Simplification of the tax system – UK focus with international context
December 2023 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
December 2023 Issue
Tax complexity and the need for tax simplification are becoming popular topics in the tax community. Accounting for Transparency, a collaborative research centre funded by the German Research Foundation, designed a survey-based Tax Complexity Index to rate the complexity of a country’s tax code and tax framework. Out of 35 Organisation for Economic Co-operation and Development (OECD) countries covered by the 2020 survey, the UK was ranked in the middle of the tax complexity range, with the same overall tax complexity rating as Canada, Israel and Denmark. While this suggests there are tax systems more complex than the UK, business sentiment suggests there is room for simplification and this has been recognised by the UK government, despite the recent disbandment of the Office of Tax Simplification (OTS). While the closure of the OTS may appear counterintuitive, the government’s reasoning was that tax simplification should be embedded into the core of tax policy-making by the Treasury and HM Revenue and Customs (HMRC) rather than being dealt with by an independent body.
The complexity of the UK tax system has been increasing. The UK tax code, at over 10 million words, is now the longest in the world. The House of Commons Treasury Committee’s Report on Tax Simplification in June 2023 concluded that the UK tax system is overcomplicated, presenting “an obstacle to economic dynamism”. The Tax Complexity Index considered general anti-avoidance rules, group provisions, loss offset and investment incentives as some of the more complex provisions of the UK tax code in every year the survey was conducted (2016, 2018 and 2020).
UK tax system – examples of possible simplification
There are many ways to simplify the tax code. Below are some examples which could help simplify corporate tax.
Multinational groups looking to move overseas entities into the UK would welcome the introduction of a re-domiciliation regime (on which the government ran a call for evidence in 2021) allowing an overseas company to move its legal seat to the UK without losing its corporate identity. While the main barrier to re-domiciliation is English law, from a tax perspective a re-domiciliation regime would make relocation straightforward without the need for complex reorganisation structures and bring more businesses to the UK. The government should follow its plan to consult on the design of the regime without further delay.
The UK domestic tax rules for groups do not provide for a fiscal unity regime, although several group taxing provisions exist. Introducing a fiscal unity regime would simplify matters for many UK groups, both in terms of applying the tax law and paying tax. A group ‘unique taxpayer reference’ and a group payment mechanism (rather than separate entities making payments or having to enter a group payment arrangement with HMRC) would save time and effort for both businesses and HMRC. Needless to say, in the view of existing group provisions like transfer of assets or group relief, the design of any fiscal unity regime will need to be carefully considered to avoid any unintended consequences. This may be a challenging task, but if accomplished the simpler tax rules would be welcomed by groups operating in the UK.
A less ambitious idea would be to further streamline the loss relief rules. The 2017 loss reform already introduced a degree of simplification by allowing most types of losses to be offset against total profits. However, taxpayers must still account for losses in separate ‘buckets’, which complicates the calculation without obvious benefits for taxpayers or HMRC. Removing the distinction between types of losses would streamline the calculation, potentially reduce errors and simplify tax review returns, freeing up HMRC resources.
Tax simplification is also about administrative process, including the ease of applying various exemptions and reliefs. Those associated with withholding tax on interest are a good example. UK tax legislation provides many exemptions from withholding tax on interest, such as the Eurobond exemption and qualifying private placements, in addition to reliefs available under the treaty network. The existing process of obtaining preclearance from HMRC is time consuming, again demanding more resources from businesses and HMRC. This could be optimised by either simplifying the current preclearance process or switching to a self-assessment regime where taxpayers apply reliefs from withholding tax, where relevant, based on available and sufficient proof. Interestingly, one of the EU’s recent simplification proposals addresses withholding tax.
Looking into the near future, once Pillar Two is in force in the UK, the Offshore Receipts of Intangible Property (ORIP) rules, which represent a significant compliance burden for those businesses affected, would appear to be superfluous. Groups within scope of Pillar Two and HMRC could both benefit from a reassessment of ORIP to ease the burden, particularly as Pillar Two compliance is expected to put significant pressure on their resources.
