The government’s attempt to deflect criticism of senior civil servants using personal services companies to avoid tax symbolises why the UK tax system is so chronically complex.
“As if IR35 is not complicated enough, they need to introduce another layer of complexity to deal with controlling persons,” said ICAEW Tax Faculty chairman David Heaton at the Wyman symposium on tax simplification on Wednesday night (18 July).
Heaton, a tax partner with Baker Tilly who specialises in employment, explained that similar rules were rejected when IR35 was first proposed back in 1999, “But I doubt anyone’s still around from then,” he said.
Personal services companies exist because clients don’t want to take on the extra risks of hiring employees or run the risk of status enquiries. And the differential treatment of dividends and earnings only served to encourage the practice. Instead, Heaton argued that a lot of the problems IR35 is designed to deal with would go away if dividends in close companies were taxed at a higher rate.
“Higher NICs would discourage people from forming limited companies,” he said. “Then you could repeal IR35 and drop this controlling persons nonsense.”
Is it possible to achieve simplification?
With AccountingWEB tax editor Rebecca Beneworth chairing proceedings, Heaton anchored a three-way discussion with Office of Tax Simplification (OTS) policy chief John Whiting and Robert Maas from Blackstone Franks on whether or not it was possible to achieve simplification.
Maas played devil’s advocate, arguing that simplicity is in conflict with certainty and fairness.
“Simplicity is a myth that is incapable of being achieved,” he said. To illustrate his point, Maas waved a small bundle of documents in the air and said he was holding all of the Finance Acts from the 1950s, which ran to 625 pages. In contrast, the Finance Act that was given royal assent on Tuesday was 687 pages long.
On the controlling persons rules, Maas commented: “It’s hard to see how IR35 doesn’t apply to a person who is part and parcel of an organisation.” One of the reasons why tax legislation has been expanding rapidly, he added, is that it’s cheaper for the government to legislate new rules than to litigate to enforce rules that already exist.
“Patches on patches on patches makes legislation disjointed and hard to follow. They militate against simplicity,” he said. The sad fate of the OTS was that it was only being asked to look at redundant reliefs and pick away at legislative patches.
“I feel sorry for John. I think he’s taken on an impossible job. The real job isn’t tax simplification. What George Osborne wants is someone to peel the hot potatoes so that John can be blamed for changes that are difficult for Chancellors to propose.
“If George Osborne is serious, he should ask the OTS to look at something serious. Until he does that, there’s not the slightest hope of simplification.”
In the context of a formal debate, Whiting may not have helped his case by confessing, “I don’t think we can ever get to simple. Life is complex. Life has got a lot more complex since the 1950s.”
Instead, Whiting posed a series of thoughtful questions designed to solicit feedback from the profession about what kind of simplification the OTS should work towards, and where it should compromise with legal and political realities.
In most people’s minds, the OTS is about technical simplification - “tearing pages out of the Yellow book” as he put it. But was administrative simplification a more viable target? “If we can make the system easier to deal with I think we can make progress,” Whiting said.
“Who is the tax code aimed at? We’ve got to simplify it with those people in mind.”
Whiting said that Chancellor George Osborne and Treasury minister David Gauke were serious about simplification, “but they’ve got bigger fish to fry”. Against that backdrop, he asked whether the OTS should keep tinkering away with incremental simpilification.
“Do we keep chipping away at the barnacles on the hull of taxation, or do we need a complete rebuild of the ship of state?”
His next question tackled the patching challenge: “How can we get to a situation where the process of making new tax law doesn’t make things worse?”
Having acknowledged the Maas argument that simplicity and fairness were pulling the law in different directions, Whiting asked: “Which takes precedence, fairness or simplicity? Would you take some rough edges to get simplicity?”
In his defence, Whiting said the OTS had made some progress, for example by excising around 100 pages of old, mainly unused reliefs from the statute books. “But whether we’ll ever make a dent in the Yellow Book, I don’t know.”
Simplification manifesto
It was obvious that all of the speakers yearned for simplification, but the evidence they presented confirmed just how intractable the problem was. Along with the IR35 controlling persons rules, Heaton presented a litany of examples where “even those responsible for the law lose track in the maze over time”.
He praised the OTS for its work on simplifying pensions for taxation and for identifying redundant legislation, but pointed out that that was shortening the law, not simplifying it.
“I suspect it’s going to be a hard, neverending struggle without a change of mind at ministerial level,” Heaton concluded. “If ministers are serious, it’s easy. Stop it. Now.”
At the end of the symposium, Rebecca Benneyworth called for an electronic vote on whether simplification was possible; 59% of the audience said no, 39% said yes, but the proportions was almost unchanged from earlier in the evening. Like tax simplification itself, there looks to be little hope of shifting the profession’s pessimistic outlook.
