Board minutes - 12 May 2011

Present

Rt Hon Michael Jack – Chairman
John Whiting – Tax Director
Dave Hartnett – HM Revenue and Customs
Edward Troup – HM Treasury
Teresa Graham
Adam Broke
Fawzia Cassiem – shadowing Dave Hartnett

Secretary

Jeremy Sherwood

1. Minutes of the last meeting

The minutes of the 7 April 2011 meeting were formally agreed.

2. Action points from minutes

At the previous OTS Board meeting, Teresa Graham had asked the OTS to make sure HMRC’s Administrative Burdens Advisory Board (ABAB) was involved in the small business tax review. Since that meeting, Michael Jack had attended a meeting of ABAB to update them on the work of the OTS. The OTS would be working closely with HMRC’s Business Customer and Strategy Unit on the next stage of the review into small business taxation, and would also meet regularly with the Department for Business, Innovation and Skills.

3. Future reviews

The Exchequer Secretary to HM Treasury, David Gauke MP, had written to Michael Jack setting out the Government’s detailed response to the first two reviews of the OTS, and outlining the process for agreeing its next projects. The OTS intended to publish the letter shortly on its website with a covering press release.

As a follow up to the OTS’s interim report on small business, David Gauke had asked the Office to continue its work on ways to improve tax administration for small businesses as part of its programme of work for 2011/12. His specific areas of interest as reflected in his letter also complemented the other areas of the small business tax review that the OTS would propose taking forward.

In addition to taking forward the small business tax review, the Minister had also invited the OTS to develop proposals for a range of further reviews with a view to announcing a full work programme in the summer. In framing these proposals the OTS would supply evidence of complexity gathered in the course of the OTS’s work so far, and would aim to set out how the OTS would approach the subjects and what the expected simplification benefits might be.

Small business review

The small business review Consultative Committee had met the previous week to consider the areas of complexity identified in the interim report of that review. There had been mixed views on the different proposals in the report, but there was a general consensus that HMRC administration of small business tax was a good project to take forward. People had thought that the OTS could usefully explore whether a new system of taxing the smallest unincorporated businesses would deliver real simplifications, and be welcomed by those affected.

Some on the Committee thought that recent tax and NIC rate changes might mean there is less demand for a “disincorporation relief” but it was worthwhile exploring how this might work in practice, and whether it would deliver simplification. A few members of the Committee also thought that the employment/self-employment boundary should be looked at in more detail, although acknowledging that this would be a major task, and would need to take employment law into account.

The Board was aware of previous work by tax experts and Government into different ways of taxing small businesses, and into disincorporation relief and thought the OTS should draw on lessons from these previous policy debates. It would also be important to understand the population of very small businesses – for example, what proportion of the total tax revenues they paid, what the characteristics of the business owners were, and whether they had other sources of income.

Dave Hartnett made the point that the small business population made up a sizeable element of the “tax gap”, and any proposals would need to take into account the possible effect on tax compliance. However, he was aware that the Chinese revenue authorities had recently introduced a form of “turnover tax” for small businesses which appeared to have had a very positive effect on tax compliance.

The Board also suggested that OTS staff gather evidence from HMRC operational teams on where the tax system generates most complexity for small businesses, including where most errors occur. One suggested area to look at was around transactions between small companies and their directors which were complex and difficult for business people to understand. However, given the potential size of the small business review, it probably made sense to focus initially on one area, for example, unincorporated businesses.

The Board asked the OTS Secretariat to review the terms of reference for the small business review in David Gauke’s letter, add in some broad proposals on how best to take forward the rest of the small business review, and circulate an overall project outline to the Board members within two weeks.

Other reviews

The point was made that although the OTS had formally concluded the review of tax reliefs, and Ministers had acted on its recommendations, that did not preclude the Office revisiting areas covered by the report at some later date. The review had been a useful mapping exercise, and there was an expectation that some areas of complexity identified in the report would be looked at in future simplification reviews.

The OTS had been considering a number of specific areas for future reviews which had been discussed in detail at the previous Board meeting, and had since met with HM Treasury and HMRC experts to discuss possible simplification projects. The Board asked the OTS secretariat to draw up more detailed plans for the three most likely areas to be taken forward – pensioner taxation, share schemes and employee benefits and expenses, setting out what the likely evidence gathering process would be, and the expected outcomes of the reviews.

The Board also asked the secretariat to draw up plans for an overarching project that would aim to establish broad criteria for complexity across the tax system. The aim would be to identify which parts of the tax system were most complex, and this would then help the OTS to prioritise areas for future reviews. This work would be carried out alongside the other shorter term projects. Overall, it would be important not to overstretch the limited resources of the Office by taking on too much, instead concentrating on achieving high quality reports in focused areas.

These plans should be drawn up within two weeks, and then Michael Jack would write to the Exchequer Secretary, David Gauke, setting out a menu of options for the 2011/12 OTS work programme.

4. OTS budget

The Board discussed the OTS financial performance against its budget for 2010/11, and plans for 2011/12 – 2014/15. The annual budget of the OTS was around £500k, funding for which was shared equally between HMRC and HM Treasury from existing resources. Around half of the budget was for staffing (only the civil service staff received salaries) and the rest was for operational costs including accommodation, IT and corporate services provided by HM Treasury.

In 2010/11 the office had underspent its planned budget by around £143,000 because IT costs had been less than expected, and the full complement of civil service staff had not been appointed until September.

The Board thought that the model for the OTS had worked well so far, based on recruiting unpaid private sector secondees alongside permanent civil servants. However, they considered that the constraining factor on how much work the OTS could do in future was its ability to attract suitably qualified and experienced private sector secondees.

For some projects, it might be difficult to attract the right people without some form of payment. HM Treasury and HMRC were clear there was no additional money available for this and any payments to secondees would need to be found from the existing OTS budget. The OTS would also need to get authorisation from Treasury Ministers if it wanted to pay secondees, in the context of the current civil service recruitment freeze.

5. Date of next meeting

The next meeting will be held at the Treasury on Wednesday 29 June.