Friday 15 April 2016 4:25 am

Britain’s nineteenth century tax system is breaking under twenty-first century strains

Politicians have noticed (perhaps belatedly) that they have been fiddling with a nineteenth century tax system while taxpayers have been operating in the twenty-first century.

The existing tax system is a result of years of tinkering, reflecting the influence of political views and special interest lobbying. This has created vast complexity. We could look to simplify and debug the current system rather than dream up an entirely new one, but as the tax code has doubled in size since 1997, the prospects aren’t great. Remember, it took five pages of legislation to describe the role of the Office of Tax Simplification in the Autumn Statement last year.

Corporate tax is one of the most obvious issues. It could be seen as a moral obligation by shareholders to forego a percentage of their profits in return for the benefits of the legal and economic framework in which their company operates. Being able to hire employees who have been educated by the state should require some contribution from employers. In our increasingly global and digital economy, however, it has become harder to determine where these firms operate and the link between country and company has weakened.

Furthermore, the tax residence of companies in the UK is underpinned by case law dating back to the turn of the last century. Cases from 1888 on whether French champagne houses were trading in London are the basis of determining whether an overseas entity is trading in the UK. Modern businesses would be unrecognisable to the judges of the time, but these cases remain fundamental to UK tax law.

So there is a case for abolishing corporation tax entirely. It only accounted for about 6 per cent of the tax take in 2012-2013, and Treasury data shows that employer National Insurance Contributions (NICs) raised nearly half the tax from business in 2011. Given it is much easier to find an employee than work out where profits are made, a rise in employer NICs could replace the lost corporation tax.

But the nature of people’s relationship with work has also changed dramatically, and the UK tax system struggles to cope with such developments. There are no more “jobs for life” and the technological revolution has created a different class of worker.

In this “gig” economy, firms struggle to work out whether someone is employed, self-employed or something in between. The Budget introduced a micro entrepreneur’s relief but there is a danger that trying to combine modern working practices with an old tax system could hamper innovation.

Take an Uber driver. They are an independent contractor, but bound by the rules of the platform. Are they employees? Are they self-employed? Should they be? Innovators and workers need to know the answer now, not take a view and argue it out with HMRC at a later date.

Jean-Baptiste Colbert, French minister of finance under Louis XIV, famously stated that “the art of taxation consists in so plucking a goose as to obtain the largest possible amount of feathers with the smallest amount of hissing.”

The Treasury Committee has launched an inquiry into tax policy, which will examine whether the system is fit for purpose. Let us hope that some sensible voices will be heard above the loud hissing.

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