The Treasury has issued nine consultation papers on various aspects of the personal and business tax system in what amounts to a far-reaching overhaul of the entire regime.

The papers are asking for views on, among other topics, a reform of the PAYE system, pensions tax relief and inheritance tax.

Announcing the consultations, David Gauke, the Treasury Secretary, said: “We want to make the tax system simpler and work better for the taxpayer. By reducing burdens, making the right choices and involving taxpayers, we are sending a very clear signal that Britain is open for business.

“We are committed to a more considered and open approach to tax policymaking. That is why consultation and scrutiny of our tax policies will be the cornerstone of our tax policymaking process. I want to encourage relevant parties to provide their feedback on the tax consultations we have published.”

The papers follow on from a series of tax changes introduced in the emergency Budget and from the government’s commitment to simplify the overall tax system.

Other tax issues that will be assessed include furnished holiday lettings, associated company rules, foreign branch taxation, the controlled foreign company regime and the modernisation of investment trust company rules.

On PAYE, the government is looking to update the system.

Mr Gauke said: “The PAYE system needs to respond better to the circumstances of the individual taxpayer because only in this way will we be able to reduce errors and provide taxpayers with the clearest picture possible of their tax and allowances.

“We also need a PAYE system that reduces the burden on employers.”

At the moment, responsibility for administering the system lies with employers, who deduct employees’ income tax and NICs at source.

A real time system could see tax and NICs automatically taken from employees’ gross pay as it enters their bank accounts.

There are plans, too, to change the way that pension contributions are treated for tax purposes.

The Treasury is proposing that each taxpayer’s annual pension allowance, the amount by which pension funds can grow tax free, should be reduced from the current £255,000 a year to between £30,000 and £45,000.

The new measures would replace the previous administration’s intention to taper pension tax relief for higher earners.

The consultations will also investigate inheritance tax avoidance schemes. Transfers of property into trusts, as a way of sidestepping inheritance tax, will be subject to a much closer level of scrutiny.

The government has already consulted on the use of travel and subsistence schemes for temporary workers under the national minimum wage, and has concluded that some action needs to be taken to prevent any abuses on expenses.

Commenting on the consultations, Vincent Oratore, President of the Chartered Institute of Taxation (CIOT), said: “The government’s objective of simplifying the system and reducing burdens on business and individual taxpayers is one that the CIOT shares. The more comprehensible the tax system the more likely it is to command public and business confidence and the more likely taxpayers are to get their tax right.

“The review of the proposed changes to pensions tax relief is especially welcome. We all understand that pensions tax relief is going to be curtailed, but that there has to be a simpler way than the complex and costly system previously legislated for. A cut in the annual contribution limit would be a simpler and more pragmatic way forward.”

Mr Oratore added: “We also welcome the discussion document on improving the operation of the PAYE system. It seems to acknowledge many of the problems with the PAYE system and offers the opportunity of real change to a system that, for all its merits, is creaking badly and imposing too many burdens on employers.

“The prospect of changes that, for example, largely eliminate P45/46 problems, mean tax codes are far more up-to-date and offer the possibility of streamlining tax credits and benefits, is very appealing.”

But Richard Baron, head of taxation at the Institute of Directors, warned: “We now need to see the full cycle through to Budget 2011. If proposals get the thumbs-down from business, it will be important for Ministers to accept that fact and drop them.”

While acknowledging that the banks are hampered in part by the need to hold more capital, Mr Cable nevertheless argued that there was a “very serious problem” with bank business lending and its effect on economic growth: “We can already see the evidence that finances are constrained and we don’t want that to stop the recovery happening.”

The green paper, entitled Financing a Private Sector Recovery, is designed to tackle the on-going problem of business credit.

The government said it recognised that access to finance is critical for businesses to survive and grow and that the current system is not adequately delivering finance to many small businesses.

The paper explores a series of finance options, including a greater use of equity and better incentives for venture capital and business angel investment in a wider range of enterprises, and a responsible return to securitisation.

It considers options for the finance industry, such as an insolvency moratorium on companies restructuring their debt, increasing transparency in bank loan applications and fostering competition between banks and finance institutions.

