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The OTS has published the final report on its review of the competitiveness of UK tax administration, making 50 recommendations for improvements.

The Office of Tax Simplification (OTS) has published a report on UK tax administration competitiveness. The report summarises the OTS’s findings and submissions received from businesses (both small and large), tax advisers, representative bodies, and HMRC frontline staff.

Key recommendations

The report identifies 50 key recommendations across the spectrum of taxes. These are summarised below:

Corporation tax

1 There needs to be a review of the rules for the basic corporation tax and business income tax computations to consider:

  1. closer alignment of taxable profits with accounting profits thereby eliminating many ‘sundry adjustments’ and reducing the need to maintain additional accounting systems for corporation tax purposes. A particular example is that following removal of the non-statutory renewals allowance, we recommend that relief be given for the cost of repairs and replacements as reflected in the accounts
  2. replacing capital allowances with tax relief for accounts depreciation including transitional rules. This review should also encompass other 100% allowances
  3. what tax is actually paid by companies on chargeable gains and on what transactions to see if abolishing the general charge balanced with limited specific charges could deliver simplification.

2 The trading /investment distinction is outdated and businesses should be taxed on their overall business profits. This change should be coupled with a review of the implications of removing the streaming rules including the effect on loss offset restrictions.

3 The worldwide debt cap and UK-UK transfer pricing provisions are generally seen as burdensome with little net tax effect resulting. There needs to be a review of their effectiveness; at a minimum the threshold at which the transfer pricing rules apply to medium-sized businesses should be raised or the rules otherwise simplified. In particular UK-UK transfer pricing for domestic companies can be a lot of work for no tax. We recommend that HMRC develop an administrative workaround to reduce the compliance effort, particularly for mid-sized businesses.

4 The UK’s VAT system is already competitive in many ways. The main way to help smaller businesses is to look for ways of giving greater certainty over the categorisation of supplies. This is both in terms of rulings and at boundary issues.

Payroll taxes

5 Income tax and national insurance should be harmonised and integrated as far as possible. This should extend to considering applying class 1 national insurance to all remuneration and benefits in kind.

6 HMRC should conduct a post-implementation review into Real Time Information (RTI), looking (in conjunction with the Department for Work and Pensions) at whether full ‘on or before’ reporting is necessary in all circumstances and what further scope there is to extend/harmonise easements for small employers.

7 To help executives coming to the UK to work, the easement from PAYE for some short-term business visitors should be extended to cover all short-term business visitors to the UK, coupled with a general widening and clarification of the rules. This should include a streamlined national insurance application process introduced for incoming staff to avoid personal attendance at job centres; this should be linked to visa applications where these are necessary.

HMRC administration

8 Providing certainty:

  1. HMRC should extend its customer relationship manager model to as many businesses as is financially viable.
  2. Depending on the results of (a), HMRC should continue to develop its new mid-sized business customer service, and expand the range of situations under which the service is available.
  3. HMRC needs to explore how to increase certainty in their tax affairs for the vast majority of small businesses, particularly around VAT.

9 Providing assistance to businesses:

  1. HMRC must continue to strive to reduce the waiting times and improve the quality of its phone service.
  2. HMRC should provide further training to contact centre staff including help for them to identify quickly more complex requests and the appropriate person to refer them to.
  3. HMRC should make greater use of email to deal with queries and review how to ensure that replies are based on best knowledge of the taxpayers’ affairs.

10 HMRC should explore creating a single tax account service for smaller businesses, to enable them to make regular payments to cover all taxes.

Other recommendations

Corporation tax

11 There should be a review around introducing a consolidated return for groups of companies, at least on an optional basis.

12 Businesses should be able to agree a level of materiality with HMRC.

13 The Annual Investment Allowance (AIA) should be set at a particular figure for a longer length of time. At a minimum the rules surrounding apportioning the AIA into different accounting periods should be simplified.

14 Research and development (R&D) relief generally works well but we propose that:

  1. more case studies on R&D be incorporated into the guidance
  2. HMRC guidance makes clear what costs that are part of an R&D activity within the BIS guidelines do not qualify for R&D tax credits and relief
  3. HMRC provides clear guidelines on what qualifies as R&D for software development particularly with regard to the capital/revenue distinction.

Although in principle HMRC and BIS use the same definition, we heard a number of times that differences are encountered in practice.

15 HMRC should continue its current work on streamlining the processes and tagging definitions for iXBRL and should publicise how iXBRL information is used and the benefit of receiving the returns and accounts in this form.

VAT

16 The de minimis amounts for partial exemption need to be reviewed.

17 HMRC should consider a simpler procedure for SMEs that are partially exempt.

18 HMRC should allow scope for modifying partial exemption agreements in real time. HMRC should establish a target for the time taken to agree a partial exemption method.

19 The burdens imposed by the capital goods scheme (CGS) seem to be considerably out of proportion to the adjustments being generated. Now that HMRC have other protections, we think it is time to review whether the CGS is needed or, if it is, whether its scope can be reduced.

20 Retail schemes need to have de minimis amounts for changes built in so that there is more leeway before a retailer needs to change their arrangement.

