Tax simplification: time for a more radical approach?

When the question ‘what is tax simplification’ is asked today, it is easy to point to the Office of Tax Simplification (OTS) but that overlooks a range of developments over the course of many years. Going back to earlier Parliaments reminds us of the tax law rewrite project, the aim of which was ‘to rewrite the UK’s primary direct tax legislation to make it clearer and easier to use, without changing the law.’ The word ‘simple’ isn’t there, but ‘easier to use’ comes pretty close.

 

Going back further, you can see that ‘simple’ featured in the ten tenets produced by the Tax Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW). These were published in early 2000 and the ‘simple’ tenet states that: ‘Taxpayers should be able to understand the rules by which they are to be taxed.’ It proposed the somewhat challenging (and potentially unrealistic) test that ‘every proposed policy change to taxation [should] not make the tax law more complex.’

 

The OTS’s approach is ‘to make the case for change’ and to convince ministers to follow through on their recommendations. John Whiting, tax director of the OTS, noted that ‘we will never get to a simple tax system for the UK’ but that this ‘should not stop us putting effort into getting a simpler tax system’.

 

So where are our aspirations for tax simplification? From my perspective, I do not see simplification as an aim in itself: our tax system should always be as simple as possible to deliver the objectives of the government. Like Whiting’s comment, that’s a way of delivering tax law, rather than something independent of policy.

 

But that doesn’t mean that we need to accept the current way of doing things.

 

All these initiatives seem to take for granted that we have to operate in the current status quo (with perhaps the exception of the OTS that has repeatedly suggested the combination of income tax and NICs. What’s needed is a more radical approach. 

 

To date, the approach has been to start with the tax system as it exists today and seek to simplify elements of it, hoping that this will lead to a simplification of the whole. This is an outdated approach. Instead we should be looking at the experience of the ‘customer’, as HMRC likes to call the taxpayer. In my evidence to the House of Lord’s Economic Affairs Committee on the future of corporation tax, I suggested that the government ‘could instead focus on the different types of taxpayer (i.e. employees, businesses etc.), rather than the technical form of tax’. Ultimately, the compliant taxpayer wants to pay the right amount of tax, with the least amount of effort and is relatively indifferent about the form that that tax payment takes. (They will want to make sure that the amount they pay feels fair, compared to that of others, but, in practice, does anyone care about paying a little more in income tax and little less in national insurance?)

 

We should, therefore, look at tax simplification from a taxpayer perspective. One of the simplification successes that I often site is the VAT flat rate scheme (FRS). This looks at the taxpayer, identifies the amount of net VAT it is likely to have to pay based on the type and turnover of the business and provides a single flat rate that is applied to the turnover to generate the payment. Of course, this won’t be exactly right, but it will be in the right ballpark and the simplification it delivers is well worth any small loss in revenue. We should build on this type of thinking.

 

There are many areas that could benefit from this, but perhaps the most needed is the small company. These businesses suffer from operating in a tax system that is designed to be resilient against abuse and, therefore, the legislation includes much anti-avoidance. Some of the rules are then disapplied for small businesses. Such a system is always going to be complicated.

 

Instead, we should look at the success of the FRS and build from it. Inherent in the FRS is an estimate of the ‘value added’ produced by the business (i.e. the sales less the costs that incur VAT). If you were to deduct the salary costs and funding costs, you would arrive at the profits of the business. So with three pieces of information, being the turnover, the salary costs and the interest, you would be able to estimate the VAT and the corporation tax. If you added in the number of employees, you could also estimate the employers’ NICs.

 

So in a stroke, we could have a scheme that covered VAT, CT and employer NICs. Again, this wouldn’t give you the exact answer but it would remove considerable administration and uncertainty.

 

Other ideas exist in different areas. Indeed, the OTS’s report on small business taxation picks up on the idea from the Association of Independent Professionals and Self Employed (IPSE) of a freelancer limited company, which itself could offer an opportunity to create a mechanism by which particular taxpayers could opt into a simplified tax treatment.

 

All this relies on segmenting the taxpayer population. This is a different approach and sceptics will argue that it is complex for taxpayers to decide to which group they belong and could be complex when taxpayers move from one segment to another. However, we should question how real this concern is and whether such choice is really complexity. Without looking at this type of approach we are doomed to ‘incremental simplification’ which, given that the legislation is getting longer every year, seems unlikely to deliver to anyone’s aspirations.

 

 

The above views are those of  the author and not necessarily those of his employer.