The paper reviews the success of existing government schemes, such as the Enterprise Finance Guarantee, and looks at whether they should be improved or extended.

It also outlines proposals for regional stock exchanges in cities such as Edinburgh and Nottingham.

Announcing the paper, Mr Cable said: “If we don’t anticipate and tackle finance barriers now we could face a big problem in the future. Left unchallenged, a lack of accessible finance for businesses could prevent the recovery accelerating.

“I’ve heard the problems businesses are facing in getting bank loans up and down the country. They need innovative ways to access finance from other sources to grow our firms and economy. That’s why this green paper is so important as we look to help viable firms get the money they need.”

George Osborne, the Chancellor of the Exchequer, added: “As the economy recovers, it is crucial to ensure that the supply of finance supports rather than constrains demand and business confidence. If businesses are to play their part in promoting economic recovery it is important that they are able to access a diverse range of finance choices in a stable macroeconomic environment.”

Reacting to the paper, David Frost, the director general of the British Chambers of Commerce, said that it was absolutely right to focus on the problems that many businesses are currently experiencing when it comes to securing funding.

Mr Frost continued: “Getting the existing concerns resolved as quickly as possible is essential if we are going to see a lasting private sector recovery.

“It is vital that the right approach is taken when dealing with the access to finance question. The situation is much more complex than simply forcing banks to lend when demand among businesses is anaemic. As the recovery gathers pace, we expect demand to rise along with some of the concerns businesses have articulated about bank lending.

“The banks must be as transparent as possible when decisions are made, and ensure that decision-making processes are not over centralised, tick box or removed from the front line.”

Matthew Fell, the CBI’s director for company affairs, welcomed the paper’s recognition that the issue is a broader one than simply the unwillingness of the banks to lend and that the financial system needs to be assessed for its capacity to help finance economic recovery.

Mr Fell said: “It is right to acknowledge that, in order to lend, banks need certainty about future regulations, so that they can make decisions with confidence.

“We are also pleased that the paper is broad in scope, looking at a wide range of financing options from bank lending to equity finance.”

The government has launched a review examining how best to raise skills levels among the UK workforce.

The consultation document is entitled Skills for Sustainable Growth and outlines the Department of Business’ vision for skills development and ways in which the strategy can be delivered.

The range of issues covered by the consultation includes, among others, where more limited public investment should be focused; how the skills system can be made simpler and more effective; how support for individuals and employers can be improved to develop skills and learning; and how businesses can be encouraged to engage in supporting local community learning.

Announcing the consultation, John Hayes, minister for Further Education, Skills and Lifelong Learning, said: “Skills are vital for our economy but they also help to build stronger communities and empower individuals. Only by seeing learning as a single whole, not a series of separate compartments, can we ensure that it takes its place at heart of both business strategy and community life.

“Delivering future priorities will involve making difficult choices about the use of public funds. I believe that we can deliver more and save money. But we will only achieve cost effectiveness by challenging the orthodox assumptions about what skills are for, how they are funded and what role government should play.

“I am determined to ensure our decisions are the result of proper consultation so that policy reflects real priorities. I therefore welcome responses to the questions in this paper.”

Adam Marshall, director of policy at the British Chambers of Commerce, commented: ”Employers want the public sector to focus limited resources on basic employability skills, focused apprenticeships and the leadership and management skills needed to help grow small businesses.

“While we are pleased to see an emphasis on the apprenticeship programme, the economy is still fragile, and expectations that businesses will be taking on a high number of apprentices may be premature.

“Employers have long complained that there is a mismatch between the skills on offer and their business needs. These simplification plans must root out this mismatch – because getting the right skills to businesses means growth in productivity, jobs and tax revenue.”

Susan Anderson, the CBI’s director for public services and skills, added: “We believe the government is asking the right questions in order to achieve a demand-led skills system and is prepared to make the difficult choices about the use of public money.

“We need a more simplified and effective skills system and funding support that is better focused on supporting economic growth and helping individuals develop the skills they need to enter or progress in the labour market.”

The UK economy expanded at twice the forecast rate during the second quarter of the year.