“As if IR35 is not complicated enough, they need to introduce another layer of complexity to deal with controlling persons,” said ICAEW Tax Faculty chairman David Heaton at the Wyman symposium on tax simplification on Wednesday night (18 July).
Heaton, a tax partner with Baker Tilly who specialises in employment, explained that similar rules were rejected when IR35 was first proposed back in 1999, “But I doubt anyone’s still around from then,” he said.
Personal services companies exist because clients don’t want to take on the extra risks of hiring employees or run the risk of status enquiries. And the differential treatment of dividends and earnings only served to encourage the practice. Instead, Heaton argued that a lot of the problems IR35 is designed to deal with would go away if dividends in close companies were taxed at a higher rate.
“Higher NICs would discourage people from forming limited companies,” he said. “Then you could repeal IR35 and drop this controlling persons nonsense.”
Is it possible to achieve simplification?
With AccountingWEB tax editor Rebecca Beneworth chairing proceedings, Heaton anchored a three-way discussion with Office of Tax Simplification (OTS) policy chief John Whiting and Robert Maas from Blackstone Franks on whether or not it was possible to achieve simplification.
Maas played devil’s advocate, arguing that simplicity is in conflict with certainty and fairness.
“Simplicity is a myth that is incapable of being achieved,” he said. To illustrate his point, Maas waved a small bundle of documents in the air and said he was holding all of the Finance Acts from the 1950s, which ran to 625 pages. In contrast, the Finance Act that was given royal assent on Tuesday was 687 pages long.
On the controlling persons rules, Maas commented: “It’s hard to see how IR35 doesn’t apply to a person who is part and parcel of an organisation.” One of the reasons why tax legislation has been expanding rapidly, he added, is that it’s cheaper for the government to legislate new rules than to litigate to enforce rules that already exist.
“Patches on patches on patches makes legislation disjointed and hard to follow. They militate against simplicity,” he said. The sad fate of the OTS was that it was only being asked to look at redundant reliefs and pick away at legislative patches.
“I feel sorry for John. I think he’s taken on an impossible job. The real job isn’t tax simplification. What George Osborne wants is someone to peel the hot potatoes so that John can be blamed for changes that are difficult for Chancellors to propose.
“If George Osborne is serious, he should ask the OTS to look at something serious. Until he does that, there’s not the slightest hope of simplification.”
In the context of a formal debate, Whiting may not have helped his case by confessing, “I don’t think we can ever get to simple. Life is complex. Life has got a lot more complex since the 1950s.”
Instead, Whiting posed a series of thoughtful questions designed to solicit feedback from the profession about what kind of simplification the OTS should work towards, and where it should compromise with legal and political realities.
In most people’s minds, the OTS is about technical simplification - “tearing pages out of the Yellow book” as he put it. But was administrative simplification a more viable target? “If we can make the system easier to deal with I think we can make progress,” Whiting said.
“Who is the tax code aimed at? We’ve got to simplify it with those people in mind.”
Whiting said that Chancellor George Osborne and Treasury minister David Gauke were serious about simplification, “but they’ve got bigger fish to fry”. Against that backdrop, he asked whether the OTS should keep tinkering away with incremental simpilification.
“Do we keep chipping away at the barnacles on the hull of taxation, or do we need a complete rebuild of the ship of state?”
His next question tackled the patching challenge: “How can we get to a situation where the process of making new tax law doesn’t make things worse?”
Having acknowledged the Maas argument that simplicity and fairness were pulling the law in different directions, Whiting asked: “Which takes precedence, fairness or simplicity? Would you take some rough edges to get simplicity?”
In his defence, Whiting said the OTS had made some progress, for example by excising around 100 pages of old, mainly unused reliefs from the statute books. “But whether we’ll ever make a dent in the Yellow Book, I don’t know.”
Simplification manifesto
It was obvious that all of the speakers yearned for simplification, but the evidence they presented confirmed just how intractable the problem was. Along with the IR35 controlling persons rules, Heaton presented a litany of examples where “even those responsible for the law lose track in the maze over time”.
He praised the OTS for its work on simplifying pensions for taxation and for identifying redundant legislation, but pointed out that that was shortening the law, not simplifying it.
“I suspect it’s going to be a hard, neverending struggle without a change of mind at ministerial level,” Heaton concluded. “If ministers are serious, it’s easy. Stop it. Now.”
At the end of the symposium, Rebecca Benneyworth called for an electronic vote on whether simplification was possible; 59% of the audience said no, 39% said yes, but the proportions was almost unchanged from earlier in the evening. Like tax simplification itself, there looks to be little hope of shifting the profession’s pessimistic outlook.
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