From an income tax perspective, there are also a number of ways to simplify the rules. For example, the UK tax year, despite its historical context, presents a challenge in the fact that it is not aligned with the calendar year, creating additional complications for individuals and employers when calculating income tax liabilities. When a UK-resident individual is taxed in other countries on workdays overseas and needs to claim a credit for the overseas tax, it is necessary to apportion the income and associated tax. The income tax legislation does not prescribe how this should be done, creating uncertainty. Moreover, tax authorities of other countries with limited exposure to the UK tax system can be reluctant to accept residence, income or tax figures relating to the UK tax year, which can lead to double taxation. A well designed, planned and executed transition to a calendar year is an ambitious task, but one that should simplify the income tax compliance process and improve the UK’s attractiveness to overseas talent.
To continue with the international context, it is worth mentioning the current non-domiciled regime that also requires substantial effort from taxpayers and HMRC due to its complexity. While the regime is attractive to many non-UK domiciles and important for the UK’s international competitiveness, it could benefit from simplification. Options to reform the regime vary from the introduction of a digital nomad visa system to a wealth-based visa. In addition, a special expatriate workers regime, to simplify the current non-domiciled regime used by non-UK employees on assignment in the UK, could be introduced with either a fixed tax rate or percentage of income to be deducted for a temporary period.
Finally, the ‘off payroll working’ (IR35) rules are an area of complexity for many individuals and employers, with some prominent case law. The rules could benefit from a statutory employment test, reflecting modern ways of working, to provide more certainty to all parties involved.
As the government embarks on the tax simplification journey, it is important to have a transparent and consistent method of measuring complexity to prioritise simplification efforts. The complexity measure could be included in the tax information and impact notes for all proposed tax measures, together with a simplification declaration. Indeed, such a declaration was suggested by UK professional tax and accounting bodies in their recent letter to the Financial Secretary to the Treasury.
EU twist
Despite Brexit, UK companies with a presence in the EU may still find themselves in scope of some existing and upcoming EU regulations. The European Commission (EC) also recognises the importance of reducing tax complexity exacerbated by differences in the implementation of various EU tax directives by member states. However, the EU’s recent tax initiatives may simplify some aspects while increasing complexity elsewhere.
For example, the proposed EU-wide withholding tax system, Faster and Safer Tax Excess Refund (FASTER), which aims to harmonise and accelerate the refund process across the EU, allows member states to choose between two alternative systems (relief at source or a speedy refund), which does not align with the UK government’s aims. It may also create an additional checking and reporting burden on certain financial intermediaries and, at least for this group, will in fact increase complexity. The initiative to create a common EU corporation tax framework, the Business in Europe: Framework for Income Taxation (BEFIT), in its current draft would co-exist alongside member states’ domestic corporate tax laws, creating yet another tax regime for large groups (including non-EU headquartered groups with a significant EU presence) to deal with, in addition to Pillar Two. While badged as tax simplification, both proposals in their current form may not achieve this aim. It remains to be seen how the EC responds to such concerns as part of the consultation process.
Time for ‘global decluttering’?
Groups in scope of Pillar Two will undoubtedly feel the impact of additional compliance and many tax functions may already be struggling with the workload. Even the OECD, which designed Pillar Two and most of the recent major tax changes worldwide, recognises the volume of these tax measures and the potential for them to overlap with rules that address the same risks. In its May 2022 report ‘Tax Co-operation for the 21st Century’, the OECD stressed that as countries implement Pillar Two rules they may wish to review existing anti-tax-avoidance measures to reduce the burden on businesses and tax administrations.
Simplifying a tax system is not a quick or easy process. It depends on many factors – economic, political, the age of the tax system and others. One of key steps in any tax simplification strategy should be to assess the effect of any existing measures and their interaction, as well as to give any recent measures a chance to make a full impact, before any further measures are considered in the same area. A transparent simplification roadmap, with concrete and measurable goals and clearly defined responsibilities, is key to success. Following the UK government’s statement that simplification will be at the core of all tax policymaking, it will be interesting to see whether any tangible tax simplification announcements are made at the next fiscal event.
Artem Vasyutin is a partner and Daria Adepegba is an associate director at Deloitte LLP. Mr Vasyutin can be contacted on +44 (0)20 7007 0261 or by email: avasyutin@deloitte.co.uk. Ms Adepegba can be contacted on +44 (0)20 7303 0563 or by email: dadepegba@deloitte.co.uk.
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Artem Vasyutin and Daria Adepegba
Deloitte LLP
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