Tax simplification review: comments sought

Paul Morton is tax director at the Office of Tax Simplification Paul Morton is tax director at the Office of Tax Simplification

The UK tax code is one of the longest in the world and it keeps growing. The Government acted in 2010 to tackle this complexity by setting up the Office of Tax Simplification (OTS) to advise the Chancellor on ways of simplifying the tax system.

Start-up and incorporation

The first question a new business owner faces is when they need to register and with whom. For those starting a small incorporated business, the administrative burden of having to register separately with Companies House and HMRC could be reduced by introducing a ‘one stop shop’.

The OTS notes that while there are reliefs for those raising capital from third parties later in the business life cycle, there is no tax relief for those having to raise start-up capital on day one.

Financing

There are several areas where tax complexity adds to the challenges of raising finance. Firstly, in order to qualify for Entrepreneurs’ Relief (the 10% capital gains tax rate on disposal of qualifying business assets) it is necessary to hold a minimum of 5% of a company’s shares. Some business owners feel discouraged from bringing in external venture capital feeling there was a risk that their shareholding could be diluted below this level.

The three main tax-favoured venture capital schemes are the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs). These have common features but also a number of differences which means that they attract different types of investors who invest for different reasons.

Succession

When a business is disposed of by way of a gift, relief from capital gains tax may be available under either Entrepreneurs’ Relief or Gift Relief: one offers the option of paying 10% now (Entrepreneur’s Relief), or potentially paying at the full rate at a later point in time (with the gain deferred under Gift Relief). These two reliefs are mutually exclusive but determining which is better to claim depends on the future plans of the recipient of the gift.

Capital gains tax reliefs (Entrepreneur’s Relief and Gift Relief) are available for transfers of shares in trading companies where the non-trading element of the business is not more than 20% of the whole. In contrast, Inheritance Tax Business Property Relief is available on transfers of a business, or shares in a business, where the non-trading element of the business is less than 50%. As well as the confusing effect that results from two different rules, this can lead to businesses adopting commercially unnecessary and complex structures to preserve their qualification for the reliefs.

Disposal

The cost of Entrepreneur’s Relief is greater than that of any of the other reliefs considered by the OTS. While other reliefs appear to be designed to encourage investment in young and growing businesses or to preserve existing business from break-up in the event of succession, Entrepreneur’s Relief does not seem to achieve either of those objectives.

When a business is sold there is a possibility of double taxation. Tax arises on the company on sale of its business and again on the shareholder on disposal of the shares (or receipt of a dividend). This is disadvantageous for the seller. In contrast, the purchaser of the business enjoys more favourable tax treatment and reduces their risks by buying assets from a company rather than buying the company.

What next?

The OTS warmly welcomes comments and views on all of these areas. How should this work be taken forward? Views are sought on the Business Life Cycle Report and thoughts on where the work might most helpfully be taken forward.

OTS Business Life Cycle Report: https://bit.ly/2qABhWi

Comments should be sent to ots@ots.gsi.gov.uk

 

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