By Jeremy Cape @jeremydcape
Tax simplification is in the news. It forms a central part of President-elect Donald Trump’s legislative programme. The IEA recently produced a report – Taxation, Government Expenditure and Economic Growth – which includes an eye-catching proposal to abolish 20 taxes. And the Chancellor is facing the usual calls to simplify the tax system in the Autumn Statement,
There are few, whether they are tax experts or not, who consider that the UK tax system works adequately. But the expression “simplification” is loaded with ambiguity, and implies that we can change to a utopian tax system, usually with fewer taxes, lower rates and easier compliance, without making hard, political choices. Simplification should more sensibly be seen as a likely outcome of a more coherent tax system, and the debate should focus on how we can make our tax system more coherent, rather than more simple.
Let me set out some of the different ways in which “simplification” is used by those who talk about it.
1 Simplifying compliance
Many businesses spend considerable time and expense on tax compliance. Simplifying compliance is driven by a desire to see shorter tax returns and more straightforward calculations, leaving businesses more time to focus on – well – doing business. “Reducing tax compliance burdens on both businesses and individual taxpayers” is the stated objective of the Office of Tax Simplification. Since its establishment in 2010 the government has implemented about 200 of its recommendations, such as abolition of reliefs (e.g. the 15p luncheon voucher), aligning legislative definitions and introducing easier compliance regimes for small businesses. It’s estimated to have saved taxpayers £20M per year in compliance costs, and also resulted in the abolition of a small amount of tax legislation, but ultimately it’s all a little underwhelming.
Simplifying compliance is a laudable aim, but reducing the compliance burden by, say, an hour a year per business is unlikely to be the main thing taxpayers are seeking from simplification.
2 Shortening tax legislation
There is a popular view that the increasing length of the UK tax legislation is a cause of it becoming more complex. The increased length is in fact a function of an attempt to simplify legislation through the Tax Law Rewrite Project. But most tax practitioners generally find the re-written Acts more user-friendly than the Acts they replaced and prefer the longer form.
This is not to say that UK tax legislation shouldn’t be shortened. The recent diverted profits tax (DPT) takes up twenty pages of Tolleys and, even given that it deals with some fairly complex concepts, is (in my view) longer than it needed to be.
3 Simplifying concepts in tax legislation
Let’s turn to the DPT. The stated policy objective of the tax was “to counteract contrived arrangements used by large groups (typically multinational enterprises) that result in the erosion of the UK tax base.” It consists of two rules. The first rule has seven conditions. The existence of some of the conditions is relatively easy to determine, such as whether a company is UK resident. Others are not. Some of the concepts are borderline-impossible to understand.
One question is whether the policy objective behind the diverted profits tax could have been achieved without pages of fiddly legislation. Most practitioners think it could have been which would allow them, in turn, to advise taxpayers with more clarity whether it applied or not. (The diverted profits tax also provides a good example of the pitfalls of bad legislation because, if the intention was to make Google pay considerably more UK corporation tax, it appears to have failed. It does not follow, however, that complex legislation always creates loopholes, and it is unquestionably true that loopholes have been closed by complex legislation.)
So why not give a smart civil servant a month to bring it down to four pages? Well, it probably couldn’t be done without some consequences. The likelihood is that it would impact more companies and arrangements; at the very least, there would be more inherent ambiguity (and more HMRC and judicial discretion) regarding its application. But, again, the question of whether the DPT, or any other tax, could be drafted in a more simple manner for the practitioners who have to read it, seems to me to be a sideshow: the general public and business don’t ultimately care all that much, because they don’t themselves generally look at legislation.
4 Simplifying or abolishing reliefs and exemptions
Waiting for Tax has previously written about this. If Philip Hammond were to announce the abolition of CGT private residence relief, pension tax relief, ISAs, VCT and EIS, Gift Aid, group relief, the substantial shareholding exemption, etc. then this would immediately simplify the tax system. But, again, there would be consequences for taxpayers (many of whom would have to pay more tax) and the government (who would need to respond to the change in behaviours, such as the impact on pension savings and investment in start-ups, in the short time before it got wiped out in an election).
One example of a simplification measure (not strictly the abolition of a relief) was the infamous “pasty tax”. The Treasury, correctly identifying that this had been an area of litigation, decided to “apply VAT at the standard rate to all food which is at a temperature above the ambient air temperature at the time that it is provided to the customer, with the exception of freshly baked bread …[to] ensure that all hot takeaway food is taxed consistently”. This would have added around 20p to the price of a £1 pasty. The subsequent furore caused Osborne to abandon his plans. Imagine the reaction if homeowners were told that they would now have to pay CGT on the increase in the value of their primary residences in the name of simplification.
Abolishing reliefs ticks most boxes of what simplicity might be, but it is not simple to achieve. And those advocating simplification of reliefs tend to support the abolition only of those reliefs that do not affect them or their families, friends or commercial interests. Funny that.
5 Abolishing taxes
In many ways, this is the opposite of 4. For some, the concept of tax simplification is part of a broader policy to reduce the role of the state. Legislation will be shorter, concepts will be simpler, reliefs will be fewer, but the state will necessarily receive fewer revenues and spend much less. Take the IEA’s recent paper, for example. This calls for the abolition of, inter alia, corporation tax, capital gains tax, council tax, SDLT, stamp duty and alcohol and tobacco duties. Even if you buy the IEA’s argument that this will result in increased growth in the UK, it results in a very different UK (broadly, much better if you’re rich). Although the IEA’s modelling suggests that the poorest decile would enjoy tax cuts worth 26% of their gross income, with the richest decile enjoying a tax cut of only 13%, a starker comparison is that someone earning £300,000, currently taking home £170,000 after tax, would take home £256,500 after simplification (£86,500 more). Someone earning £30,000 and taking home £23,500 now would instead take home approximately £27,000 (£2,500 more).
It’s hard to see the IEA’s approach working in the real UK, or to imagine even 52% of people wanting it, even though I admire their boldness and their attempt to devise a coherent system. My problem with their approach is that their use of “simplification” implies a non-existent neutrality to appeal to those whose desire for simplification does not extend to such radical reform of tax and public expenditure.
I’ve tried to set out the different ways in which people think about “simplification”. The more I think about it, it’s not really about tax simplification. None of us will be happy in the long term solely by reducing red tape for businesses or shortening the tax code or making it easier for tax practitioners to understand tax law. These may be desirable outcomes but they are symptoms of a broken tax system, and not a sole cause of it. The main cause is the lack of coherence in our tax system and its design, which is partly a function of history, but is exacerbated by having effectively two Budgets every year, with the focus on the short, rather than medium or long term.
Making the tax system more coherent will not be – for want of a better word – simple. It requires a huge amount of political capital that the Brexit-beleaguered government does not have. For now, we can but hope that Chancellor Hammond will avoid gimmicks (such as hints on the future rate of corporation tax or VAT) and indicate that he will take a broader, more considered view of the UK tax system as a whole.
His aim should be that one day a Chancellor can stand up on Budget Day and announce no changes to the tax code because – thank you very much – it is working perfectly well as it is. Simples.