"I'm on the lookout for a dream – a distant dream that is getting a little closer today – that people will actually understand the tax laws they must comply with." With this success, the then British Chancellor of the Exchequer George Osborne set up the Tax Simplification Office (OTS) in July 2010 to advise on the introduction of a simpler tax system.
At the time, there were serious concerns for the UK on a global scale. The Chancellor noted that the United Kingdom had slipped from 7th to 13th place in the World Economic Forum's Global Competitiveness Index over the past decade and that its tax legislation, "one of the most complex and opaque" in industrialized countries, had more than doubled during this period 11,000 pages. This trend had to be reversed and the OTS was intended to play an important role in making the tax system work better for the taxpayer.
The Chancellor expected that simpler and more competitive taxes would help show the world that "Britain is open to business".
Despite the fanfare, the OTS was a humble operation at first. It was established temporarily as the independent office of the UK Government's Department of Commerce and Treasury, HM Treasury (HMT). The chairman of the board of directors and the tax director were unpaid part-time jobs. They were assisted by a small, full-time secretariat made up of civil servants and a few representatives from accounting and law firms, as well as other professional and industrial associations. In total, the unit employed three to six full-time employees.
A change came in 2015 when the OTS was made a permanent independent bureau of HMT and then made legal by the Finance Act 2016. This brought the benefit of a larger budget paid by HMT and HM Revenue and Customs (HMRC), and the office now has 9.5 full-time equivalents, plus the tax director (three days a week) and board of directors.
The legislation provides for a review of the effectiveness of the OTS in the performance of its tasks every five years. The first such legal review will therefore fall in 2021 as the OTS approaches its 11th birthday and was announced in March 2021.
Among the tax policy documents and consultations published on UK “Tax Day” 23 March 2021 is a document related to the review of the OTS and its mission statement. It will be an internal review by HMT that is expected to report by November 2021 and will be both backwards and forward looking. The review will:
- Check the effectiveness of the OTS in performing its tasks, taking into account the following:
- the objectives and functions of the OTS in the UK Finance Act 2016 and the OTS Framework;
- the procurement, financing and control of the OTS;
- the relationship between the OTS and HMRC and HMT;
- the work of the OTS to date, including the reports commissioned by the Chancellor of the Exchequer and prepared on his own initiative;
- the impact of the work of the OTS on both the government's simplification approach and wider public debate; and
- In the light of this review, consider what further steps should be taken to improve the effectiveness of the OTS in performing its duties as the Registrar's independent advisor on tax simplification.
OTS goals and functions
The starting point for the review is an understanding of the objectives and functions of the OTS. Its main legal task is to “advise the Chancellor of the Exchequer, on request or in the opinion of the OTS, on the simplification of the tax system”.
When the Chancellor commissions a report, he is obliged to publish it and to submit a copy to Parliament as well as to publish a response. The government's responses can be accessed through the index of reports published by the OTS on its GOV.UK website.
Problem of complexity
As part of its work for the first five years of its life, the OTS began on the other end of the tax simplification function. It carried out its “Complexity Project” which examined why taxes are complex, how to measure complexity and how to avoid it. The project has challenged the principle that complexity is always bad and recognized that taxpayers often expect the system to be "fair" and that a system with a higher level of complexity allows better design and alignment of provisions and can facilitate relief.
On the other hand, the OTS recognized the risk of including too many fairness tweaks in a tax. These can have the opposite effect, making them too complex, unmanageable and potentially unfair.
Another area of complexity that is of particular concern to the government relates to distortions created by the tax code. These are areas where the current rules may skew behavior or are inconsistent with their political intentions: in other words, where the rules encourage taxpayers to behave towards a certain taxable outcome rather than allowing decisions to be made solely for business reasons be taken or family reasons.
An example cited in the OTS Capital Gains Tax Review published in November 2020 is the discrepancy between capital gains tax and income tax rates, which is seen as an incentive for taxpayers to reorganize their businesses in such a way that income is effectively recast as capital is characterized. Greater convergence in tax rates is seen as a way to reduce the need for complex rules to “monitor” the line between income and profit.
Ask a UK tax advisor about tax complexities beyond a certain age and they will tell you that the "Yellow Book" (which contains all UK direct tax laws) was a volume or two in its day when compared to the five heavyweight books published today. But what does that tell us about the tax code? Does the length correspond to a greater complexity? In considering this issue, the OTS concluded that while practitioners would appreciate precise legislation, this should not be at the expense of clarity and ease of use. The length is therefore not considered a key legislative factor, although the OTS certainly considered this to be a psychological one.
