The Office for Tax simplification (OTS) has reviewed the business lifecycle, and has recommended urgent work to simplify the business tax system and encourage growth.
Why has the report been produced?
The OTS has been taking a higher-level approach to commenting on the tax system. Rather than focusing on trying to simplify individual legislative provisions, the OTS has been adopting a broader approach. Its 2016/17 annual report includes one of its objectives as providing ‘analysis that shines a light on challenging structural issues’. In this respect the OTS occupies more of the position of a lobbying group rather than acting as part of government or adopting an approach in the way that the professional bodies would traditionally have done. The Business Lifecycle Report focuses on family businesses and, in particular, on issues around start-up, incorporation, provision of finance, succession and disposal.
What does the report conclude?
The OTS makes a number of observations, but the report is fairly insubstantial and unfocused given the scale of the subject. The observations as to the complexities and complications associated with the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme do not deal with the major wholesale reform of those reliefs that is now required after excessive tinkering and changes over many years. The report is concerned about the position of founders, but my understanding of the evidence that has been gathered on this issue is that founders are not motivated to start businesses by tax reliefs.
The observations on succession focus on the potential conflicts between inheritance tax (IHT) and capital gains tax (CGT) reliefs. IHT business property relief and CGT gift relief were introduced at different times and for different purposes, and there are significant areas of difficulty with these reliefs, and so a need for clients to seek professional advice. The potential tax liabilities can be very significant, and so the arbitrariness of the reliefs can cause problems. The comments in the report are consistent with previous statements by the OTS, and so there isn’t anything new here.
It is on the subject of disposal where the OTS gets particularly excited. It focuses on entrepreneurs’ relief as being an expensive and, in its view, possibly ineffective relief. The cost of this relief, at £2.4bn in 2016/17, is nearly the same as all the other reliefs combined, and the report observes that ‘the OTS has seen no evidence that entrepreneurs’ relief encourages further investment in new business ventures’.
The report also picks up the old chestnut of the potential double charge to tax on the sale of a business by a company followed by a subsequent liquidation. The executive summary of the report concludes that, in the view of the OTS:
“There is a pressing need to undertake a detailed review of the tax system as it operates on key events in the business lifecycle, to help the UK economy to maximise its opportunities and to make the system clear and simple for companies to understand and use. This might be supplemented by additional work focusing on tax complexity as it impacts business growth, including learning from the OTS reviews of VAT and small company taxation.”
Does the report achieve its objectives?
The difficulty with such a wide-ranging report is that it ends up being fairly superficial in its comments (reliefs are complex, tax administration by HMRC is poor, etc) and is too easily biased by the views of the author(s). It does not have the necessary empirical support for such a report—and indeed, on patient capital, CGT reliefs and IHT there has been research by HMRC, and by academic and overseas institutions.
One of the difficulties here is that the OTS is not a large organisation and it probably doesn’t have sufficient resource to fulfil the review required for this report. As such, the report comes across as anecdotal and lacking in academic rigour— reports of this type are probably better left to tax academics.
What can practitioners take from the report?
The difficulty for tax professionals is that this type of report increasingly seems like background noise that you have to be aware of, but does not really add much to your life. It can be useful to draw to the attention of clients when trying to explain the political uncertainties around certain tax reliefs (such as on succession planning), but the audience for this report is politicians and journalists. In that respect the headline grabber is probably on entrepreneurs’ relief and an implication that the Treasury should look to restrict that relief in future.
John has particular expertise in private clients and owner-managed businesses. He advises individuals, corporates, partnerships and trustees—specifically in relation to property matters, business transactions and capital taxes. He is a national expert on capital taxes, especially capital gains tax on residential properties and business sales. John acts as a trustee and executor in contentious family situations, and also undertakes expert witness work. He has written widely in the professional tax press.
This article was first published on Lexis®PSL Private Client on 29 May 2018.