Tax reliefs face massive overhaul

FOR THE FIRST time in 200 years someone has managed to map out the UK’s tax relief system – a system which has ballooned according to the government of the day, taxpayer demand, and backlashes to aggressive tax schemes.

The Office of Tax Simplification (OTS) is trawling through 1,042 reliefs, allowances and exemptions – which cover everything from selling assets stolen by the Nazis, to deep-sea drills- before recommending which should be simplified or scrapped.

The difficulty facing the OTS is that each relief – even the ones which seem obscure – may be vital to a particular group of people or businesses.

For this reason, the UK’s dense mesh of double taxation reliefs – an area the OTS is known to be looking at – will raise major points of conflict if they are “simplified”, because simplification often translates as a relief being withdrawn.

It’s inevitable the OTS will encounter a wall of resistance with any potential changes in this area because of the sheer number of groups that come under the double taxation umbrella. It’s not just the high-net worth individuals and corporates considering whether to leave the UK for countries with lower tax rates.

Double taxation reliefs also affect the UK’s two million migrant workers, overseas bank workers – most of whom aren’t super-rich traders – 22,000 diplomatic staff, and non-domiciled individuals who all rely on these breaks.

Lowly-paid migrant workers currently don’t have to file tax returns when paying tax on any overseas income they make below a value of £10,000.

Even a slight change to the rules – for example, a decrease of the £10,000 ceiling – could see more of these lowly paid workers shelling out for tax returns to be prepared and also cause a rise in admin costs for the taxman.

Against this backdrop, the Low Incomes Tax reform Group (LITRG) will be lobbying for the relief to be kept. “We are keen that this [relief] is preserved – not least as it was LITRG who persuaded ministers to introduce it,” an LITRG spokesman said.

“If the relief were removed we think the amount saved would very quickly be swallowed up by the administration costs of dealing with the tax returns of low-income migrants,” LITRG added.

Another good example of the difficulty facing the OTS are the tax rules for freelancers. These are relatively new, but have suffered from criticisms that they are fiendishly complex.

There is already a project running to simplify the freelancer income tax rules known as IR35, but there are related areas which could also come under the OTS spotlight.

The numerous reliefs available to businesses for training expenditure could easily be changed or withdrawn, but this would have a marked effect on the freelancer sector.

Contractors trading as managed service companies keep their skills up-to-date in order to stay in business, and often have to fork out for expensive training courses.

With 20,000 members potentially affected, the Professional Contractors Group (PCG) says it would strongly resist any withdrawal of income tax relief on relevant training courses.

PCG representatives are currently preparing to lobby the OTS for guarantees that training courses will be spared the axe.

But the OTS will not just face resistance from taxpayers. The panel could also face opposition from both the Treasury and HM Revenue & Customs: the OTS has been told to make sure recommendations end up revenue neutral, a senior OTS figure tells Accountancy Age.

Trying to make sure that the UK’s coffers neither benefit or lose out by the proposed changes to potentially hundreds of reliefs is almost impossible, advisers say.

The OTS already has enough to worry about without government divisions potentially taking umbrage with its recommendations.

One particular bugbear for the taxman is the way UK- based multinationals pass company funds through subsidiaries in low tax jurisdictions.

Controlled foreign companies (CFC) rules cause advisers and businesses a major headache in terms of complexity, and efforts have been dragging on for years to simplify the system.

These efforts have pushed on in recent months but that would not stop the OTS weighing into the CFC issue because of the panel’s wide-reaching mandate to make recommendations on all areas of the tax system.

John Whiting, the tax specialist in charge at the panel, has said there will be no issue the body will shy away from in trying to make the system less administratively complex.

“It isn’t about saving money, this is about a more efficient tax system,” Whiting said.

“If you come up with some sensible recommendations, it will make it very hard for the government to argue against them.”

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