BUSINESS ADVICE
Making tax simpler
Tax can be a mind-boggling minefield, Paul Morton, tax director of the Office of Tax Simplification, talks RCI
through the basics
For many years, the UK tax
system has been becoming more
and more complex. The UK tax
code is one of the longest in the
world and it keeps growing. In part, this
is to be expected as the UK has one of
the largest economies in the world and
is at the forefront of new ways of doing
business and the digital economy. The
government acted in 2010 to tackle this
complexity by setting up the Office of
Tax Simplification (OTS).
Previous reviews have focused on
a particular tax or issue. But for now,
the key area of interest is the “user
experience” – how it feels for a member
of the public when dealing with tax
obligations. We feel that there is value
in looking, for the first time, at all taxes
across the whole of the business lifecycle.
Start-up and incorporation
The first question a new business owner
faces is when they need to register, and
with whom. For those starting a small
incorporated business the administrative
burden of having to register separately
with Companies House and HMRC
could be reduced by introducing a “one-
stop-shop”.
The OTS has also noted that while
there are reliefs for those raising capital
from third parties later in the business
lifecycle, there is no tax relief for those
having to raise start-up capital on day one,
particularly where that capital has to be
raised from relatives, as is often the case.
It is not clear, however, whether a relief is
needed at this point or whether it would
stimulate enough new business to be
worth the cost.
Financing
There are several areas where tax
complexity adds to the challenges of
raising finance. Firstly, to qualify for
Entrepreneurs’ Relief, (the 10% capital
gains tax rate on disposal of qualifying
business assets) it is necessary to hold a
minimum of 5% of a company’s shares.
We have heard that some business
owners feel discouraged from bringing in
external venture capital because there was
a risk that their shareholding could be
diluted below this level.
The three main tax-favoured venture
capital schemes are the Enterprise
Investment Scheme (EIS), Seed Enterprise
Investment Scheme (SEIS) and Venture
Capital Trusts (VCTs). These have
common features but also several
differences, which means that they attract
different types of investors who invest for
different reasons. There are opportunities
to remove some of the inconsistencies and
to explore ways of simplifying some of the
administrative procedures.
Succession
When a business is disposed of by way
of a gift, relief from capital gains tax may
be available under either Entrepreneurs’
Relief or Gift Relief: one offers the option
of paying 10% now (Entrepreneur’s
Relief), or potentially paying at the full
rate at a later point in time (with the
gain deferred under Gift Relief). These
two reliefs are mutually exclusive, but
determining which is better to claim
depends on the future plans of the
recipient of the gift, which will often be
uncertain at the time the choice needs
to be made. Some simplification of the
interaction of the reliefs would help to
make the choice clearer and simpler.
Capital gains tax reliefs (Entrepreneur’s
Relief and Gift Relief) are available for
transfers of shares in trading companies
where the non-trading element of the
business is not more than 20% of the
whole. In contrast, Inheritance Tax
Business Property Relief is available on
transfers of a business, or shares in a
business, where the non-trading element
of the business is less than 50%. As well as
the confusing effect that results from two
different rules, this can lead to businesses
adopting commercially unnecessary
and complex structures to preserve their
qualification for the reliefs.
Disposal
The cost of Entrepreneur’s Relief is
greater than that of any of the other reliefs
considered by the OTS. While other
reliefs appear to be designed to encourage
investment in young and growing
businesses, or to preserve existing
business from break-up in the event of
succession, Entrepreneur’s Relief does not
seem to achieve either of those objectives.
When a business is sold there is
a possibility of double taxation. Tax
arises on the company on sale of its
business and again on the shareholder
on disposal of the shares (or receipt of
a dividend). This is disadvantageous
for the seller. In contrast, the purchaser
of the business enjoys more favourable
tax treatment and reduces their risks by
buying assets from a company rather
than buying the company.
What next?
The OTS warmly welcomes comments
and views on all of these areas. How
should this work be taken forward? We
actively want your views on the Business
Life Cycle Report and thoughts on where
the work might most helpfully be taken
forward. We also welcome examples from
practical experience and readers’ insights
as to how some of the difficult areas might
be approached.
Help us to help you
If you have any comments, please send
them to ots@ots.gsi.gov.uk
Picture credit: relif/Adobe Stock
18 www.rcimag.co.uk July 2018
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