The Office of Tax Simplification has recently reported on three individual reviews that it has conducted on behalf of the government – looking into changes to Capital Gains Tax, the use of third-party data by HMRC and changing the tax year-end date.
What is the Office of Tax Simplification?
The Office of Tax Simplification (OTS) is the independent adviser to government on simplifying the tax system.
1. Capital Gains Tax
The OTS has completed two reviews of Capital Gains Tax (CGT) in the last year, but the government is yet to respond to its recommendations.
The main challenges identified with CGT were two-fold:
- Disparity with Income Tax, which distorts decision-making
- Understanding and predicting CGT liabilities
The following recommendations have been made by OTS to the government and we await to hear their response and next steps.
- Align CGT rates with Income Tax rates
- Company anti-avoidance measures – inflationary gains / capital losses
- Fewer rates and decouple from Income Tax
- Specific changes to shares and retained earnings
Review findings and considerations
The report found that many gains reported in 2017/18 tax year were £11,300 – just below the annual exemption level, indicating that people were deliberately selling the right amount of assets for the most benefit.
Business Asset Disposal Relief (BADR) – formerly known as Entrepreneurs’ Relief – is, according to the review, mistargeted and does not stimulate business investment and risk-taking. Consideration should be given to replacing this with a relief more focused on retirement, linked to a possible review of pensions policy.
Although not a formal recommendation, the OTS is suggesting that the government should abolish Investors’ Relief – a relief that reduces the amount of CGT on disposal of shares in a trading company, not listed on the stock exchange.
CGT provides revenue of between £8bn – £10bn per year, 5% of the total provided by Income Tax.
2. Use of third-party data
The OTS has considered how HMRC can explore smarter use of third-party data, such as account interest from banks and building societies, to speed up the data population process for the new Single Customer Account.
Initial recommendations from OTS are that limited third-party data is shared, including:
- Bank interest and other interest
- Listed company dividends and other income
- Pension contributions
Additional information that could be shared voluntarily with HMRC:
- Gift Aid donations
- Capital gains in listed securities
OTS suggested that using the National Insurance (NI) number as a unique identifier for individuals.
The introduction of the Single Customer Account requires the flow of third-party data into HMRC, in order for it to work effectively.
3. Changing the tax year-end
Our earlier blog considers the options and implications for changing the tax year-end to either 31 December or 31 March, in particular for sole traders or partnerships, who will need to comply with the new rules for Making Tax Digital for Income Tax when it’s introduced in April 2024.
Following a detailed review and consultation process, the OTS has put in place a short-term recommendation that to make the transition easier for Making Tax Digital (MTD) for Income Tax, self-employed and landlords do switch to using a 31 March year-end, if they are not already doing so. The OTS believes that this is achievable ahead of the April 2024 introduction of MTD and will make their accounting easier.
However, there is no formal recommendation from the OTS regarding changing the tax year-end, as yet. A change as significant as that will require substantial investment and lead time, as well as wider consultation.
The OTS concluded that if the government wanted to go ahead with a change of tax year-end dates, then further scoping work would be required and a long-term plan for implementation.
Next steps
Now that the OTS has completed its reviews, the responsibility is with the government to decide what, if, and how, any changes will be implemented.
We would expect an update on at least some of the above, before or as part of next month’s Budget – and we will of course, keep you updated.
We’re here to support you – if you have questions or would like further advice, please contact us and our expert tax team will be happy to help you.