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Sunday, March 4, 2012

Tax Simplification in the UK

In looking for the United Kingdom Treasury Department's report on the patent box approach to incentivizing innovation (more on that later), I came across HM Treasury's website for the Office of Tax Simplification. First, I thought it was intriguing that they even had a formal office of this important topic. Second, I wondered if their tax system could be as complex as the US tax system. btw, the report on the patent box is 52 pages long and involves a fairly complicated calculation.

Back to simplification ... The Office of Tax Simplification (OTS) was created in July 2010 "to provide the Government with independent advice on simplifying the UK tax system." Last week, 2/28/12), OTS released the report on simplification for small business. To come up with the recommendations, OTS "gathered evidence through surveys, meetings and roadshows" from "around 4,000 small business people, tax advisers, and representative bodies." People could also send information to OTS.

Per the summary provided by the Office, the recommendations fall into three key areas:
  1. Tax System Administration - "raising awareness of the help that is available, improving communication, improving the relationships between HMRC and the small business community and ways to gives businesses more certainty about their tax affairs. Recommendations include the use of two-way email communication, better VAT rulings and information and a dedicated helpline for small businesses"
  2. Simplified Accounting for the Smallest Businesses - the report recognizes some complications for small sole proprietors (they called them "one-man bands"). OTS recommends allowing the cash method rather than GAAP.  OTS also "recommends a wider range of flat rate expense allowances be available.  These methods should be the default option for qualifying businesses, with an “opt-out” allowing those to select the system that is most beneficial to them. Furthermore, the OTS recommends a full study is undertaken of a turnover tax as a possible alternative for the smallest businesses."
  3. "Disincorporation – the OTS identified that a number of the smallest companies would like to ‘disincorporate’ and move to an unincorprated status. The current tax system mitigates against this, so the OTS has proposed the introduction of a tax relief so that companies can disincorporate without incurring significant tax cost. This would parallel the existing incorporation relief. This would have the dual benefit of reducing admin burdens whist facilitating business reorganisations allowing businesses to trade in their correct form" 
Well, I think all of this is interesting. Would an OTS for the federal government help simplify our laws? The UK OTS is part of the administrative branch. So they will need to get the legislative branch to handle recommendations 2 and 3 above. It depends then on the political process and the legislature's commitment to tax simplification.

In the US in 1976 and 1998 (and likely other times as well), Congress asked the Joint Committee on Taxation to prepare a report on how the tax system could be simplified.  The reports were issued, but Congress did not respond, at least to the 1998 report.  Simplification in the US would require broadening the base to remove the 200+ special tax rules. The result would be lower tax rates, improved equity and efficiency, a lower tax gap, transparency and reduced compliance and administrative costs.  So, what is the hold up?  I think taxpayers like to have the special rules and Congress and Presidents like to create them.

I wonder what will happen in the UK in response to the small business tax simplification report?

What do you think?

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