The Office for National Statistics reported that GDP rose by 1.1 per cent in the period from April to June. Predicted growth had been for around the 0.6 per cent mark.

The rate of growth was four times higher than for the first quarter (0.3 per cent) and the highest since 2006.

Output in the construction industry jumped 6.6 per cent on the quarter, rebounding after bad weather affected the start of the year.

But the main driver behind the improvement was the upturn in the services industry, which saw a 0.9 per cent boost in output, three times better than in the first three months of 2010.

The last time the UK enjoyed such impressive quarterly growth figures was 1999.

Experts, however, warned against premature optimism that the recovery might be accelerating.

Jonathan Loynes of Capital Economics said: “The second quarter’s much stronger than expected rise in UK GDP is a pleasant surprise, but is likely to prove as good as it gets as far as the pace of economic recovery is concerned.

“There are two reasons not to get too over-excited. First, while strong by any ordinary standards, the second quarter’s gain in GDP is less impressive in the light of the sharp falls seen during the recession. There were two quarters when GDP fell by more than 2 per cent and activity is still over 4 per cent below its first-quarter 2008 level.

“And second, with recent business surveys weakening and the fiscal squeeze looming, the second quarter looks very likely to be the peak in terms of the pace of growth – expect a much weaker second half.”

It was a view echoed by Graeme Leach, chief economist at the Institute of Directors: “The latest quarterly GDP figures were good news, but we think they’re likely to be as good as it gets. We do not think this rate of growth can be maintained.”

The body responsible for monitoring the effects of business red tape on a local scale should be reformed rather than abolished, the Federation of Small Businesses (FSB) has said.

The performance of the Local Better Regulation Office (LBRO) is to be the subject of a government assessment.

While welcoming the review, the FSB expressed worries that the LBRO might be dropped altogether.

The FSB said that research showed that one in three smaller firms think that regulation is the largest obstacle to growth and added that there is a role for a body whose purpose is to support and represent small firms’ views on red tape within local authorities. 

The FSB wants the government to revamp the LBRO by giving it extra powers in all areas of local authority regulation.

These would include enforcing a regime of compulsory booked inspections; guaranteeing that all small firms are provided with a single point of contact within their local authority for all regulatory matters; and carrying out an annual rating review of local government regulatory services.

John Walker, the FSB’s national chairman, said: “Creating a robust relationship between small firms and regulatory services locally should be a high priority for the government if they are to truly deliver on their pledge to cut red tape. At the FSB we know that small businesses prefer to receive information from a local, single source and so this power should be provided locally.

“The LBRO should be a key body that represents the needs and views of small businesses on red tape to local authorities to drive best practice. Yet it has never been given the true powers it needs to fulfil its role. The FSB is urging the government not to bin the LBRO, but to revamp the body. We look forward to working with the government in this review.”

As many as one in three firms are worried that the planned increase in VAT could have an adverse effect on their business, a new survey has claimed.

A study of the reaction of 500 businesses to measures introduced in the emergency Budget, carried out by YouGov research, found that 30 per cent of respondents believe that the rise in VAT from 17.5 per cent to 20 per cent, planned for January 2011, will have a detrimental impact.

As a result, 19 per cent of those expressing a concern intend to freeze or reduce employee pay.

A similar proportion (31 per cent) do not think that the Budget’s national insurance announcement, which will see the threshold at which employers start to pay NI climb by £21 a week, will encourage them to take on more staff.

John Walker, the national chairman of the Federation of Small Businesses (FSB), said: “This research highlights the feelings of small firms about the potential problems they face come the New Year. For many, the increase in VAT to 20 per cent in January 2011 could put businesses at serious risk.  

“The increase will especially hurt small firms who will have to pass the increase on to their customers, unlike big business which can absorb the cost.

“Even the move to decrease VAT by the previous administration cost small businesses up to £1,500 in bureaucracy alone.”

The UK tax system is be streamlined and made simpler in an effort to boost levels of investment in business, the government has announced.

The Treasury has set up the promised Office for Tax Simplification (OTS) with the aim of reforming the current tax regulations.

