Can we simplify the tax system?

The UK’s tax code – in 2015-16, because next year it will be longer – runs to 22,298 single spaced, small font, heavily footnoted pages. That’s two-thirds the page-count of the 32 volume Encyclopaedia Britannica, which affected to summarise the sum total of human knowledge.

The immediate consequences of this state of affairs are uniformly negative. Complexity clogs the ability of business to grow; reliefs, poorly attuned to the behaviour they’d like to incentivise, distort the decision-making of consumers and businesses alike; new technologies enable arbitrages that reward fiscal and punish commercial efficiency; and enormous compliance costs barnacle the journey to profit.

We have an Office for Tax Simplification. Setting it up, the Coalition delivered on a 2010 Conservative Manifesto Pledge, one which grew out of a Geoffrey Howe chaired report entitled ‘Making Taxes Simpler’. That report took “as its starting point (and rightly so) the proposition that the UK direct tax system cries out for simplification and reduction in scale.” Its main recommendation was the establishment of an Office for Tax Simplification.

But in each and every one of the five years the Office for Tax Simplification has existed the tax code has grown by an average of 900 pages.

How did we get here? And is there any room for optimism?

In April this year, Andrew Tyrie MP, Chair of the Treasury Select Committee, called a meeting with a small group of hand-picked leaders from the tax field – academics, lawyers and accountants – to discuss proposals to improve the functioning of the Office for Tax Simplification.

The tax profession is pretty uniform in its desire for progress – whatever you might read elsewhere – and suggestions weren’t slow to come.

But they foundered on a single, political, reality.

Achieving tax simplification isn’t a technocratic exercise. It creates winners and losers. And losers make a lot of noise – remember the so-called Granny Tax? A simplification measure to freeze the personal allowances of over 65s and over 75s until the rest of us caught up – and the choice of who they are is an intensely political one. And those political choices will often fail to coincide with what, in purely abstract terms, good tax policy looks like.

Indeed there are occasions when it will stand in direct opposition to it. A good recent example of this is the Google Tax.

Business hated it: it tore up the Coalition’s Corporate Tax Roadmap. The tax profession was no more enthusiastic: the ACCA, ICAEW, CIOT and others lined up to slam it as radical, introduced without proper consultation and pre-empting international measures to tackle avoidance. All in order to raise washers. Nevertheless, and unopposed by Labour, it became law.

It was dictated by politics. The (unfounded) vulnerability of the Coalition to allegations it was soft on tax avoidance rendered the Google Tax politically necessary. And no appeal to process, or simplification, or anything else would persuade the then Government otherwise.

Understand this and you’ll understand that meaningful tax simplification involves the exercise of real political will. As Andrew Tyrie but few of his attendees recognised, politicians won’t delegate their most powerful mode of electoral patronage to an unelected technocracy. And nor, you might think, should they. And the abstract advantages of good tax policy aren’t, on their own, sufficient to cause politicians to act.

So what, then, is left?

There will be occasions when political and technocractic aims are coincident. And when those occasions arise we can expect a rationalisation of our tax system – but we shouldn’t kid ourselves that the driver is a technocratic one. We can hope for, indeed expect – for there is an uncertain but steady drift in this direction – a process that produces better quality legislation. But I don’t see substantial reductions in page numbers in our future.

Perhaps we are better off working with this?

We live in a complex world. The modes through which we transact collectively multiply. The competition between businesses for a competitive edge takes in the attractant force of lower effective tax rates on the pricing of capital. Human nature is that we’d prefer that tax liabilities slipped from our roofs and onto those of our neighbours. And our Government jockeys with its neighbour and competitor nations for a greater share of the tax base. Perhaps the tax code we have is what the world we have demands?

But I will offer this prescription.

