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Reliefs under review

The Office of Tax Simplification is assessing a long list of tax exemptions and reliefs

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It’s fair to say that the publication of the Office of Tax Simplification’s interim report caused more than a few flutters of concern around the financial services sector.

Hardly surprising, given that so much financial planning (note planning, not avoidance) incorporates the maximising or legitimate use of available exemptions and reliefs.

We have all become (quite quickly really) used to an environment in which official attitude has consistently hardened towards all forms of tax avoidance. The economic imperatives that HM Treasury is struggling with make it essential to minimise tax leakage and maximise tax gathering.

Each Budget for the past few years has seen a significant batch of new anti-avoidance measures introduced.
The toughening has gone beyond what might be considered anti-avoidance heartland. Taxpayers and financial planners have had to assimilate a new additional income tax rate, the withdrawal of personal allowances, a new higher capital gains tax rate of 28 per cent for higher-rate taxpayers and a frozen nil-rate band for inheritance tax.

On top of all that, there is the pension anti-forestalling and tax relief removal provisions.

With this as background, the initial dismay expressed in some places at the announcement of an extensive list of much loved and long-standing reliefs that were up for review is hardly surprising, this dismay being based on an initial interpretation of review being apparently equated to possible withdrawal.

The more so as the initial list incorporated such staples as top-slicing relief and 5 per cent withdrawals – shock horror or what?

A more considered read of the review document reveals (fairly early on) the following important statements:

  • The Office of Tax Simplification (OTS) has as the prime aim of the review the simplification of the tax system. That is not to say that as part of the process of simplification some reliefs might not be removed or changed but relief removal appears not to be the main objective of the review.
  • The OTS has compiled a list of 1,042 reliefs to be reviewed in the interests of simplification.
  • The main purpose of the published interim report is to test whether the methodology and criteria to be used to carry out the review of reliefs will lead to sensible results.

The criteria to be used (see below) will give a very clear idea of underlying motives for the review and, we believe, should give taxpayers and planners some reassurance – especially if these criteria are applied to some of the financial planner’s much loved and much used reliefs. Why not try applying them against any of the reliefs that you may be concerned about?

Here are what the review has set out as the key criteria for assessing the validity of the 74 reliefs that have initially been listed for review.

  • The policy rationale. A number of tax reliefs have been introduced over the years to fulfil a specific purpose, or to help a certain industry in need. The Treasury will examine whether there continues to be a policy rationale behind a relief and also whether the relief is the best way to deliver the aim.
  • Evidence of taxpayer take- up, which is a proxy for the perceived value of the relief. This is a function of understanding, complexity and whether the legislation is too tightly focused.
  • The tax cost of the relief is also a key factor which the Treasury takes into account but is not by any means the key driver.
  • The administrative burden for the taxpayer, adviser and HMRC; determining for each relief which aspects take up the most time and resource. This includes the legislation itself, the volume of changes, the procedures and documen-tation required for dealing with HMRC or other bodies, and the work HMRC has to undertake to monitor claims.

The OTS, in connection with the stated criteria, has admitted there are other criteria that could be considered but that it feels that those listed are the most relevant. The OTS is welcoming comments on whether the use of the stated criteria is likely to achieve the stated objective of deter-mining whether a relief is fit for purpose and whe- ther it can be simplified or abolished.

This target for this part of the review is important to keep in mind. Namely, at this stage, the OTS is merely seeking comments on the validity of the criteria for general application to the reliefs to be reviewed so as to give a reliable and valid outcome.

In the introduction to the review, the OTS makes the following clear.

“1.7 We are particularly interested in identifying those reliefs that:

  • are largely historic or have a policy rationale that has weakened over time;
  • are not frequently used;
  • benefit a small number of taxpayers but may create distortions in the tax system; or
  • are used by larger numbers of taxpayers but that are complex for business and/or HMRC to administer”

The OTS has listed

1: Seventy-four reliefs it plans to include in its final review.
2: Seventy-five reliefs that will be considered if time permits.
3: 883 reliefs that will not be pursued in detail at this time.

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