The new body has been briefed to look at the system of reliefs, allowances and exemptions, and to recommend areas where changes can be made.

Initially, the OTS will carry out two reviews, which will see a streamlining of some 400 tax reliefs, allowances and exemptions, along with an overhaul of the tax system for small businesses, including a proposed alternative to the IR35 code.

The panel will also be entrusted to recommend changes to the personal tax system.

However, the OTS remit does not cover tax credits, which are regarded as part of the benefits system.

Michael Jack, the former Treasury minister, will head up the OTS and will be helped by leading figures drawn from the tax and legal professions.

As well as examining the existing tax laws, the OTS will consult with various stakeholders on how best to reduce the complexity of the regulations.

The hope is that a simpler regime will allow firms, particularly smaller enterprises, to become more competitive and will make business investment a more attractive proposition.

At the launch of the OTS, the Chancellor, George Osborne described the UK’s 11,000 page tax code as “one of the most complex and opaque” in the world.

He introduced the OTS as a “permanent body to push against the forces of complication” so that people “might actually understand the tax laws with which they are being asked to comply”.

Mr Jack commented: “Entrepreneurship should never be stifled because of an overly complex tax system. That’s why I am delighted that the government have committed themselves to looking at ways to simplify the tax system, with an initial focus on small businesses.

“Simplification in a complex world is a real challenge but it’s one that has to be addressed if the tax system is not to hinder the economy’s ability to grow.”

David Gauke, the Treasury Minister, added: “The tax system created by the previous government was overly complex and has made the tax affairs of millions of families and businesses across the UK extremely complicated.

“We need to reduce the complexities in our tax system and the coalition is committed to delivering that goal.

“The OTS will provide important advice that will help inform us in making the right reforms to the tax system that will help to pave the way to bringing more international business to the UK, which will give our economy the boost it so urgently needs in the years ahead.”

The areas which will be subject to the OTS reviews include taxes and duties administered by HM Revenue and Customs (HMRC) but will not extend to taxes that fall under the control of other bodies or to tax credits.

It is already known that the government intends to pay for part of the graduated reduction in headline corporation tax – from 28 per cent to 24 per cent over the next four years – out of savings made on the capital allowances that are available to firms that invest in new plant and machinery.

As far as the tax reliefs review is concerned, the OTS has been commissioned to examine a list of all reliefs, allowances and exemptions within the taxes and duties administered by HMRC and identify those reliefs that should be repealed or simplified.

The government said it is particularly interested in identifying reliefs that are largely historic, not frequently used, create distortions in the tax system or are complex for business or HMRC to administer.

The OTS will produce an interim report by late autumn 2010 and a final report, with recommendations, to the Chancellor ahead of the 2011 Budget.

On the small business tax system, an initial report will be delivered to the Chancellor by the time of the 2011 Budget, highlighting areas that cause the most day-to-day complexity and uncertainty for small businesses.

Once the government has considered the initial report, the OTS will next produce specific recommendations on tax simplification for small businesses.

IR35, which has attracted controversy in its time, will come under the microscope as part of the initial report, and the OTS will put forward alternative proposals.

The IR35 regime was introduced in 2000 to counter avoidance of tax on employment income where workers receive payments from a client via an intermediary (usually a personal service company) and the relationship between the worker and the client would otherwise be one of employment.

The Institute of Directors (IoD) welcomed the announcement but warned that the new body must have “teeth”.

The IoD spelled out three conditions that need to be met if the OTS is to be effective.

It must be genuinely independent and must take evidence from the Treasury and HMRC Revenue, and from outsiders, on the same basis, the IoD argued.

It must report publicly on all the ideas it has looked at that are worthy of serious consideration, including those that contradict government policy.

And ministers must be required to respond in detail to all the OTS proposals, setting out the precise economic or technical reasons why each rejected proposal is being rejected.

Richard Baron, head of taxation at the IoD, commented: “We warmly welcome the new government’s decision to set up the Office of Tax Simplification. It is a long overdue initiative.

“The important thing now is to make sure that the Office achieves some early successes, and that it goes on achieving. Its recommendations must not end up stamped ‘too difficult’ or ‘maybe in the longer term’.”

