Can tax be simplified?
ICAS supports tax simplification as a vital part of building an effective and trusted tax administration system but making simplification happen isn’t simple.
Why simplify tax?
The complexity of UK tax legislation is reflected in complex tax administration systems which are difficult to use and do not facilitate compliance. Compliance is also undermined because many taxpayers do not understand their basic tax obligations. Complexity drives up costs for taxpayers (and HMRC) and undermines trust in the tax system. For businesses, it can divert resources away from running the business into wrestling with tax administration.
There are plenty of good reasons for simplifying tax – and there is government support for simplification, in theory at least. The Office of Tax Simplification (OTS) was set up in 2010 and put on a statutory footing in 2016, with a remit to advise the Chancellor on delivering a simpler tax system.
The difficulties of simplification
There have been a few successful simplification measures since the establishment of the OTS – for example, the introduction of the cash basis for small businesses. Some OTS suggestions for administrative improvements have been adopted or are the subject of ongoing work. Overall, however, significant simplification has proved elusive and every year more complexity seems to be added in another Finance Act. Unfortunately, there are many reasons why simplification is hard to achieve – a few of them being:
- Winners and losers: in financial terms it is unlikely that everyone would benefit from a proposed radical simplification so getting universal, or even widespread, support is tricky.
- Government revenues: simplification could often be achieved but would reduce tax revenues. Options for reform tend to be restricted to those which are revenue neutral – inevitably this also restricts the scope for simplification
- The cost of change: tax rules are built into business administration systems. The benefits of minor simplifications may not justify the cost of implementing them.
- The EU: VAT was historically quite difficult to simplify because the UK had to comply with EU VAT directives and did not have a free hand to make changes. Post-Brexit there could be more scope for reform.
- A proliferation of tax reliefs: the OTS identified over 1,000 tax reliefs available to UK taxpayers. Many are complicated – and made more so by the anti-avoidance provisions required to prevent abuse.
- Lack of transparency about tax: governments need money to pay for public services but find it difficult to introduce straightforward increases to the main revenue-raising taxes, VAT, income tax and NIC. Resorting to less obvious ways of increasing the tax take usually means more complexity.
What next for tax simplification?
The government ten-year strategy (announced in 2020) for building a trusted, modern UK tax administration should provide an incentive for a sustained effort to simplify tax. The success of key parts of the strategy and the delivery of suggested benefits to taxpayers would be far more likely to happen if tax rules could be simplified.
ICAS has called on the government to take action on ten priority areas – including tax simplification. We would like to see:
- A comprehensive government statement setting out its policy on tax simplification, the reasoning behind the policy, the level of importance it attaches to simplification, the methods it would use to implement that policy (including the role of the OTS) and the resources which would be made available.
- A strategy to avoid adding to the existing complexity, by building simplification criteria into the process for introducing new primary tax legislation or amending existing legislation. Legislation would not be enacted/amended if the proposals did not meet the criteria.
- A system of regular reviews of tax reliefs to ensure they are still meeting their objectives and that analysis of the costs and benefits demonstrates there is value in retaining them – and the repeal of any reliefs where retention cannot be justified.
ICAS would like your feedback
ICAS responds to many tax-related consultations, calls for evidence and discussion documents issued by HMRC and H M Treasury. We welcome input from Members, which we take into account when preparing responses. Please send us your thoughts by emailing firstname.lastname@example.org.