Fans of the Channel Four sitcom The IT Crowd will remember the advice given to hapless office workers when they called the IT service desk. “Have you tried turning it off and on again?” would be the world-weary response to any and all queries.
The UK tax system is in need of a similar reboot. If you were building a tax framework from scratch, there is no way you would have ended up with the current system.
Here’s the first problem. The Ten Commandments contains 200 words, the US declaration of independence has 1,300 and the Magna Carta has 4,000 words. The UK tax code clocks in with an excessive 10m words.
It’s a slightly facetious example, but the point remains that the UK tax code is verbose, complicated, and always changing. It is in need of bold reform.
Some might say that the government should be focusing all its energy on Brexit, and that it would be a mistake to use precious headspace engaging in an overhaul of the UK tax system.
But now is precisely the right time to delve into this. The UK economy is at the crossroads – while recent GDP figures have shown better than expected growth, BDO’s own data shows that UK services output is hovering around recessionary levels. At a time of great change, businesses crave simplicity and certainty. Anything policymakers can do to facilitate a more pro-business environment is welcome.
Of course, the Brexit negotiations will be complicated, and naturally will dominate the government’s agenda in the years ahead. We understand that leaving the EU will cast a long shadow over domestic policy, but that is precisely why changes in the UK must be made to reflect the international realities.
Let’s look at the UK tax code in the context of Brexit. While government may be tempted to reach for the lever of tax subsidies and tax breaks to encourage growth, these policies will be difficult to enact, especially if they contravene EU state aid rules, and so will complicate already difficult Brexit discussions.
Another alternative could be to cut corporation tax in a bid to attract more inward investment into the UK. The EU has already warned the UK about becoming a tax haven and it’s likely that the government would also face a backlash from voters worried about the impact of tax cuts on public services like the NHS and schools. Last week, Philip Hammond explicitly ruled out such a tactic.
There is a third way. The government has the opportunity to make a virtue out of a necessity and, where possible, choose simplicity over subsidy to support the economy.
Simplicity in doing business will give the UK a competitive advantage that does not breach EU rules. A poll of 500 of our clients found that the majority would even accept a small tax increase in response to greater simplicity in the code.
So how do we go about simplifying the tax system? Earlier this year, we launched a campaign called New Economy, looking at what policy changes are needed to help UK businesses thrive after we leave the EU. Tax simplification is a major cornerstone of that.
First, we would like to see an alignment of National Insurance and Income Tax.
National Insurance no longer covers the costs of the benefits it was set up to finance back in 1911 (and expanded again after World War Two). It has developed in parallel with Income Tax, yet with a separate set of rules and regulations.
Having parallel taxes creates unnecessary bureaucracy and added compliance costs for employers. Aligning both taxes with an ambition to merge them into one payroll tax would remove economic distortions, reduce burdens on business, and improve fairness and transparency. It would also help individuals keep track of their tax contributions.
Second, the government should resist the tinkering around the edges that makes the system even more complicated than it already is.
In the last 30 years, the UK tax code has increased more than tenfold. This is absurd. We would like to see the government agree a moratorium on all new business tax policies that do not simplify the system until 2020, or until the Brexit negotiations are finished (whichever comes first). A commitment to simplicity would be a clear signal to the world that the UK is a destination where businesses can flourish.
Addressing the complexities of the tax system in the UK is a necessity for the short term and a way of ensuring competitiveness.
Policymakers must use Brexit as an opportunity for bold thinking. We don’t need to dole out more subsidies or turn Britain into a tax haven. We just need to create a tax system fit for the twenty-first century.