The overwhelming majority of taxpayers – individuals and businesses alike – don’t need the complex tax framework I’ve described. What they need is something which is rational, workable, and knowable. Perhaps that’s where the Office for Tax Simplification should focus its attention. Maybe the simplification of our tax system looks like its division into two tax systems: a short one for taxpayers who eschew and a longer one for taxpayers who embrace complexity?

16 thoughts on “Can we simplify the tax system?

  1. Having two tax systems sounds both crazy and also immensely logical Jolyon. Most people wouldn’t need the complex one.

    I wonder if it is more achievable than the, now abandoned, tax rewrite project. That led to easier to understand legislation but took an enormous amount of time and effort. And as the parliamentary draughtsmen/people refused (or weren’t given enough time) to use the rewrite style for new (often rushed) draft legislation everyone sadly agreed to give up on it a few years back.

    Another relevant piece of related info is that the initials SA were originally used in the early 1990s for the forthcoming new ‘Simplified Assessing’ tax system that became Self-Assessment with all ref to the intended simplification now lost.

  2. Ultimately the tax system will simplify when it is fully digitised, the journey there has already started and is accelerating (RTI/ Digital tax accounts etc). The tax legislation, for almost everyone (i.e. at least 99.5% of taxpayers) will simply be a user manual for a digital platform no different to the extremely simple user guides you get when you buy an Apple product, It will say – turn on here, tick this page to agree, press big green button on front to submit or ask tax siri a question if you are not sure about something. The ‘tax system’ will be coded in completely into the digital platform and todays yellow books will just be code for the IT wonks to plug into the system and keep it current.

    I see no real point right now of tackling legislative simplification in the form we know it today – it is surely much better to drastically simplify the user experience.

  3. As a tax layperson, there seem to be a few things I’m missing here, so further explanation please.

    I can see that the current system may behave as in effect split between lay users of new digital systems, who take tax calcs as a black box, and those who peer inside and adjust their inputs to the system to the extent they may (tax avoidance). But how can actually dividing the current system at some threshold of complexity (which side would SIPP pension contributions lie?), and offering tax payers a choice which to use do anything to reduce overall complexity? I can see it might if there was cost to choosing the complex system, although there already is, in the sense of tax advisors’ fees. Is the idea for the government to charge a levy on those who opt for the complex system set at a level to cover the costs of running it?

    I can sort of see this might work, but is it feasible? What else might work?

  4. That’s a matter to explore.

    But for example you might, for individuals and businesses who opted in (and likely initially below a certain income threshold), have a flat tax? We already have something akin to this for VAT…

  5. Making tax simpler for people and businesses who already take a simple attitude to it, and whose behaviour is not distorted by it, doesn’t seem to address the part of the system which has become over complex. Surely there has to be a stick to drive those who choose tax complexity towards simplification, so that complexity becomes a loosing option.

    Is there any empirical evidence for how tax payers behave when offered a choice between different tax schedules? Are there many such choice points? I know there is an ultra secure tax system lab where such research might be possible.

  6. I guess we think complexity itself, and associated risk, is dissuasion enough. People don’t always have the ability to choose real simplicity.

    No empirical evidence of which I’m aware but we could reason by analogy with VAT flat rate scheme which sometimes delivers small tax advantages along with the reduced costs associated with simplicity.

  7. I think maybe a good starting point is to work out “what is the tax system”? Is it the user experience, or is it the underlying legislation – or perhaps both? Take for example the current SA1 registration form; simple and digital though it may be, the HICBC has near enough doubled its length (and incomprehensibility). IIRC, the front page of the SA registration still refers to tronc masters and share fishermen; HMRC would have loved to have got that *off* the front page, but the shape of the legislation made that impossible.

    The idea of two systems was hinted at in a piece I wrote in 2011 at – but my conclusion at the time, after much thought, was that while two systems make sense, the difficulty comes at transition time.

    Worse yet is the risk that you end up with the same issue as on the VAT flat rate scheme – businesses end up running both calculations just to work out which they should use; a supposed “simplification” increases the admin burden. However, making the choice compulsory stops it being a choice (I’m sure there must be a better way to phrase that) and removes the value.

