Our tax code needs a total overhaul
LET us hope the coalition is serious about tax simplification. Britain’s taxes are not only far too high; they are also extraordinarily complicated. I was recently talking to a very senior tax lawyer who admitted to me that no single person understands more than a small proportion of our tax code. His views were all too typical. The rules are oppressive and confused; many individuals and companies are inadvertently in breach of them in one way or another, thus holding themselves open to punitive fines or worse. The system keeps changing, which makes it tricky to plan properly and efficiently. Ignorance is no excuse in the eyes of the law – yet apart from those willing to spend a fortune on advisers, the rest of the country has at best an approximate grasp of what is permissible. The result is an unjust two-tier system; we are not truly equal in front of the law.
All of this was made much worse under the previous government, which appeared to enjoy adding relentlessly to the tax code, in part to try and squeeze ever more out of the economy and in part because it was pursuing various forms of social engineering via HMRC. In 1997, Tolley’s tax handbook, the tax accountant’s bible, was 4,555 pages long; it is now over 11,000 pages and growing. It is a Kafkaesque nightmare which even those who derive all of their income from helping others comply with HMRC’s demands loathe and want to reform.
It is vital, therefore, that the new Office for Tax Simplification be truly independent. When taking evidence, it must treat government officials no differently than it treats outside experts or informed members of the public. It is also vital that it be allowed to publish freely – or even better, that it must release – all of its conclusions. Last but not least, ministers must be required to respond properly to all the Office’s proposals, explaining precisely why each discarded idea to simplify things is being rejected. Simply dismissing its conclusions or firing off a short letter must not be seen to be acceptable.
In the longer term, however, merely trimming the tax system around the edges won’t work; it is akin to a lone gardener trying to weed an overgrown field. What is needed instead is a root and branch reinvention of how the state is financed. The government needs to start from scratch and work out what the best tax system is to raise the revenue that it requires every year. Some forms of income are taxed twice; others even three times. And what is the point of national insurance? It is merely a second layer of income tax; a convenient way to camouflage hikes in direct taxation and to allow politicians to pretend that they are keeping rates low. The money isn’t paid into some sort of pot or insurance scheme, contrary to what much of the public believes, but is immediately spent on current expenditure like all government revenues. It is a con, like most of our tax system.
It remains to be seen whether George Osborne has the stomach for this kind of thinking and the truly radical reforms that this would entail – his Budget, by necessity a rushed job, failed to make any dramatic changes and merely built on the existing system. But unless we think out of the box, I fear that the Office for Tax Simplification’s best efforts are unlikely to achieve the revolution Britain so desperately requires.
allister.heath@cityam.com