Final work projects of the Office of Tax Simplification

The Office of Tax Simplification (“OTS”) has now closed and ceased its work after Finance Act 2023 received Royal Assent last month. In the months of November and December it published its review of residential property income in a report and the report on hybrid and distance working.

Report on hybrid and distance working

This report examines the complexities driven by hybrid working, including for periods where employees choose to work overseas.

As part of its work leading up to issuing this report the OTS talked to a wide range of businesses and others to consider the challenges and complexities that have arisen for employers and employees following the changes in working practices in the wake of the pandemic. ONS surveys suggest that about 40 percent of the workforce is able to work from home and the evidence is that many are splitting their working time between home and office-based working.

The report’s key findings are as follows:-

• Businesses see hybrid working as here to stay and are planning accordingly – although many suggested that the approach to different ways of working will continue to develop;
• Offering employees the ability to work some of the time at home in the UK is almost universal amongst those the OTS heard from;
• Employers call for a review of the expense and benefits systems, where many concepts are tied to more traditional ways of working. Adding additional tax reliefs would have a significant exchequer cost – but new ways of working present the opportunity to reconsider the approach to employee tax reliefs;
• As well as the government considering policy change, respondents asked for HMRC to improve guidance to help both employers and employees; at present there is limited guidance on hybrid working;
• Working abroad for short periods is not taken up by many employees, but still seen by many employers as a crucial business policy to attract and retain staff. Businesses are also permitting a small number of individuals to live and work overseas on a long term basis whilst the benefit of their services is mainly received in a different country;
• The social security and payroll implications of cross-border working are already complex, and these and the UK’s position on issues such as taxable presence for the business (permanent establishment) were seen by businesses as unclear where the staff are the ones choosing to work overseas for short periods;
• On both cross-border payroll and social security issues, businesses want to see improved HMRC processes, turnaround times, more PAYE relaxations and better guidance; and
• Multinational businesses want to see the UK taking a lead on how permanent establishment and transfer pricing interact with staff who choose to work overseas on for personal reasons and longer term, and where possible, businesses would like the UK to set out unilateral guidelines that can be clearly understood.

Residential property income report

This report examines the income tax rules for residential property income, exploring the common complexities, issues, and concerns facing taxpayers.

Key findings from the report are as follows:-

• Although the furnished holiday lettings regime can provide some tax benefits, it is not widely used and adds a complex layer to the tax rules which apply to property income. The government should consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings;
• The report recognises that removing the furnished holiday lettings regime could put pressure on the boundary between whether a taxpayer has a property business or a trade, and recommends the government consider whether it would be appropriate to introduce a statutory ‘bright line’ test to define when a property business should be handled under the trading rules;
• Should the government wish to retain the furnished holiday lettings regime, the report recommends that the government consider removing the benefits for properties in the EEA and removing the benefits where there is private use (other than a minimal level);
• The report reflects the weight of feedback on the long-standing tax complexity for landlords of whether costs are allowable straight away as repairs and replacements or should be disallowed for income tax as capital improvements, and recommends the government consider a broader immediate income tax relief for the majority of property costs;
• Nearly half of landlords will be filing for Making Tax Digital for Income Tax in respect of jointly-owned property. It is common practice for only one of the owners to keep records, and the report recommends that HMRC should establish a system to allow this practice to continue for Making Tax Digital. The report also notes the importance of HMRC accepting multiple agents to help with the new tax filings and recommends that HMRC should not go ahead with Making Tax Digital until these issues have been resolved.

The report also covers the general regime for property and the confusion and challenge raised by large numbers of respondents about matters such as the allocation of income between joint owners, and in relation to rules which cause significant distortions or complexity such as the circumstances for diversified agricultural businesses.

It also looks in detail at how Making Tax Digital (“MTD”) for income tax will affect landlords, and questions whether the initial and medium term threshold for entry into the new system should be increased above £10,000. Readers should note that the report was published before the Government’s December announcement on MTD.

Non-resident landlords are examined and the report encourages HMRC to make it easier for them to register for and report their income online for UK tax purposes. It also recommends that the government should consider removing the obligation on individual residential tenants in some situations to withhold tax from their rental payments to non-resident landlords.