21 It is probably time to review flat rate schemes and their rates.

22 On clearance applications:

  1.  there should be guidance on how a trader can best protect themselves against incurring penalties from the time of making the clearance application;
  2. an email template should be developed for the clearance service; and
  3. rulings should be publicised, suitably anonymised to reduce future enquiries and to ensure consistency.

23 Once VAT returns have been submitted, they are only amendable through form VAT 652. It would be helpful if this form was given greater prominence or (preferably) if VAT returns could be amended online.

24 The need to wait six months for VAT bad debt relief seems harsh, as it involves tracking a series of invoices over six months. Relief should follow the accounting with the VAT being restored if any of the bad debt is recovered.

25 A few businesses remarked that they had had multiple audits and reconciliation exercises for VAT, Intrastat and EC Sales list where they had to produce the same information multiple times. We recommend that visits and audits in relation to these taxes be better coordinated and carried out simultaneously.

26 There needs to be better guidance around property transactions, particularly aimed at smaller businesses, including better definitions of ‘dwelling’. (4.32-4.33)

27 An option to tax register (ie a searchable list of properties that have been ‘opted’) would be very useful to business and is something that should be possible to develop with increasing digitisation.

28 The changes to VAT place of supply rules from 1 January 2015 will lead to increased registration and return requirements from smaller businesses. The ‘mini one stop shop’ (MOSS) does not provide a complete answer and we encourage HMRC to continue discussions with professional and trade bodies to address concerns.

Payroll

29 The existing programme of work to implement the OTS’s recommendations on employee benefits and expenses should be carried through. This needs to extend to properly re-examining the OTS’s recommendation on extending PAYE Settlement Agreements.

30 Legislation needs to be amended to allow employers to give authority for third parties such as software providers to deal with HMRC on payroll issues.

31 One particular problem faced by businesses coming to invest in the UK is when they need to set up a payroll. Clearer guidance on this would be helpful.

32 It should be possible to set up annual schemes through a structured email facility.

33 The RTI reporting rules require a date of leaving employment to be no more than 30 days later. This may not agree with the actual date used for many employment entitlements and the guidance should reflect this.

34 The ongoing HMRC programme of work on improving CIS needs to be carried through; ideally this would include an overriding review of the need for CIS in its current form.

HMRC administration

35 Any business that is being moved out of the customer relationship management system (perhaps because it is shrinking) should receive suitable warning and support from HMRC about the transition.

36 HMRC should investigate whether an advance tax ruling service would be advantageous for both the UK government and inward investors.

37 We recommend HMRC scope out a charge-based clearance service, or issue a discussion document about how such a service might look. This might be combined with plans for increased working with agents as part of the developing agent strategy.

38 HMRC should better advertise and target its current clearance service to taxpayers faced with genuine uncertainty.

39 HMRC should take advantage of moving its guidance to gov.uk to make it more accessible, in particular to make it easier to obtain guidance an all of the tax issues for transactions in one place rather than separately under heads of duty. It should also be more dynamic with greater use of flow charts and animations.

40 HMRC currently offers a wide range of webinars, which are broadly welcomed. Additional webinars on tax reliefs for businesses and start-ups on Seed Enterprise Investment Scheme and Venture Capital Trust schemes would be helpful.

41 Non-resident landlords cannot do their tax returns online. Since they are by their nature non-resident the return has to be on paper, which is burdensome for this group. Can this form be moved online?

42 HMRC should undertake a review into whether the senior accounting officer system has now completed its job, and whether it remains necessary.

Other taxes

43 HMRC should review the feasibility of raising the de minimis figure on stamp duty, with the aim of minimising administrative burdens.

44 The rule that a company secretary commits an offence if they register an unstamped stock transfer form should be removed, or the process for stamping itself be simplified.

45 HMRC should review whether the rules surrounding stamp duty reserve tax and interactions with stamp duty are in need of modernisation, including introducing group relief for SDRT.

46 The requirement to make a stamp duty land tax return at the five year point for a lease with uncertain rent needs to be streamlined, as the amount of tax is typically small and there is no mechanism to remind taxpayers of the obligation. Consideration needs to be given to a form of de minimis to avoid the need to do such recalculations.

47 The current discussions on streamlining the annual tax on enveloped dwellings (ATED) administration need to be carried through to simpler and less burdensome procedures, particularly around filing for exemption.

48 As a general rule, it should be possible to complete all forms and returns online, with the facility to save part completed forms. We heard particular comments on Insurance Premium Tax and Customs Duty forms; indeed some procedures around Customs Duties are in need of modernisation.

Payments

49 There needs to be a review of quarterly instalment payments leading to an increase in the threshold or simpler procedures for the medium-sized companies increasingly drawn into the net.

50 HMRC should develop a monthly payment option system for small business corporation tax/income tax along the lines used by utility companies.

The report certainly contains many interesting recommendations and it will be interesting to monitor which proposals are implemented and the speed with which they make it to the statute book.

For guidance on technical matters, please visit ACCA UK’s Technical advisory website.

Article from ACCA