Does simplification spell higher taxes?

The Office of Tax Simplification (OTS) is now reviewing responses to their consultation on the taxation of profits from the letting of residential property. The deadline for input was on 5 June 2022 and we could see the recommendations published by the OTS in the Autumn, potentially with rules changes announced in an October Budget statement. This is the latest of a number of reviews in recent years which attempt to tackle some fairly complex areas of UK tax legislation.

The focus of the property taxation review is to ‘consider the current regimes for the taxation of residential property held by individuals, partnerships and micro-companies, and develop recommendations for simplification and ways of addressing distortions’. One area of particular interest is the difference between the taxation of straight forward rental property and furnished holiday lets (FHLs). 

As many will be aware, the FHL code is specifically designed to be favourable to the taxpayer, including allowable deductions for finance costs and interest charges as well as various capital gains tax reliefs. In comparison, more traditional landlords have been subjected to various tax increases in recent years, including the finance cost and interest restriction as well as higher rates of capital gains tax for disposals of residential property.

It is hard to imagine that any recommendations for simplification by the OTS that reverse the abovementioned changes targeted at landlords would be accepted by government, as this would almost certainly see some level of loss to the Exchequer. However, it is conceivable that there could be a recommendation that the FHL regime is transitioned into the traditional property regime. 

Such an approach would almost certainly achieve ‘simplification’ by bringing together two individual tax regimes but would undoubtedly result in tax increases for landlords and companies operating FHL businesses. This would not be the first recommendation for simplification that would be costly to taxpayers, indeed the OTS’s published 2020 CGT review document outlined a recommendation for alignment of CGT and income tax rates, which by their own admission would have ‘the potential to raise a substantial amount of tax for the Exchequer’.

Whilst the vast majority of stakeholders recognise that the UK’s tax legislation does require significant overhaul and simplification, many would agree that this should stop short of policies that make the system less competitive and prima facie increase tax rates in the name of simplification, as this is ultimately unlikely to benefit anyone.