Article by John Whiting, President, published in the August 2001 issue of Tax Adviser. KEY POINTS
• Simplify age allowances
• Age related MCA fully transferable
• Abolish restriction of MCA in year of marriage
• Abolish accrued income scheme or raise threshold substantially
• Carry back of losses and pension contributions included in-year for SA
• Adjust limit for minor’s income deemed to be parent’s
• Raise limit for relocation expenses
• Identify children’s tax credit as £520, not £5,200 at ten per cent
• Call chargeable events on non-qualifying life assurance policies ‘income events’
• Backdate the FA2000 taper relief changes for CGT to April 1998
Members will have seen that the CIOT is undertaking work on ‘Quick Wins for tax simplification’. Started by the Tax Policy sub-committee, the idea is to challenge the authorities to start to do something practical about tax simplification. Most professional and trade bodies involved with taxation are saying that our tax system is too complex and that complexity is increasing exponentially. Although privately many in the taxing authorities would agree, all too often the response from government and tax authorities is a combination of, among other things:
• life’s complex;
• it’s too difficult to change things;
• it’s your (i.e. tax planners) fault.
It is valid to question whether we should argue for simplification. Most of us – in large and small practices, in commerce and industry, and indeed in the taxing authorities, are in business at least in part because of fiscal complexity and make our livings because of it. But we are all really there to help our clients – internal or external – carry on their businesses, private lives, and responsibilities more efficiently and effectively. Complexity for its own sake can get in the way. No amount of simplification will take away the work involved in explaining, to non-specialists in tax, how things work and how they can best plan to take into account the impact of taxation and comply with their responsibilities. The additional time it takes to understand, explain and administer complexity does not all have a payback. Hands up all those who can read a new Finance Act and understand it first time round? I mean the sections, not the title … thought so. Maybe it’s increasing age but I find that there are larger and larger chunks of each act that I have to sweat over and struggle to understand. While I can recover some of this time through advising clients, a lot of the time spent has to be absorbed by me. Am I alone in this?
We’re not aiming for complete simplification – that’s unrealistic (and even undesirable!). But ‘Quick Wins’ – small changes to the tax system that could be put through easily – should pay a simplification dividend. We plan a number of papers to identify the grist in the fiscal mill – things that get in the way of the smooth running of the tax system to no useful effect. The target is change which would cost little or no money and, where there is a tax cost, there is payback in terms of administrative savings for both sides. Indeed, some ‘wins’ are simply administrative measures.
The first set covers personal tax.
(1) Simplifying personal allowances for older people
The two higher personal allowances (and different married couples allowances) for the over 65s and over 75s, with clawback under TA 1988, s. 257 result in a plethora of income limits and a higher marginal tax rate for some. Our proposals are at various levels:
• Our quickest win would be to harmonise the married couples allowance at the over 75 level; while there is an exchequer cost it would be small;
• The next stage would be to work towards harmonising the personal allowances; different rates cause confusion and are not always claimed;
• Ideally the clawback would be eliminated – something that causes great confusion and difficulty. This is a longer-term win but it is surely worth consideration in the context of the plans for the new integrated Pensioners’ Credit.
(2) Age related married couple’s allowance to be fully transferable
It is confusing for the elderly to read on the tax return that you can allocate half or all of the allowance to your husband or wife, only to find when you do the tax calculation that you can only enter £1,000 or £2,000 respectively. Since there is now no tax advantage (though there can be cash flow advantages) to be had by transferring the married couple’s allowance, and if the allowance proves to be surplus to requirements it can be transferred anyway, there seems little point in retaining this restriction.
(3) Abolish restriction of married couple’s allowance in the year of marriage
There cannot be many taxpaying couples marrying with one aged 66 or over so we do not see this involving much tax loss to the Exchequer. By way of comparison, the new children’s `tax credit does not have any in-year restriction.
(4) Accrued Income Scheme
Okay, who out there really understands the Accrued Income Scheme (AIS)? The Inland Revenue is not immune from getting the rules wrong as well.
Anti-avoidance worries may prevent total abolition of AIS. But if that is the case, wouldn’t it be possible to design something that acted as a blocker to the real abuse that the Revenue are worried about while being simpler to operate? The practical answer is perhaps to raise the £5,000 de minimis limit substantially? After all, at today’s interest rates, the current threshold can lead to apportionment arguments over the princely sum of under £60 of tax for a half year.
