The Office of Tax simplification (OTS) has been asked by the Chancellor, Rishi Sunak, to review Capital Gains Tax (CGT). This has led to lots of speculation that it will result in a tax hike to mitigate spiralling government debt. Based on previous experience, however, this may be a bit off the mark.
The OTS was set up in July 2010 as an independent adviser to the Government. Its objective is to offer recommendations and advice to the Chancellor on how to make our tax system simpler, with a focus on individuals and smaller businesses.
It is important to note that the OTS can’t implement any of its recommendations, which is a matter for Government. So, its remit is not to look at revenue raising but in its own words: “… to improve the experience of all who interact with the tax system. It aims to reduce the administrative burden – which is what people encounter in practice – as well as simplifying the rules.”
The reports produced by the OTS – though I may not necessarily agree with some of their conclusions – are excellent. Sadly, so far, they seem to have fallen on deaf ears and if I, personally, was tasked with putting the CGT report together I think I’d feel somewhat disheartened at the prospect of it being left to gather dust on a shelf with none of its recommendations being implemented.
Holding that thought, let’s consider the fate of two OTS reports issued in the last 4 years.
The OTS has been keenly focused on a major re-vamp of National Insurance (NI) since its inception. Its view is that the whole NI regime is not fit for purpose, being dated, complex and unfair. In a report of November 2016, the OTS proposed the alignment of NI legislation with income tax and replacing Employer’s NI with a payroll levy.
It put forward a radical seven stage programme with the hope that the first two stages would be in place by 2020. The only minor outcome to date is Boris Johnson’s pledge to increase over time the NI contributions’ Primary Threshold and Lower Profits Limit, for employees and the self-employed respectively, to the level of the income tax personal allowance of £12,500.
In its report “Simplifying the design of Inheritance Tax (IHT)”, released in July 2019, a raft of changes were suggested. Among the proposals was a reduction in the period from seven to five years that gifts, made by an individual during their lifetime, are taken into account, when assessing IHT on death.
It also looked at changes to gift exemptions, for example, the small gifts exemption has been £250 since 1980, so the recommendation was to increase it to £1,000 to reflect inflation.
There were some negative aspects to that report. This included removing taper relief and where an IHT exemption, or relief, applies to an asset, any CGT uplift should be removed with the beneficiary acquiring the asset at the historic base cost of the person who has died.
The key point to make is that while the proposed changes would produce some winners and some losers, in both reports the outcomes were relatively tax neutral, and it’s fair to assume that the CGT report would be no different.
I may be being slightly naïve in thinking none of this will come to pass, though the lack of action may simply be because of Brexit and now Covid-19. If this turns out to be the case, we might ultimately get some laser focus from the Government and all three OTS report recommendations being initiated at once.
Now that would be one pretty explosive Budget!
Neil MacGillivray is head of technical support at James Hay