scheme. The design should be simple and easy to self-certificate.
  • Increased annual Capital Gains Tax exemption of £50,000 (up from current £11,100) to encourage entrepreneurs. This measure would have to be accompanied by “necessary anti-avoidance measures” - proving once again that tax stimuli almost always have a sting in the tail.

Let’s face it. Tax is more of a trap for politicians than a source of excitement, but the hyperactive tinkering through the early part of this century is having a visible impact on the economy, business and individual taxpayers. Failing to grasp the simplification nettle now could rebound on politicians if voters wake up to the source of many of their complaints and vent their frustration in the polling booth.

Help us refine the AccountingWEB business tax manifesto for the 2017 election. What do you think of the simplification and business support measures suggested here? And what tax reforms would convince you to switch your allegiance to a different political party?

Replies (8)

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Replying to petestar1969:
rebecca cave
By Rebecca Cave
26th Apr 2017 15:34

No. There has been no official announcement of MTD delay, although that may be a face-saving move by HMRC. I expect will have to wait until 9 June or later to learn the official position on the MTD project.

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By johnjenkins
27th Apr 2017 11:11

If MTD was going to be looked at "in a different light" it would have been done so by now.
HMRC won't let any Government mess with it. So it doesn't matter who gets in (my view a hung parliament) MTD will come off the shelf quicker than you can say "TM has resigned" cos she didn't get the majority she needed. The only stumbling block I see is the software being ready on time.
We all know it won't work though.

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By Wiganer Elaine
27th Apr 2017 11:33

Personally, I have no political allegiances - I vote for whichever party seems to be addressing the issues that I believe to be the most important of the current time we are in. If no party seems to address the issues I am concerned with, I will vote for the local independent candidate.

In terms of tax simplification, I would vote for the party that truly believed in tax simplification - ie the starting point would be a flat rate of tax on ALL sources of income. (No more National Insurance cons) You can take lower earners out of tax by having a personal allowance, but any excess over this is taxed at a flat rate of (say) 32%. I would also consider whether or not to abolish corporation tax on the proviso that dividends are paid to shareholders net of the flat rate of tax. Basically, if a company wants to grow then taxing its profits with which it can grow seems somewhat backward.

A growing company (theoretically) will employ more people who will pay tax. If the company is profitable then the dividends paid to its shareholders will be bigger and therefore the shareholders will pay more tax (at source). In this instance a parent company shareholder is not exempt from the tax on its dividend.

All things considered, I would vote for a party which truly wanted to simplify the current tax regime and make it open and transparent.

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Replying to Wiganer Elaine:
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By matchmade
27th Apr 2017 16:52

Unfortunately there is the dominant rhetoric of "those with the broadest shoulders" etc. A flat rate of 32% looks like a hefty tax cut for the higher-paid paying 40% and 45% tax rates. How well do you think this would go with the voting masses?

What about Employer NICs? One of the reasons behind the growth of self-employment (voluntary or involuntary) is the reluctance of corporations large and small to pay payroll taxes and the accompanying administrative costs. How do you simplify business taxation to make it less onerous to take on employees, or less advantageous for people to work freelance?

Growing companies do not necessarily employ more people: tech companies, especially with business models based around the licensing of patents, can employ very small numbers of people and yet earn huge returns. Or manufacturing companies can deploy large numbers of robots, who pay no tax.

I would like to see a government that committed to a thorough reform of international taxation, to reduce the advantages exploited so effectively by multinationals, technology companies in particular, although as more and more elements of business move online, the taxation of internet-based transactions is going to become an ever-larger issue.

I am also very interested in integrating social care into the NHS, with a national insurance scheme to cover the population against the need to go into a care or nursing home. This improved welfare benefit - much cheaper per head of population if the whole population contributes - should perhaps best be paid for by extending NICs to pensioners - or your suggested 32% basic rate of tax on everyone.

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By johnjenkins
27th Apr 2017 12:41

I have just heard from a very reliable source that HMRC are actually looking at the policy wherby MTD was introduced with a view to a re-structure. Quite what that means in terms of bottom line? I can only assume that the larger concern will be registering first. Or it could mean that all business will be VAT registered

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By Jack Spratt
27th Apr 2017 18:20

“Moving towards a more neutral underlying tax policy, which taxes similar activities more similarly, would be the biggest step towards simplification,” the IFS argued.

This principle is not new."

Nigel Lawson set CGT at the same rate as IT (40%?) and that made all the wheezes to make income into capital pointless.
We could do with a lot more of that sort of stuff.

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Replying to Jack Spratt:
paddle steamer
By DJKL
02nd May 2017 11:25

Please can you devise a tax system that even unrepresented taxpayers can just about understand.

Something like:

A new business entity, the Corporate Partnership, through which smaller (size up to say £xxxx turnover/ £xxxx net assets/number of employees) business entities will operate; its profits are taxable at a corporate level irrespective of whether funds are withdrawn/not withdrawn from the business.

There is no need for the "owners" to pay themselves "Directors'" remuneration, it will not matter. Similarly as no employment income/self employment income
things like personal personal pension contributions pointless, instead contributions made on behalf of members by the Corporate Partnership.

In effect take tax burden from the individual to the entity.

(The tax rate chargeable will in effect accommodate tax and NI, the owners/operators will have no need (unless they have other income) to complete an individual tax return.)

The tax will not be income tax/corporation tax/capital gains tax, it will be its own Corporate Partnership rate, accordingly legislation can be applied specifically to the type of entity.

All legislation regarding Corporate Partnership tax will be contained within one short Act, SI used merely re changes in corporate partnership tax rate variation.

All legislation regarding Corporate Partnership legal framework be within one short Act.

One body will regulate submission of returns re income/payment of tax. Whilst Corporate Partnership will have third party limited liability, owners may be liable personally to repay drawings where Corporate Tax/Vat/PAYE remains unpaid by the Corporate Partnership.

Corporate Partnership insolvency, in all cases, will need reviewed. (as will be the case with lower number Ltd companies who fail) CP as the default entity unless use of a Ltd from outset advisable.

All traders not trading as Limited Companies will require to trade as a Corporate Partnership, there will be no sole traders etc, All CP and Ltd will have reg number, to be displayed on all sales transaction documents, so invoices/till receipts/e bay sales etc.

In effect create an embryo business entity that will act as the starting entity, keep companies as the next step upwards, have simple steps to convert from Corporate Partnership to Ltd and Ltd to Corporate Partnership, have ability to target entrepreneur tax rates as distinct from general tax rates (similar flexibility with differential interest rates re business/non business borrowing would not be a bad idea either)

Now-do you want my far simpler scrapping of IHT and introducing CGT on death proposals (with spousal relief) so that only pregnant gains get taxed on second death Yep, that family house now worth £600,0000 falls into tax, none of this £650k £1,000k exemption nonsense, where assets have been taxed (interest on deposits say added to deposit) no liability, when invested in houses/shares etc, value uplift on second death gets taxed.

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