On the surface, there would be an Exchequer cost to raising the AIS threshold, but in practice this would be minimal, given the amounts involved at today’s interest rates, the regularity with which the issue is missed and the saving in administrative costs.
(5) Carry back of losses and pension contributions to be included in self-assessment for year of relief
This topic has been a regular feature of moans from practitioners. They have to deal with all the extra administration the current rules cause: carry backs, reworking the self-assessment calculations, deducting the revised figure from the original figure to arrive at the ‘repayment’ and then deducting from the tax due for the year, but not reducing the payments on account.
(6) Settlement income
The £100 limit under TA 1988, s. 660B(5) should be increased to £500. The £100 limit has applied since 1991/92 (the previous five pound limit admittedly lasted from 1936) and is in need of updating. The proposed increase would ensure, inter alia, that income arising in ISAs held by minors and funded by parents is not deemed to be the income of the parents. Raising this limit would have a small Exchequer cost, balanced by administrative savings.
(7) Relocation expenses
The present limit of £8,000 for tax free relocation expenses should be increased significantly to reflect current costs of relocation. The £8,000 limit was enacted in Finance Act 1993 when the rate of stamp duty on houses costing over £250,000 was only one per cent. The stamp duty element of the relocation costs on purchase of a house of this cost was thus only £2,500 or so – it’s now over £7,500, taking up most, if not all, of the tax free limit.
If it is not possible to have a simple significant increase in the tax free amount, reimbursement of stamp duty costs should be in addition to the £8,000 limit. Although this change does have an Exchequer cost, we see no justification for imposing a tax change on, in effect, the mobility of labour. Being moved by an employer is something employees rarely welcome; it is perverse to make it into a tax charging occasion.
(8) Children’s Tax Credit and the new Baby Tax Credit
The Revenue leaflet CTCR/1 begins by describing Children’s Tax Credit as a reduction in income tax of £520. We suggest that this way of identifying the tax relief be retained for all purposes and for the new Baby Tax Credit as well (the figure being in that case £1,040). Continuing to refer to these ‘credits’ as ‘allowances at 10%’ is only a source of confusion.
(9) Chargeable events on non-qualifying policies
Another regular from the postbag – why call profits on non-qualifying policies such as single premium investment bonds ‘chargeable events’, or ‘gains’ when they are income? Just re-term them ‘income events’ or ‘insurance policy profits’ making their tax treatment clearer to all (including the fact that they count as income for the purpose of income-related reliefs).
(10) FA 2000 taper relief rule changes for Capital Gains Tax to be backdated to 5 April 1998
Most of CGT seems ripe for simplification but let’s start here. We do not think that there would be much loss to the Exchequer if the FA2000 changes applied from the start of taper relief in 1998. This would reduce complexity and the compliance burden for many taxpayers, particularly those with shares in their employers’companies. The fact that someone who has held their employee shares for many years can’t sell them to achieve the fabled ten per cent CGT rate for many years because of the ‘overhang’ of the non-business period from 1998 to 2000 comes as a nasty surprise to many. Arguably, it isn’t what the Chancellor had in mind with the changes in any event.
Surely some of these changes could be brought in over the coming year? In the meantime we will be looking at other areas – we want to do a ‘Quick Wins’ paper on:
• business tax (expensive cars limits perhaps?);
• employee issues (shared vans, anyone?);
• indirect tax (there must be lots in VAT);
• capital taxes (no you can’t abolish CGT);
• why not a second Personal Tax list?
Please send your nominations for Quick Wins under any of the headings, to me at the Institute or firstname.lastname@example.org. A bottle of champagne is on offer for the best under each heading – or the funniest! Bear in mind that ideally a Quick Win would:
• have no net revenue cost;
• have minimal numbers of winners and losers;
• be simple to achieve;
• save administrative effort as well as technical problems;
• have a positive impact on the general taxpayer;
although it’s unlikely that one will pass all those tests.
Many topics in this general area of simplification would repay longer-term study. A prime example is what might be regarded as the ultimate big win of Income tax/NIC harmonisation, in terms of definitions if not combination (though without the lid being taken off employees’ contributions thank you). Another real simplifying measure would be combining the 10 per cent, 20 per cent and 22 per cent rates of income tax into a single 20 per cent rate – but that starts to get into deep political water.
My idea for a Tax Practice Committee has a role in all this simplification, by perhaps managing the process of change more effectively – but that’s another story.
020 7235 9381
August 2001 by