Tax and behaviour change for CA students

Women doing claculations
By Duncan McKellar, ICAS Tutor

21 September 2017

TC and TPS tax materials contain many instances of tax being used as a mechanism to encourage certain behaviours.

When learning these rules and reliefs have you ever considered whether they are actually having the desired effect? Or even what the desired effect is?

Throughout history we have seen examples of tax successfully affecting behaviours such as the research and development tax credit scheme (helping to promote the UK as a centre for innovative and creative industries), the current ‘plastic bag tax’ (which is not really a tax but is having the desired effect of reducing the number of bags used) and the CO2-based rules for company car calculations (helping to reduce UK emission levels by encouraging more environmentally friendly car purchases).

However, we have also seen certain tax rules give rise to unintentional or unforeseen behavioural changes. The ‘window tax’ was a property tax levied throughout England, Wales and Scotland in the 18th century and was based on the number of windows in a house. 

In some instances, this tax led to home owners bricking up their windows to avoid paying the tax; evidence of this can still be seen in many historical buildings throughout the country. The tax was designed to be levied on individuals relative to their prosperity but it led to complaints about it being a tax on ‘light and air’.

It is important that [tax reliefs] are effective if they are to be retained in an ever-more complex system of rule.

In more recent times we have seen the introduction - and subsequent abolition - of a top rate of income tax of 50p (now 45p). You may think that by introducing a higher top rate of income tax the government would expect tax receipts to rise, but it has recently been claimed that the increase led to behavioural changes which actually reduced tax receipts during the life of the 50p tax. Since its abolition, the government have collected an additional £8bn in revenues.

It was revealed in 2016 that the City of London was the main contributor of tax since the 2008 recession; generating as much tax as the next 37 largest cities. By increasing the personal allowance, thousands of low-income workers based outside the Capital have been taken out of the equation. 

However, this means that the Exchequer is now reliant on London for 30% of our economy taxes. How do you think this will affect the economy in the future? What is needed to readdress the balance (if it needs to be re-addressed)?

In this article on CA Today, Nicola Sinclair examines some of the more unusual tax reliefs that we currently have in the UK. Tax reliefs add to the complexity of the UK tax system, therefore, it is important that they are effective if they are to be retained in an ever-more complex system of rules.


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