    As I said in 2011, we need to explore the possibilities, and digital may make it easier to implement; HMRC’s intelligent iForm pdfs are a good starting point. But somehow we need to align the two bits of the tax system around that new aim and structure, developing the legislation with an eye to how it will actually be inflicted on taxpayers and their advisers. That, I suspect, really will be a challenge…

  8. Perhaps there’s scope for an ACCA sponsored roundtable on this?

  9. There may be – it’s an interesting area. Will let you know how things turn out.

  10. As I’ve said on Twitter, the current head of the Office of Tax Simplification is also an ex tax partner from Price Waterhouse Cooper, no need for further comment. The output (there are no outcomes, as far as I can see) from the ‘Office’ has been nugatory, so far.

    As to the matter, I think some of the complexity was actually ‘good faith’ in that people felt that corner cases and details made things fairer. However, I’m a computer person who knows that bugs always reside in complexity. Hence the avoidance ‘industry’ including, wait for it, PWC.

    As a matter of societal functioning, I see no reason why anyone/company should need lots of expensive advice and/or spend lots of time to declare their tax. That’s just pure productivity loss. But I’m not holding my breath, especially with regard to the aforesaid ‘Office’.

  11. Hi Hugh,

    Thanks for your comment.

    Of course everyone is entitled to their opinion. Mine is that most people who know the field would struggle to identify anyone in the tax world who is as universally respected as John Whiting. As my post implicitly suggests, it’s a tough gig heading the OTS: technically demanding, politically constrained, poorly paid (relatively to private practice, anyway) – and I suspect somewhat thankless. Personally, speaking as a tax professional, I think the profession, and users of the tax system, are lucky that he’s there.



  12. Thanks, you clearly know him, so I’ll defer, I did try to avoid anything specifically ad-hominem in the post. However, I will stay with my two points, a) nothing much has come out of there b) there shouldn’t be a ‘field’ at all, sorry.

    The worst is, from my life in France, a country full of ‘paperasse’, as we say, they made substantial progress on simplifying the forms and (for example) simplifying the regimes for micro-enterprises whilst I was there. This, from a country that is reputed to be very bureaucratic and anti-enterprise. Here, just reports and ‘notes pour le dossier’.

  13. I don’t really know him. I’ve met him maybe three or four times? I judge him by his reputation and the quality of his work and – as I try to explain in my post – there are very strong alternative candidate explanations for the OTS’s failure to achieve more.

  14. JasonP’s point about businesses running both calculations an opting for whatever is best is exactly what I had in mind. Options always add complexity, and *free* ones always cost the party offering them.

    Can I make a radical suggestion for a non financial cost for a choice of tax codes, which would not be absorbed by large companies’ being able to afford the best tax advice? Publish the the calculations for any assessment which does not use a preferred, simple method. Would this not be a big enough stick to push out those who thrive off complexity?

    BTW, by the “ultra secure tax system lab” I referred to earlier, I meant the HMRC Datalab.

  15. Perhaps given the recent light shined on AstraZeneca’s arrangement and the way the law was shifted to enable them, you might be a little more circumspect with certain declarations.

    Beyond that, all reasonable enough. The current treatment of business expenses (for example) is heavily weighted in favour of larger companies. Hard to see how you level that out without a huge outcry from those politically influential CEOs.

  16. No that’s somewhat mistaken, because it stays complex [and therefore maintains the ‘consultancy’ and avoidance ‘industry’] and also becomes more opaque. At least with book, we can read it or [more usefully] use it as a doorstop.

    Quote “in 2015-16, because next year it will be longer – runs to 22,298 single spaced, small font, heavily footnoted pages” for a ‘normal’ person as myself, that’s simply insane. No other word will do. Ten pages (think flat tax etc.) would be just fine.

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