Tax developments

Date: 02 Aug 2011

Citywealth

Relaunched litigation and settlement strategy

HMRC’s relaunched Litigation and Settlement Strategy (LSS) which sets out principles for handling all tax disputes. In the past, it was based on the principle of “no compromise” if they thought they were on strong legal ground. This meant that in reality, as most tax planning is based on a point of law, it was extremely difficult to reach a compromise. The refreshed LSS uses words that suggest a more collaborative approach and indicate a desire to reach a settlement without the need to pursue litigation. Perhaps this apparent change in attitude reflects the need to increase tax revenues by resolving the number of outstanding disputes. It will be interesting to see if this is borne out. It cannot make sense for the “no compromise” attitude to persist when many taxpayers are prepared to settle outstanding tax enquiries immediately, providing a fair settlement regarding grey areas of law can be reached.

Promise of cuts to business tax miss the point

Government figures confirming the slow rate of economic recovery have prompted further calls for cuts in corporation tax. But these will not help the businesses in the greatest need. Tax cuts help profitable businesses to retain more profits, but rising costs and weak demand mean that many businesses are struggling to turn a profit. In order to boost demand cuts in income tax, National Insurance Contributions (NIC) and VAT would increase consumers’ disposable income. Although this may seem counter intuitive in reducing the deficit, the increased economic activity may actually be more effective.

OTS Proposals for flat-rate expenses will not work

The OTS has issued its consultation document on simplifying income tax for small businesses. The proposals to reduce the requirement for record keeping are very welcome, but we are concerned that a flat rate system for deducting business expenses could prove to be unfair. Businesses are facing a prolonged period of rising costs. A flat rate allowance would inevitably lag behind actual inflationary increases to their expenses, putting further pressure on already squeezed profit margins.

The OTS consultation document also includes proposals for a move from accruals-based accounting to a cash-based accounting system. This is good news as it would simplify matters. The government should not expect too many plaudits for such as move, as many owners of smaller businesses do not know, and do not care, what accounting system they use.

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