On the way to simplification
In 2015, the OTS summarized the lessons from its complexity project into four key principles that policymakers and decision-makers should consider in order to avoid unnecessary complexity when introducing new tax measures:
- ensure that the proposed tax measure is in line with policy objectives;
- carefully focus the action;
- Outline the measure to achieve the goal. and
- Maintain the measure properly.
All well and good when you start over with new tax legislation.
When asked what a simple tax system would look like, the OTS describes it as one that is:
- focused on fundraising and not being distracted from other economic and political goals unless absolutely necessary;
- understood by those who deal with it; and
- with the lowest possible cost of compliance.
Against this background, the prerequisites for the design of a new tax system and the introduction of new tax measures are being created. First, however, there is the “Lego” problem that needs to be addressed.
In a lecture given in 1999 to the Institute of Chartered Accountants in England and Wales, tax specialist Adam Broke noted that every developed country has a tax system that resembles a children's building with Lego: “If necessary, parts stick and generally stick There . But if you want to make changes it can be quite difficult to do something about the older parts of the structure that are closer to the center because if you move them around, a lot of the outer parts will also come loose. "
The framework document published on Tax Day makes it clear that the OTS plays an advisory role, with decisions on tax policy and legislation still being a matter for the Chancellor. His job does not include designing and building a new structure from scratch. As Bill Dodwell, the current tax director, made clear in a recent presentation at a private tax conference, the OTS is not a think tank.
Instead, as stated in the framework document, the focus of the OTS is on improving the efficiency of the tax administration by identifying complex areas with potential for simplification and considering reform options. In relation to the tax policy decision-making process, the substance of tax law may be taken into account, but the only role it needs to play in relation to policy issues is to support the consideration of simplification issues.
OTS effectiveness record
In the first five years, the OTS carried out 10 major projects, prepared over 30 reports and papers and made a total of 402 recommendations. These were summarized in March 2015 and are included in the list of recommendations published by OTS. The nine simplification reports illustrate the breadth of his expertise in: tax relief; Business tax; Employee participation programs; Pensioner taxation; Taxation of partnerships; Benefits and expenses for employees; Competitiveness in Great Britain; Tax penalties; and employment status.
The Tax Director gave a rough idea of the “success rate” in 2015 and expected that 50% of the OTS recommendations would be adopted and that they would be good value for money. At the same time, he admitted the criticism that they did not have much of an impact.
The work on tax breaks in 2011 is a case in point. The OTS identified 1,042 reliefs, allowances and exemptions and selected 155 for detailed examination. His report resulted in the abolition of more than 40 of these, but the number of reliefs available four years later was higher than at the beginning of the project.
More recently, at the request of the Chancellor, the OTS has published two inheritance tax reviews that reflect its published role and jurisdiction.
The first review published in November 2018 focuses on simplifying the administrative aspects of inheritance tax. The second, which appeared in July 2019, looks at more substantial issues, including the distortion created by the interaction of capital gains tax and inheritance tax on death. The tax hike on capital gains upon death negatively impacts lifelong gifts of assets, which result in inheritance tax breaks when it makes business sense to benefit the next generation. The OTS recommendation is to remove the elevation if relief or exemption applies.
A response to this and the other recommendations is awaited.
On tax day, the government's response to the initial inheritance tax review was released.
The OTS will have been pleased with its recommendation to remove the need for many non-taxable estates to fill out inheritance tax forms after death, with a commitment to continue with the remaining recommendations for digitization and improve processes for lifetime and escrow fees.
Simplification is complex
John Whiting, the OTS's first tax director, admitted in 2015 that they couldn't point to a simplification of the “Big Bang”. Those who expect the OTS to produce one are more likely to miss the point and ignore the scope of their published job. Fundamental political changes are not currently on the agenda. Without a major overhaul of the way the OTS works and the examination of its reports by a parliamentary committee, the essential structural changes required to combat complexity will not be achieved.
This does not mean, however, that George Osborne's dream cannot get any closer to a reality and the hard work of the OTS to seek a simpler tax system and to hold public consultations and debates should be recognized in its upcoming review.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Judith Millar is Tax and Trusts Partner at BDB Pitmans.
The author can be contacted at the following address: [email protected]