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Relief process

Advisers will need to keep a keen eye on tax relief developments and the OTS proposals


Few people would argue that we have a very complex tax system in the UK but are things about to change?

On July 20, 2010, the Chancellor announced the creation of the Office of Tax Simplification to provide the Government with independent advice on simplifying the UK tax system.

Initially, the OTS has been asked to carry out two reviews, one into small business taxation and the other into all current tax reliefs, and it is this review that I will concentrate on in this article.

On November 8, 2010, the OTS published a list of all the reliefs that are currently available – there were 1,042.

On December 13, 2010, it then published an interim report, the idea of which was to gauge reaction to the OTS’s methodology for approaching the rest of the review. It was decided not to look at 893 of the reliefs for various reasons.

Some were subject to inter-national agreements, some were structural and thus an integral part of the tax system, some were already the subject of ongoing consultations and those related to VAT were ignored, given the complex interactions between EU law and UK political commitments.

This left 149 reliefs still on the list. The OTS has been at pains to state that these remaining reliefs do not represent some sort of hit list. It will consider them and recommend one of three options – retain the relief in its current form, abolish it completely or mend it to make it more simple.

The criteria for assessing the ongoing suitability of a relief are broadly as follows:

  • Does the policy rationale still exist?
  • How much taxpayer take-up of the relief is there?
  • The tax cost of the relief (although the review does not, in itself, have a tax-raising agenda)
  • What is the admin burden of the relief for the taxpayer, advisers or HMRC?

One of the reliefs that is being looked at by the OTS is the 5 per cent withdrawal facility available under insurance bonds although it could be reasonably argued that this is not a relief at all as it does not appear to fall within any of the definitions of a relief set out in section three of the OTS interim report.

It is hard to imagine that any recommendations made by the OTS should fundamentally alter the nature of the 5 per cent withdrawal facility based on its own criteria.

After all, the facility is very widely used, easy to explain to clients, easy to administer from the point of view of the providers and HMRC and does not have any significant tax cost as the tax is merely deferred rather than avoided altogether although, of course, a tax advantage can occur such as in the situation where a person is a higher-rate taxpayer while taking the 5 per cent withdrawals but then subsequently becomes a basic-rate taxpayer.

Furthermore, any replacement would be more complex, involve significant system changes for providers (and probably HMRC) and would be harder to explain to clients.

In any event, we will not have to wait long to discover the outcome of the OTS deliberations as the report is expected to be published in the coming weeks.

Of course, no matter what the report says, it will only contain recommendations that the Chancellor can accept, dismiss or amend according to his own thoughts.

This is yet another thing that advisers will need to keep their eyes on in the next few weeks.

Brian Murphy is financial planning manager at Axa Wealth


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