The Office will provide an initial report to the Chancellor by in time for the 2011 Budget. It will identify areas of the tax system that cause the most day-to-day complexity and uncertainty for small businesses and recommend priority areas for simplification.
Once the Government has considered the initial report the Office will be asked to produce specific recommendations on tax simplification for small businesses. As part of the initial report, the Office will also explore alternative legislative approaches to IR35.
In its terms of reference relating to IR35, it said:
The Government has already indicated that reviewing IR35 legislation is a priority and that it will seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility.
Therefore, in its initial report to the Chancellor, the Office should also:
- identify and provide evidence of the complexity and uncertainty created by IR35;
- consider alternative legislative approaches that would be simpler and create certainty while ensuring that, where intermediaries are used to disguise employment, any income that is effectively employment income is taxed fairly; and
- consider the scope for tax avoidance and the extent to which alternatives to IR35 would affect it.
The focus of this work should be exploring alternatives to IR35. However, the Government will be interested in issues in relation to the structure of the tax system and the employment status test more generally. This may have a bearing on wider issues about employment status and the boundary between employment and self-employment, including the impact on larger businesses.
Among the general principles for any recommendations, the Office was toild that it should aim to:
- build consensus amongst small businesses, tax professionals and academics;
- take into account current and emerging trends amongst small businesses;
- consider all HMRC taxes and duties that impact on small businesses, including the administrative burdens imposed;
- take into account Government objectives for labour market flexibility;
- be consistent with the principles for a good tax system, including fairness and efficiency;
- be broadly revenue neutral overall;
- be consistent with the Government’s corporation tax reform agenda and wider tax reforms; and
- take account of international experience.
The Chartered Institute of Taxation (CIOT) was quick to welcome the inclusion of IR35 in the review, Colin Ben-Nathan, Chairman of the CIOT’s Employment Taxes Sub-Committee, said: “In a modern, flexible labour market, workers and engagers should be free to form the contractual relationships they choose, without having their arrangements second-guessed because the tax consequences of their choice differ from those of another possible arrangement.
“Rather than the tax system being used as an override to determine a worker’s status as an employee, we think their status should be based on their legal position in employment law and that the tax and NICs liability should flow from this.”
Freelancer group, the PCG also welcomed the launch of the Office of Tax Simplification and the IR35 review.
John Brazier, PCG’s Managing Director, said: “We are delighted that the Government has now set up this vital office and that they have already set out the terms of reference for a Small Business Tax Simplification Review, including IR35. The fact that IR35 has been highlighted as a priority is good news. We will be working to ensure that this iniquitous tax will go and that all freelancers and small businesses will be able to operate within a fairer and more transparent tax system.”
The Government has appointed John Whiting – Tax Policy Director of CIOT – as Tax Director of the OTS. He is being released by the CIOT to perform the role on a one day a week basis, in addition to his existing post at the CIOT.
Vincent Oratore, President of the CIOT, said: “I strongly welcome the setting up of the Office of Tax Simplification. This new body could play a crucial role in making our tax system simpler, more certain and more transparent.
“The CIOT has long called for simplification of the UK’s tax rules, and argued that a new body needs to be set up to review our existing stock of tax laws and their effectiveness. We are delighted that the Government has listened to these calls in setting up the OTS.
“I am particularly pleased that the first Tax Director of the OTS will be John Whiting. John has a record second to none in explaining our labyrinthine tax system in an understandable way, and in working up the sorts of reforms that the system needs. I hope he will be given the resources he needs to make a real difference.”
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