"Don't tinker with taxes” is a consistent cry from business. True, few will bemoan a change that benefits them, but it’s hard to overestimate how much firms value certainty in their tax affairs. It’s difficult to plan ahead if you don’t know what your costs are likely to be.
Yet we now effectively have two Budgets annually (the Autumn Statement is one in all but name), with a third this year happening tomorrow. The UK tax code now runs to around 20,000 pages and is arguably the world’s longest. While the Office of Tax Simplification is pruning what it can, it can’t keep up with the regrowth.
It might follow that the best thing the chancellor could do for tax is leave it well alone. I’d argue the contrary. The tax system needs to be updated. If it can be streamlined so it works more efficiently, it will help generate revenues and reduce the need to increase tax rates. A simpler system will also mean less change in the longer term.
Tax changes are more palatable if they sit under clear policy objectives. And over the last year we’ve been consulting with the public and businesses on the best course for reform. There’s been a lot of consistency on the areas that need attention, such as the interaction of income tax and national insurance, and anomalies and complexities within VAT.
But a couple of overriding messages are particularly pertinent for the Budget. One is for a longer-term focus to tax policy, with more clarity and transparency about objectives, and accountability on delivery.
Related to this is a desire for the tax system to be harnessed to address major economic and social challenges – including the competitiveness of the UK economy, the need to drive innovation, supporting an ageing population while ensuring fairness and opportunity for younger generations, and important environmental issues.
UK competitiveness is high on business’ radar. We have an internationally attractive tax system thanks to corporate tax policies put in place by successive governments. But competitiveness is a moveable feast. Other countries are upping their game by reducing compliance burdens and/or tax rates. The UK has slipped two places to sixteenth in the PwC and World Bank global league table of business tax systems – although we remain third in the G20.
Maintaining, or even improving, the UK’s rank is set to become even more challenging. The Conservative manifesto pledged to raise £5bn from tackling tax evasion and avoidance. Some of this may come from measures tied to the OECD’s proposals to update the international tax rules and prevent base erosion and profit shifting (BEPS). Yet there is an inherent tension between tax competitiveness and these important OECD reforms.
If the UK adopts all the OECD proposals, we will lose some of our taxing rights as tax will be due where the economic activity is taking place. With these taxing rights will go UK tax revenues. Cherry picking international proposals is not an attractive option as their effectiveness hinges on a consistent global approach – and ultimately firms want a system that will work.
There’s no easy solution. Some lost revenue may be a price worth paying for a better global tax system. But it’s vital there’s transparency on these tensions, and a willingness by those affected to work through them – tax advisers included. This will help prevent disappointment further down the track.
Complete certainty may be unrealistic over the next five years, but reforms that follow a clear trajectory, with transparency on objectives, will help provide the stability that should be the hallmark of an effective tax system.