David Frost, director general of the British Chambers of Commerce, said: “The creation of the OTS is a necessary and long overdue response to the relentless chop and change of tax law. The business community, and the economy, will benefit from the recently announced lower rates of tax, and now from the drive towards a simpler system.

 “It is entirely right for the OTS to concentrate its initial work on small business. Complying with an ever expanding and complicated tax code only succeeds in taking resources away from core business activity, and subsequently growth and wealth creation. The government needs to continue with measures that foster entrepreneurship in order to secure a sustainable economic recovery.”

A leading business group has urged the government to extend the promise of a national insurance contribution holiday for new businesses right across the country as a new survey shows business confidence in decline.

The Federation of Small Businesses (FSB) said that its latest business index survey recorded a worsening of confidence in the second quarter of 2010.

In a survey of over 1,200 firms, only 4 per cent of respondents believe that business prospects will improve in the third quarter of the year, down from 16 per cent in March. 

The survey also suggested that almost 67 per cent of small firms are operating below capacity, with those in the manufacturing sector faring much better than service sector firms. 

The findings further highlighted how the UK economy is still some way from a full-speed recovery, the FSB argued, with 64 per cent of firms in the south east of England likely to be working below capacity, more than anywhere else in the country. 

The government announced in the emergency Budget that the South East, London and the East of England would be exempted from a proposed national insurance holiday for new businesses.

But the FSB is concerned that the regions affected could be starved of start-up enterprises.

John Walker, the FSB’s national chairman, said: ”The consensus view from small firms is that the recovery is far from secure and there are significant risks to business growth in the future. With this is mind, as well as the fact that almost 70 per cent of businesses report working under capacity, we encourage the government to support small businesses to grow and expand. 

“With small firms in the South East most likely to be working below capacity, this shows how wrong the government is to not include this vital region, as well as the East and London, in its proposals for a National Insurance holiday for start-up businesses. While we support the policy we believe that it should be extended to be UK-wide and be available for existing businesses too.”

Taxpayers are being reminded that the date for making the next set of self assessment tax payments will be arriving soon.

The second payment on account for 2009/10 needs to be made by 31 July, along with any outstanding amounts due for the tax year 2008/09.

Tax bills for 2008/09 should have been paid by 31 January. Those that were not will have collected a 5 per cent surcharge as of 28 February. Failure to settle any remaining payments on the tax due for 2008/09 will mean a second 5 per cent surcharge, as well as interest charges.

The tax bills cover income tax, capital gains tax and class 4 national insurance contributions.

The 31 July deadline also applies to those taxpayers who have yet to submit their self assessment returns for 2008/09. Otherwise they will incur another £100 late filing penalty.

The government is looking at ways of encouraging business investment that does not rely so extensively on bank debt.

A consultation paper is to be launched by the Treasury and the Business Department which will examine business finance in the UK.

Speaking ahead of the launch, the Business Secretary, Vince Cable said: “The system is still biased towards debt and we need to find ways of getting more equity funding into business, maybe through something like the old 3i, to help growth with tax breaks or tax incentives without it being a way of avoiding paying tax.”

The paper is expected to review such alternatives to bank debt as equity and public market instruments like covered bonds.

It will also ask for views on the sort of tax incentives that could be used to encourage private investors to put money into new enterprises, and may also include proposals for regional stock exchanges.

It is well known that the government is keen to promote business funding outside of the high street banking system.

Mark Hoban, the financial secretary to the Treasury, has already pointed out that only 2 per cent of small businesses use equity finance at any one time, describing it as a “missed opportunity for the UK’s small businesses”.

The Business Secretary also criticised the banks on their business lending record.

Responding to claims by the British Bankers’ Association that banks were hitting an 80 per cent target rate of business loan approvals, Mr Cable argued the claims were “misleading”.

He said: “I think they are raising the hurdle. All the evidence from business, from the Institute of Directors and other bodies, is that banks are not lending as much as is needed.”

Mr Cable has hinted that mandatory action may be taken to force the two semi-nationalised banks, Lloyds and RBS, to lend more to smaller firms.