Making things simpler

Christy Wilson considers two reports by the Office of Tax Simplification on how to simplify capital gains tax.

There is no denying the enormous strain that the Covid-19 pandemic has put on the UK’s finances over the last 16 months. In fact, according to the Institute for Government, the deficit is now expected to be at £394 billion in 2021. This is £339 billion higher than had been anticipated before restrictions were first imposed back in March 2020. Furthermore, tax revenues are also forecast to be lower than originally anticipated, with the likes of capital gains tax expected to provide 29% less, business rates 39% less and stamp duty 34% less revenue

Christy Wilson Tax Associate, Katten Muchin Rosenman UK LLP this year than initially estimated at the start of the pandemic.

Undoubtedly, the chancellor Rishi Sunak will be keen to ensure that the government recoups some of the money that it has spent during the pandemic. In July last year, the chancellor actively encouraged the Office of Tax Simplification (OTS) to review the CGT system and stated:

“I would like this review to identify and offer advice about opportunities to simplify the taxation of chargeable gains, to ensure the system is fit for purpose and makes the experience of those who interact with it as

The OTS recommended that the rates of capital gains tax should align closely with those of incometax

Author bio

Christy Wilson is a tax associate in the Transactional Tax Planning practice at Katten Muchin Rosenman UK LLP. smooth as possible. In particular, I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”

Following this request for a review, the OTS has published two reports outlining its recommendations. The first report published in November 2020 focused primarily on the policy design and underlying principles of the tax system, looking at how the operation of some tax reliefs can cause a distortion in behaviour. The second report published in May 2021 considered the practical, technical and administrative issues of capital gains tax. November 2020 Report It is clear from the November report that the OTS took on board the chancellor’s suggestion to compare capital gains tax with income tax. The OTS recommended that the rates of capital gains tax should closely align with those of income tax. It argued that this would remove some of the incentive for people to seek to characterise certain receipts as capital gains rather than income, or to favour activities and investments that generate capital gains rather than income. In order to achieve this, the OTS recommended that the government considers reducing the number of capital gains tax rates to two rather than the four currently in place; with the two basic rates likely to be the ones removed.

The report also discussed share-based remuneration. It recognised the desirability of certain employee share schemes and specifically drew attention to growth shares, where any profit on the sale of the shares is subject to capital gains tax rather than income tax, whereas profits from other conceptually similar arrangements such as share options are taxed as income.

Furthermore, the OTS recommended that business asset disposal relief (BADR) and investors’ relief be abolished. In the case of BADR, the report suggested replacing it with a relief more focused on retirement and suggested: ● increasing the minimum investment to 25%; ● increasing the holding period to 10 years; and ● re-introducing an age limit (perhaps linked to age limits in pension freedoms).

As for investors’ relief, the OTS suggested that there is little evidence of people using this relief and therefore recommended its abolishment. However, this relief was only introduced in 2016 and the first year in which qualifying disposals might have taken place is the 2019/2020 tax year; therefore, there has not been much opportunity for use of the relief.

May 2021 Report The May report focused more on practical and administrative issues, but also looked at topics such as raising awareness about when and how taxpayers pay capital gains tax and increasing the 30 day window for filing a non-resident capital gains tax return to 60 days.

Importantly, from a business perspective, there was a key suggestion that capital gains tax should be charged on a ‘receipts’ basis. This would be applicable to situations where the proceeds of a sale are deferred and would mean that tax is paid when the proceeds of a sale are actually received. The OTS argued that the current system, which requires tax to be paid on an estimate, is not intuitive and may result in tax being paid on future proceeds that are never realised. As a result, the OTS expressed concerns that a system which allows for payment of tax on future proceeds may result in distortion and push taxpayers away from arrangements that make the most commercial sense in order to take advantage of tax on deferred proceeds.

This suggestion seems somewhat at odds with the main points of November’s report, which clearly focused on ways to receive more tax revenue from the capital gains tax system. However, the second report proposes a method of tax calculation that would bring in less revenue in the short term.

Some of the other suggestions from the second report included calculating gains or losses on foreign assets in the relevant foreign currency and then converting into sterling at the exchange rate on the date of disposal. A simplification of the process for applying for the Enterprise Investment Scheme was also proposed.

Conclusion Over the last year, capital gains tax has received a lot of attention from both the government and the OTS. Many people predicted last year that there would be a rise in capital gains tax but the expected increase did not happen.

There is much speculation as to what the outcomes may be from the two reports and the chancellor’s statement from last July. Many believe that this year will be the year for higher capital gains tax rates. However, the changes may not in fact be so one dimensional. Whilst there are strong suggestions, particularly in the first report, that the rates of capital gains tax might be increased, the OTS commentary is multi-faceted and discusses a myriad of other ways in which the tax could be changed. For example, the critique of the deferred proceeds system points to the fact that the OTS is not solely dedicated to finding ways to gather as much revenue as possible, as fast as possible, from capital gains.

Maybe we should not view the OTS reports as a call for simply increasing tax proceeds of capital gains, but actually as a request to make the system of capital gains tax a bit, well, simpler.

We could consider that the words of the chancellor in July 2020 are a hint that the capital gains tax regime will change to become a system that is very closely comparable with income tax. Even so, caution against tunnel vision as the changes to capital gains tax may be less straightforward than just a rise in tax rates. ●