What does “simplifying taxes” mean?
Donald Drysdale wonders what ‘simplified taxes’ might look like. The views expressed below are his own and not necessarily those of ICAS.
The European Union (Notification of Withdrawal) Bill, heralding sweeping changes to a continent, is shorter than you think. Widely reported to have run to 137 words when first introduced to Parliament, on my count it had only 136.
By any standards the Bill might seem a trifle short. In comparison, the 20,000-odd pages of tax legislation pored over daily by practitioners resemble a UK-wide conspiracy to divert talent away from more productive activities.
Taxation has become virtually incomprehensible to taxpaying individuals and businesses – and even to MPs who make the laws and HMRC personnel who administer them. Such obfuscation undermines the rule of law by causing errors, creating opportunities for avoidance, and encouraging evasion.
As Philip Hammond was preparing his first Budget, with Brexit preying on his mind, there were hopes nonetheless that he would also consider opportunities for simplification. Unfortunately the result was quite the reverse – with controversial proposals to increase National Insurance contributions (NICs) despite an election manifesto commitment to the contrary, the new dividend allowance introduced in 2016 to be slashed in 2018, and the burdens of Making Tax Digital (MTD) still to be imposed on businesses with turnover even lower than the personal tax allowance.
What would ‘simplification’ look like?
Among professional bodies representing the tax, accountancy and law professions, there is widespread consensus that taxes should be simplified. For years ICAS has campaigned for this, and it remains a key focus of its Tax Board.
While readers may share this as a broad objective, they might not visualise ‘simplification’ in a uniform way. Do we really know what we want? And if not, how can we possibly expect governments and politicians to understand what we mean?
The extraordinary length of the UK tax code is often quoted as proof of its complexity, but an Office of Tax Simplification (OTS) report in 2012 concluded that this was not the key factor. Practitioners, while hoping for succinctness, placed a higher value on legislation that was clear, could be understood and applied, and achieved its objective.
In the noughties the Tax Law Rewrite project had introduced a new style of legislation – generally longer than what had existed before. This was disliked initially by many specialists who had known the pre-existing provisions well. However, others prefer the new approach for its clearer structure, use of plain English, and ease of navigation.
Following the Tax Law Rewrite, successive Finance Acts have increased the page-count of legislation. For example, Finance Act 2016 ran to 662 pages, and existing draft provisions for the Finance Bill 2017 run to 712 pages – even before we’ve seen all the legislative changes giving effect to MTD. It seems that the tide of new tax law is destined to continue unabated.
Delivery to taxpayers
While practitioners have no option but to bury their heads in the legislation, taxpayers are most concerned about whether the tax regime is understandable and manageable when it impacts directly on them – let’s call this the ‘point of delivery’.
Businesses interface extensively with HMRC. In addition to paying tax on profits, they are unpaid tax collectors and administrators for government. Their compliance obligations with VAT, PAYE, NICs, statutory payments, pensions auto-enrolment, National Minimum Wage and National Living Wage seem never-ending. And MTD is about to add extra burdens.
For many individuals, income tax and NICs are dealt with seamlessly through payroll – a process that can be relatively straightforward if they understand their PAYE code and if it is correct. Others must complete an annual tax return under the well-established self assessment regime. Methods are now changing with the introduction of personal tax accounts – a new ‘DIY’ approach to tax compliance. Ignorance of the law is not a reasonable excuse if matters go wrong, and individuals wanting help without engaging a professional tax adviser may find their efforts frustrated – whether they try to contact HMRC or refer to published guidance.
Over recent years, HMRC guidance for taxpayers has been moved to www.gov.uk in a process widely described as “dumbing down”. While this tries to make tax more understandable, it fails because the tax rules are simply too complicated.
What might a simple tax system look like?
Some would argue that, instead of the existing plethora of rules, a ‘flat tax’ should be applied across a very broad tax base as a simpler approach to revenue-raising. While undoubtedly simple, this would result in a loss of equity (especially among those substantially winning or losing from the change) and an inability to use the tax system to incentivise taxpayer behaviours or redistribute wealth.
Short of such a drastic and naïve solution, fine-tuning the processes of developing UK tax law might lead to some improvements.
If taxpayers are expected to pay the right tax at the right time, the law must be based on clear and unambiguous drafting of Parliament’s intentions. Fundamental changes to tax law should always be subject to full parliamentary scrutiny as primary legislation, rather than being delegated to secondary legislation.
The politicians and civil servants who develop tax law should be constrained to do so in a way that produces the simplest possible outcome. The OTS, with strengthened resources, should have an independent, proactive role in influencing new tax laws and changes to existing tax laws all the way from the drawing board. In this way new provisions might be in better shape even before they reach the statute book.
Policy changes and proposed revisions to tax legislation should also be subject to effective consultation. While successive governments have committed to this, there are instances where they are failing to deliver. For an example look no further than MTD, or Hammond’s knee-jerk proposals on the dividend allowance and NIC rates.
Better guidance would aid the smooth operation of the tax system. Business and personal taxpayers should have access to clear explanations of tax law and related compliance obligations, with an assurance of their legitimate expectation to rely on such guidance.
No tax system, however simple, will be respected by taxpayers unless they perceive it to be fair. Why are small businesses and most individuals virtually unable to contact HMRC, while support is provided to large corporates and wealthy individuals? All taxpayers should be able to obtain appropriate help from the tax authority.
Opportunities for change
Some politicians can be short-sighted, with perspectives that fail to reach beyond the next election, making it hard for them to appreciate the longer-term advantages of a simpler tax regime. Brexit may offer few opportunities for simplifying UK tax as a direct result of gaining freedom from Brussels – nonetheless they should be on the lookout for these.
Following the dissolution of the Soviet Union in 1991, many UK tax specialists envied former Soviet satellite states that were able to make a fresh start – designing new tax systems on a clean slate.
In the UK, devolved administrations have had opportunities to take an equally radical stance by introducing simple new taxes. However, look at Scotland’s land and buildings transaction tax (LBTT) or the proposed land transaction tax (LTT) in Wales – both wholly new taxes created in the image of stamp duty land tax (SDLT) with its attendant complexities.
These look to me like missed opportunities for tax simplification. We mustn’t miss any more.
Article supplied by Taxing Words Ltd