We need simpler tax rules for small firms, says Government body

The Office of Tax Simplification has suggested some radical reforms to small business tax. But will they ever come to fruition?

by James Taylor
Last Updated: 19 Aug 2013
Combining income tax and national insurance; abolishing the IR35 anti-avoidance rules; introducing a fixed allowance for expenses... These are just some of the radical measures the Office of Tax Simplification is proposing to try and make life easier for small firms. And its recommendations carry some weight; the body was set up by the Chancellor to advise him on ways to make tax less complicated. We can’t imagine many people disagreeing with this, in principle. The trouble is, changing such a fiendishly complex system will in itself be so complicated that there must be a chance some of these reforms will never see the light of day...

The OTS's remit was to produce a report before the Budget 'on areas of complexity and uncertainty for small businesses, and recommend priority areas for simplification'. The underlying premise was (quite rightly) that the tax code has become far too complicated, making compliance difficult, time-consuming and potentially very expensive, particularly for small firms. So the idea of finding ways to simplify the process was long overdue – and an essential part of any red tape bonfire.

Still, the OTS report is surprisingly ambitious. Rather than just fiddling around the edges, it has 'overwhelmingly' concluded that 'genuine and long lasting simplification can only be brought about through major structural changes to the UK tax system'. The really big idea is the integration of income tax and national insurance. Currently the two are calculated – and paid – separately, so combining them would hugely reduce the administrative burden. It would also facilitate the abolition of IR35, the controversial rules that aim to prevent people pretending to be contractors when they’re actually employees (since one of the key reasons for doing this is to save on NI).

This makes a lot of sense – but a change as huge as this would require complex negotiations and calculations (to work out all the new tax levels), not to mention fresh legislation. So the OTS has also suggested some ways to deal with IR35 in the short term: either suspending it temporarily (with a view to permanent abolition), improving the way HMRC deals with it, or creating a simpler test that would keep more people out of the net. It's also suggested some other interim measures to help small firms, including improvements to the capital allowances regimes, a simpler VAT system for operating abroad, and potentially, a fixed allowance for expenses (so they wouldn’t have to note down every single Starbucks receipt).

As the OTS points out, there isn’t the same need to treat NI separately these days, because only a few benefits now depend on it directly. And combining the two would certainly make life easier for small firms. But such a radical and ambitious change will be horrendously complicated to push through – and in the short term, will create even more uncertainty and disruption for business owners. We'd argue that it would be worth it in the long run. But does the Government have the political will to follow its own advisors' advice?

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Want to encourage more female leaders? Openly highlight their achievements

A study shows that publicly praising women not only increases their willingness to lead, their...

Message to Davos: Don't blame lack of trust on 'society'

The reason people don't trust you is probably much closer to home, says public relations...

Dame Cilla Snowball: Life after being CEO

One year on from stepping back as boss of Britain's largest advertising agency, Dame Cilla...

How to change people's minds when they refuse to listen

Research into climate change deniers shows how behavioural science can break down intransigence.

"Paying women equally would cripple our economy"

The brutal fact: underpaid women sustain British business, says HR chief Helen Jamieson.

Why you're terrible at recruitment (and can AI help?)

The short version is you're full of biases and your hiring processes are badly designed....