The chancellor could well be tempted in his forthcoming Budget to limit his announcements to introducing some further business rate reliefs, relaxing the pace of introduction and penalties in the ‘making tax digital’ (MTD) initiative and alleviating the evident strain in the social care sector. To do so in his March and November Budgets would miss an immense opportunity to start the overdue process to reform and simplify the UK tax system for both businesses and individuals.
Everyone should applaud the efforts of the Office of Tax Simplification to simplify taxation law and practice and to remove many of the anomalies that tax practitioners regularly point out. However, only the chancellor can introduce far reaching tax reforms which have broader government policy and fiscal implications. The former chancellor hoped to create a legacy based overwhelmingly upon the elimination of the UK’s persistent fiscal deficit. Although progress was certainly made towards this essential objective, it has been slower than he hoped or planned. What was lacking was a complementary objective to bring tax policy into the 21st century.
We are only three years away from the 2020 general election. The outcome of that election will almost certainly be determined by the public’s perception of the success (or otherwise) of the terms agreed for the UK’s departure from the European Union. This might lead the chancellor and other cabinet ministers to attempt to ‘clear the decks’ and focus entirely upon the Brexit process. This would be a similar mistake to the single objective of the elimination of the fiscal deficit by the previous government.
So which areas should the chancellor focus upon this year in his two Budgets? There is no shortage of choice but I will limit myself to five areas.
Firstly, the differing tax and national insurance liabilities faced by the employed, self-employed and personal service companies is unsustainable. This needs to be substantially eliminated, even if a long transition period is required to ease the burden for those expected to pay more. Secondly, the business rates system will (almost) certainly be flexed, with further transitional reliefs focused upon those seeing a substantial hike in their liabilities in 2017/18. Business rates need much more radical reforms though, as the existing system cannot keep pace with an ever faster changing economy, including new ways of occupying commercial property in the digital economy. Thirdly, there is a clear opportunity to simplify both inheritance tax and capital gains tax into a single capital tax which collects a similar amount for the Treasury but is free of the existing complex interfaces between the two existing taxes, is less open to complex planning arrangements and does not fall largely upon those who do not or cannot make use of the existing reliefs. Fourthly, alongside the Office for Budget Responsibility and the Office of Tax Simplification, the UK should have an Office for Tax Competition which measures, assesses and reports upon the UK’s tax rates and reliefs in comparison to our major global competitors for securing entrepreneurial activity and foreign direct investment.
Finally, the existing corporation tax system which seeks to tax UK profits increasingly fails to establish a level playing field between domestic and global businesses and between export focused businesses and import focused businesses. Corporation tax in its existing form will become ever more complex, require increasingly aggressive and unclear anti-avoidance legislation and fall further behind the increasing pace of economic change, let alone any potential tax reforms to be introduced in the United States. The challenge is introduce alternative taxes for both MNCs and SMEs which fairly tax economic activity, sales and business footprint whilst promoting the UK as the leading choice for investment and economic activity.
Unlike both George Osborne and Gordon Brown, one imagines that Philip Hammond is much less focused upon the likelihood of becoming the next prime minister. Accordingly, he might wish to create a legacy of bold tax reform similar to those of his Conservative predecessors, Geoffrey Howe and Nigel Lawson, who both introduced bold and complementary reforms despite, of course, having very different perspectives upon our ongoing membership of the European Union.
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Why the chancellor should be bold in the Budget
Five recommendations on tax.
The chancellor could well be tempted in his forthcoming Budget to limit his announcements to introducing some further business rate reliefs, relaxing the pace of introduction and penalties in the ‘making tax digital’ (MTD) initiative and alleviating the evident strain in the social care sector. To do so in his March and November Budgets would miss an immense opportunity to start the overdue process to reform and simplify the UK tax system for both businesses and individuals.
Everyone should applaud the efforts of the Office of Tax Simplification to simplify taxation law and practice and to remove many of the anomalies that tax practitioners regularly point out. However, only the chancellor can introduce far reaching tax reforms which have broader government policy and fiscal implications. The former chancellor hoped to create a legacy based overwhelmingly upon the elimination of the UK’s persistent fiscal deficit. Although progress was certainly made towards this essential objective, it has been slower than he hoped or planned. What was lacking was a complementary objective to bring tax policy into the 21st century.
We are only three years away from the 2020 general election. The outcome of that election will almost certainly be determined by the public’s perception of the success (or otherwise) of the terms agreed for the UK’s departure from the European Union. This might lead the chancellor and other cabinet ministers to attempt to ‘clear the decks’ and focus entirely upon the Brexit process. This would be a similar mistake to the single objective of the elimination of the fiscal deficit by the previous government.
So which areas should the chancellor focus upon this year in his two Budgets? There is no shortage of choice but I will limit myself to five areas.
Firstly, the differing tax and national insurance liabilities faced by the employed, self-employed and personal service companies is unsustainable. This needs to be substantially eliminated, even if a long transition period is required to ease the burden for those expected to pay more. Secondly, the business rates system will (almost) certainly be flexed, with further transitional reliefs focused upon those seeing a substantial hike in their liabilities in 2017/18. Business rates need much more radical reforms though, as the existing system cannot keep pace with an ever faster changing economy, including new ways of occupying commercial property in the digital economy. Thirdly, there is a clear opportunity to simplify both inheritance tax and capital gains tax into a single capital tax which collects a similar amount for the Treasury but is free of the existing complex interfaces between the two existing taxes, is less open to complex planning arrangements and does not fall largely upon those who do not or cannot make use of the existing reliefs. Fourthly, alongside the Office for Budget Responsibility and the Office of Tax Simplification, the UK should have an Office for Tax Competition which measures, assesses and reports upon the UK’s tax rates and reliefs in comparison to our major global competitors for securing entrepreneurial activity and foreign direct investment.
Finally, the existing corporation tax system which seeks to tax UK profits increasingly fails to establish a level playing field between domestic and global businesses and between export focused businesses and import focused businesses. Corporation tax in its existing form will become ever more complex, require increasingly aggressive and unclear anti-avoidance legislation and fall further behind the increasing pace of economic change, let alone any potential tax reforms to be introduced in the United States. The challenge is introduce alternative taxes for both MNCs and SMEs which fairly tax economic activity, sales and business footprint whilst promoting the UK as the leading choice for investment and economic activity.
Unlike both George Osborne and Gordon Brown, one imagines that Philip Hammond is much less focused upon the likelihood of becoming the next prime minister. Accordingly, he might wish to create a legacy of bold tax reform similar to those of his Conservative predecessors, Geoffrey Howe and Nigel Lawson, who both introduced bold and complementary reforms despite, of course, having very different perspectives upon our ongoing membership of the European Union.
