Review of Tax Reliefs; Final Report

Review of tax reliefs final report March 2011 Official versions of this document are printed on 100% recycled paper. When you have finished with it please recycle it again. If using an electronic version of the document, please consider the environment and only print the pages which you need and recycle them when you have finished. © Crown copyright 2011 You may re-use this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit http://www.nationalarchives.gov.uk/doc/open- government-licence/ or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or e-mail: [email protected]. ISBN 978-1-84532-853-5 PU1134 Contents Page Foreword 3 Executive summary 5 Chapter 1 Introduction 7 Chapter 2 Common themes emerging 11 Chapter 3 Specific simplification recommendations 19 Chapter 4 Reliefs to abolish 25 Chapter 5 Other reliefs reviewed 31 Chapter 6 Next steps 35 List of annexes 37 1 Foreword “To boldly go where no man has gone before” was the proud boast of the crew of Star Trek’s USS Enterprise. I think that this phrase must have been in the Chancellor’s mind when, last July, he set us off on our voyage of discovery into the world of tax reliefs and allowances. No one, until the formation of the Office of Tax Simplification, had attempted to list and subsequently assess the worth of the UK’s tax allowances and reliefs. This report now signals that this job has been completed. During our voyage of discovery (which has lasted a mere five months rather than the five years of USS Enterprise) we found 1,042 reliefs, allowances and exemptions; far more than any of our initial estimates. We published the list so people could see what we had found, and subsequently put out for consultation the criteria we proposed to use in order to make the recommendations which form this report. Through a process of prioritisation, we selected 155 reliefs for detailed scrutiny and the annexes to this document set out how we arrived at our conclusions. In undertaking this work I am indebted on behalf of the OTS for the assistance we received from HM Revenue & Customs, HM Treasury, the Consultative Committee, and the 60 or so organisations who contacted us with a whole raft of very helpful comments and recommendations. In reading this report I very much hope you will regard it as the start of the journey towards the simplification of the UK’s tax system. In this context, the themes emerging from the review are set out in Chapter 2 and there is a summary of our proposals in Chapters 3 - 5. However, where appropriate, we have not shied away from pointing out where in our judgement whole areas of tax law are particularly complicated. For example, the whole system of capital taxes and that of employee benefits and expenses may need a more in depth review than we have so far been able to undertake. We have looked beyond simplification and have addressed some practical aspects of policy, for example ideas to encourage more investment in small companies The cartoon at the start of this report takes us back to the days of the late eighteenth century when William Pitt laid out the aims for his income tax in 1799. Then he said that the aim of the system was to “prevent an undue abatement, and to proportion to the real ability [to pay] by a liberal, fair and efficient application”. Since that time, successive Chancellors have inevitably challenged this principle as they have sought to respond to the many competing policy requirements involved in raising revenue in an ever more complex world. This report has been put together within a tight timetable. That could not have been done without the unstinting efforts of our private sector secondees, whose services were given free of charge. My very grateful thanks go to Tom Byng of Deloitte, Caroline Turnbull-Hall of PwC and Partha Ray of BDO. Their efforts were also ably supported by a small but dedicated secretariat led by Jeremy Sherwood of HMRC, with Tunde Ojetola in particular playing a major role in this project. Finally I would like to record my thanks and profound appreciation to the Project’s tax director John Whiting. There have been times when he appeared to have been working full-time on this project in spite of the (very!) part-time requirements of his contract. However, without his dedication to the cause of simplification, knowledge of the tax system, and wise counsel this report could not have been completed. Our report has now gone to the Chancellor. All of us look forward to his response to our recommendations as part of his Budget 2011 address. Rt Hon Michael Jack Chairman, Office of Tax Simplification March 2011 3 Executive summary Following the interim report published in December 2010, we have received comments and feedback from taxpayers, advisers, HM Revenue and Customs (“HMRC”), HM Treasury, and other interested parties on our methodology and on particular reliefs. Of the 1,042 reliefs we originally identified, this report looks in detail at 1551. Our starting point was to review individual reliefs; an alternative method might have been to start with a fundamental reappraisal of each tax, thereby looking at groups of reliefs in their full context. Both approaches are equally valid; however, we consider that our approach has been the correct one for our project and circumstances. It has allowed us to review reliefs and identify wider issues in specific areas of tax that might lead to a wider review. It has also meant that we could quickly establish a methodology for our work and deliver results in a short timescale2. We have been assisted in our review of reliefs by both HM Treasury and HMRC and have gathered evidence for our conclusions from our Consultative Committee as well as the 60 or more representations that we have received from stakeholders (whether representative bodies, advisers or taxpayers). During the review, a number of key themes have emerged: • Merging income tax and NIC – this is a long term project of structural reform that would deliver major simplification; • Employee benefits and expenses – The longer term aim would be to align the treatment of employee benefits, with shorter term aims of simplifying many minor benefits with a de minimis limit of £100/£500, or amending the current £8,500 threshold; • Inheritance tax and trusts – the reliefs for inheritance tax are integral to the policy and we consider that a more appropriate approach would be to review the tax as a whole; • Capital gains tax, particularly as applicable to companies – the capital gains systems for individuals and companies have drifted apart, with gains by individuals taxed at a lower rate than income to reflect inflation, whereas companies are still required to calculate indexation. Our aim would be to realign the treatments and simplify the tax, but as there are changes in relation to corporate capital gains expected in Finance Bill 2011, this is clearly a longer term project; and • Environmental taxes – Both landfill tax and aggregates levy should be reviewed, as both regimes contain basic charging provisions with numerous exemptions and it may be more appropriate to define what is caught rather than what is excluded. Our review has suggested that these areas are particularly complex areas, for example due to the number and complexity of the reliefs involved. Whilst each area is deserving of a full review, we recognise that these are complex and time consuming areas involving important matters of government policy that go beyond the current remit of the OTS. 1 An additional four reliefs were reviewed in the interim report that have not been included here as they are under separate consultation. 2 We would point to others studies, in particular the Mirrlees Review, which has looked at the overall structure of taxes. It would be impossible for the OTS to try to emulate the Mirrlees approach with our timescale and resources. 5 Out of the total of 155 we are recommending that 54 remain unchanged, 37 be looked at in more detail, and 47 be abolished on the basis that they are either time expired, there is no ongoing policy rationale, the value is negligible, or the benefit is outweighed by the administrative burden. We also suggest that 17 reliefs be simplified, including: Enterprise investment scheme; Venture capital trusts; Entrepreneurs’ relief; and Surplus advance corporation tax. In framing our recommendations, we have borne in mind our brief to arrive at ‘revenue neutral’ proposals. Our resources do not permit a fully costed set of recommendations; in any event the real work on revenue implications must be carried out along with consultations over those of our recommendations that the Chancellor adopts. However, we think our report achieves a broad balance: the costs to the taxpayer of the reliefs recommended for abolition are balanced by the cost to the Exchequer of widening some other reliefs, and our suggestions for substitutions which will deliver simplification dividends. There is the question of the remaining 883 reliefs that we have not looked at in detail. They have been categorised in our initial work and there is clearly scope for simplifying a number of them. The OTS could start further projects to cover sections of these reliefs but such work would logically be part of wider projects reviewing specific taxes or the way taxes affect particular sectors. We have presented these recommendations to the Chancellor of the Exchequer and expect a formal response as part of Budget 2011, leading to consultation on draft legislation under the new policy making approach with amendments possibly included in Finance Bill 2012.

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