Wednesday 8 February 2017 4:15 am

Punish HMRC for arbitrarily bullying the victims of our complex tax code

John O’Connell is chief executive of the TaxPayers’ Alliance

A good rule of thumb for a system or process: if you sat down and designed it from scratch, would it look like it does now?

Ask that question of the tax system and the answer, of course, is a resounding “no”. It is a hideously complicated mess that punishes families and businesses, while destroying trust in the notion that everyone plays by the same rules.

The tax system is not just burdensome for families and businesses – it’s also a nightmare for HMRC to administer. The stories of bungles are all too frequent, with even simple PAYE calculations regularly going wrong. Many trust that the right amount of tax is deducted from their payslip and are left hard-up when they are told they must pay money back (under the threat of imprisonment, let’s remember). That HMRC makes such errors is of course partly down to incompetence, but it’s also indicative of a ludicrously complex system that went out of control some time ago.

Read more: Punitive taxation is threatening the competitiveness of UK banking

Dominic Raab MP has outlined what should be done about this in a new paper for the TaxPayers’ Alliance, recommending ways to simplify the system.

He rightly says that the Office of Tax Simplification should play a bigger role in the design of the system – it does good work. He says that Corporation Tax should be replaced by a tax on distributed profits too. Again, spot on – Corporation Tax has had its day and is no longer suitable for a global economy which is not based on bricks and mortar businesses.

Raab also argues for a big simplification of payroll taxes, with a cut in National Insurance for the lowest paid workers. This can be done by raising the threshold at which employees start paying National Insurance to the same level as that of income tax, currently £11,000. What’s clear is that complicated taxes punish families and mean businesses spend less time innovating and less money investing.

Read more: National insurance is a complicated relic: Axe it in three simple steps

Presumably as befuddled by the tax system as the rest of us, HMRC has stealthily acquired arbitrary powers to collect more money from so-called tax avoiders. In 2014 a new power was conferred upon the taxman to issue Accelerated Payment Notices (APNs), which are sent to those who have been “found” to have been using tax avoidance schemes.

These notices mean that HMRC can demand payment of tax owed upfront within 90 days – but crucially, before the charge can be contested. Some may cheer this as tax dodgers getting their comeuppance but, tellingly, HMRC has had to withdraw 2,000 APNs after their targets were found not to be covered by the Disclosure of Tax Avoidance Schemes policy.

HMRC also has a new power known as the Direct Recovery of Debts, where arrears of over £1,000 can simply be taken directly from the taxpayer’s bank account. As Raab argues in his paper, this rule has not been used formally all that often, but the power it confers has been used to bully taxpayers.

Read more: Can big business relax? HMRC is pulling in less cash from tax probes

Raab’s excellent work in Parliament has largely focused on championing the “little guy” – and in this case, small businesses who are working long hours and on tight margins and who do not have the time or the clout to put up a fight against the taxman. That’s why he has recommended that financial penalties should be imposed on HMRC to compensate taxpayers who suffer from the arbitrary use of new powers.

The tax system should be fair but, crucially, also seen to be fair. Our 23,000-page tax code contains far too many taxes that are the biggest cost of living for most families. Too many taxes are also disguised as higher prices or levies on business. And complication means that taxpayers feel that others exploit loopholes and don’t pay their fair share. We have to change that by simplifying the tax system – the prizes are significant.