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Business tax reform - considering the problems and risks

    David Martin enjoyed a career spanning 23 years as a tax lawyer within a large City Law Firm, latterly as Head of the Tax Department, before retiring in 2002. During that time he advised both company and individual clients. In a new series of four blogs, he looks at simplification of business taxes.

    This is the third article in the series. Read part one and part two of this four part series. 

    Before embarking on reform of business tax such as proposed in this series of blogs, the problems and associated risks need to be identified and evaluated.

    Would it be attempting too much, be too confusing for taxpayers, and too much for HMRC to implement? It is perhaps reassuring to note in this context that at least 95% of the tax law that will be proposed is already on the statute book and would already be familiar to tax specialists. The advantage is derived from the tax law that is dropped, rather than new law introduced. Someone familiar with current tax law might be able assimilate what is proposed for small businesses in about an hour or so.

    Would there be unintended opportunities for new avoidance? Of course this would need serious consideration, but comfort can be derived from the fact that avoidance should be easier to identify and tackle under the suggested “one-bucket” approach. It would normally consist of the attempt to divert profits to a lower taxed (or non-resident) entity, or the attempt to manipulate allowances and reliefs in a way not intended by Parliament. With the current spaghetti bowl of tax law it is often much more difficult to identify and agree upon what is “unacceptable” avoidance.

    Might the proposals get overcomplicated again, as different groups have their input in the draft legislation? It would certainly be necessary to exercise strict control over requests for “special treatment”, a prime objective is to have a tax code that creates a level playing field.

    But what about transitional rules – would these be so complicated that reformed law would not be sufficiently attractive to justify the effort? This issue is addressed in the introduction to the first of the two papers to be published Thursday – “The Reform of Business Tax”. (The second paper is a draft of a proposed new Business Tax Act). It is considered that transitional rules should be manageable, as long as HMRC does not yield to the temptation to “fine tune” all such rules. If, in places, the taxpayer (or perhaps HMRC in some instances) is left with some modest overall advantage this should be seen as a price worth paying for the introduction of a better tax code.

    What would be the impact of the proposals on Treasury receipts? This is a major issue that requires further work. The more generous relief for impairment losses and for the pooling of capital losses with income receipts would undoubtedly have significant revenue consequences. But Treasury receipts would be increased by such measures as limiting relief for losses carried forward if there is major change in the business, and charging tax on foreign residents on gains realised on UK property.

    The overall impact on Treasury receipts is not likely to be great compared with the impact of recent reductions in corporation tax, even measured on a static basis. Measured on a dynamic basis, given the reformed tax code is intended to attract overseas investment, and to help UK businesses free up more time to concentrate on the business rather than tax compliance, any loss of tax should be reduced compared to a static basis of measurement.

    Further, is it really good policy to support a low tax rate with complicated tax rules that deny tax relief to some businesses for economic losses? We should be grown up, and have the low tax rate as well as a level playing field for all businesses.

    Finally it is noted that some changes would also be needed to non-business tax law to make it fit with the new tax law for business – changes necessitated by this new approach would not need to be substantial.

    This is the third article in the series. Read part one and part two of this four part series. 

    David Martin enjoyed a career spanning 23 years as a tax lawyer within a large City Law Firm, latterly as Head of the Tax Department, before taking early retirement in 2002. During that time he advised both company and individual clients. He now lives a less pressurised life in Devon with his wife and two daughters and maintains an active interest in tax law.

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