An independent report has been published by the University of London, 'Tax complexity: impact on UK competitiveness and growth'. It revisits the Office of Tax Simplification (OTS) 2014 review of the competitiveness of the UK’s tax administration, seeking to assess progress made since that date.
Background
The Office of Tax Simplification (OTS) was created in 2014 to identify areas where complexities in the tax system could be reduced. One of its first tasks was to undertake a review of the competitiveness of the UK tax administration.
- The review made 60 recommendations for improvement.
- 57 were either accepted or taken for further consideration.
- The recommendations included technical legislative changes and administrative simplifications across the tax system, including Corporation Tax, VAT, payroll, and HMRC administrative procedures.
This latest report, produced by the Brunel Business School at the University of London and financially supported by the ICAEW, revisits these proposals, seeking to fill the gap left by the abolition of the OTS in 2022.
- It looks at what has happened since 2014, to establish whether the UK’s tax competitiveness has improved, and what could be done in today’s environment to improve the situation and reduce burdens on business.
- This was undertaken by conducting a series of 35 interviews with businesses, academics, industry organisations, tax professionals and their representative bodies and government policymakers.
Review and findings
The report considers and sets out its findings on the following specific areas:
- Innovation and growth: focusing on reliefs and their effectiveness in incentivising business.
- The overall view on Research and Development (R&D) reliefs was that Small and Medium Enterprises (SMEs) are now being put off claiming due to the uncertainty of getting their claim approved. Some businesses are not reinvesting their tax credits as they fear recovery claims from HMRC.
- The Patent Box calculations are too complex for SME's.
- The multiple conditions for the Enterprise Investment Scheme (EIS) and Seed EIS lead to errors and loss of relief.
- The maximum age requirement is the most common reason for failure by firms to find a further tranche of funding.
- The Annual Investment Allowance (AIA) is popular but complexity around the choice of capital allowance reliefs is usually left to advisers, which may remove the incentivisation for the business itself.
- The Corporation Tax/Income Tax computation
- Whether the work and time required to calculate tax adjustments is justified when they often provide no tax advantage. In 2014 there were potentially 81 differences identified between taxable profit and accounting profit.
- Problem areas raised were private use adjustments, entertaining, travel and subsistence, and repairs and maintenance.
- Several of the adjustments required under the Anti-Hybrid Rules take a disproportionate amount of time compared to the value of the tax at stake, and the lack of a de minimis or anti-avoidance/intention test means that normal cross-border commercial arrangements are caught.
- Reporting and compliance
- Making Tax Digital (MTD), Real Time Information (RTI) for payroll, Employment status and IR35, and the Corporate Interest Restriction (CIR) were considered and whether, with the exception of MTD where it is too soon to say, the rules, limits and thresholds need to be revisited.
- Small enterprises: the impact of incorporation and expense deductions for unincorporated businesses.
- Fixed rate deductions are very useful, but some need to be uprated.
- Businesses need to better understand the additional reporting and administration requirements following incorporation.
- HMRC support: communication with HMRC, statutory clearances, guidance and policy consultations.
- There were unfavourable comments from interviewees around communication times and delays and the ability to receive rulings from HMRC, and the uncertainty this creates, especially in relation to VAT in the latter case.
- Other taxes
- There is confusion about VAT rates, and Capital Goods Scheme thresholds have not increased with inflation.
- Other taxes such as the Extended Producer Responsibility (EPR) levy and the Packaging Waste Recycling Note (PWRN) are excessively complex.
- International comparisons: interviewees discussed favourable tax policies in other countries.
- A recent OECD Report 'Foundations for Growth and Competitiveness 2026' and the findings of a study therein on the UK’s tax system are highlighted, with the OECD recommending that when it comes to taxation the UK should ‘reduce distortions and close loopholes’ and commenting that ‘there is scope to improve the efficiency and fairness of the UK tax system. Parts of the tax system are complex, leading to large compliance costs.'
Recommendations
The report makes many recommendations which are too numerous to discuss in any detail here; however, the key points are:
- Innovation and growth
- More relevant guidance from HMRC on R&D, such as case studies; staff need to be upskilled, and the targeted advance clearance service currently being piloted should be expanded to allow businesses to request clearance on ‘whether the project meets the definition of R&D for tax purposes’.
- Simplification of the patent box calculations and of the conditions and processes for EIS and SEIS relief.
- Additional HMRC support on how to allocate 100% capital allowances and a better definition of 'plant'.
- The Corporation Tax/Income Tax computation: work to be undertaken to:
- Reduce the number of adjustments necessary between accounting profit and taxable profit.
- Look at aligning the tax and accounting definitions of capital and revenue, and trading and property income.
- Introduce a simpler statutory test for repairs for businesses below the accounts auditing thresholds.
- Review the anti-hybrid rules with a view to introducing a de minimis.
- Reporting and compliance
- 2027 post-implementation review of MTD quarterly reporting, to include an evaluation of whether recording and claiming by businesses has improved and if the move to a £20,000 turnover threshold should go ahead in 2028.
- Increase in Trivial benefit exemptions and review of Employer-funded childcare.
- Consider an extension of the 30-day deadline to notify liability to Annual Tax on Enveloped Dwellings (ATED) to 60 days (in line with those for Capital Gains Tax on disposal).
- Consider an increase in the CIR £2m de minimis.
- Small Enterprises
- Reintroduction of Disincorporation Relief.
- Review whether a simpler cash-based accounting scheme may be appropriate for one person companies.
- HMRC Support
- There was little to be said here other than a need for a change in HMRC culture which will take time.
- Other taxes
- VAT needs to remain a key focus of simplification efforts with consideration of a lower headline rate and removal of certain lower rates.
- International comparisons
- HMRC should set up a formal mechanism for information gathering and discussion to keep abreast of developments in other countries’ systems in terms of innovations/ideas that could/should be considered to reduce tax complexity in the UK.
Conclusions
The report notes that the final edition of Paying Taxes, the World Bank/PwC's international tax league table, published in 2020, showed both a relative fall in the UK’s rank (from 14th to 27th) and an absolute increase of almost 10%, in respect of time taken to comply with the tax regime from 2014 to 2018. Its replacement, B-Ready, records an even further fall, with the UK’s time to file and pay ranked 48th of 94 measured countries for 2025, which is below the OECD average.
As such, the report suggests that the new approach by the government of abolishing the OTS and passing their responsibilities to HMRC and HM Treasury, when it is not their primary focus, does not appear to be working.
External link
Report: Tax complexity: impact on UK competitiveness and growth