The tricky business of tax simplification

Geoffrey Howe likened the task of simplifying Britain’s tax system to painting Brighton’s pier while someone else was extending it to France.

Howe, a former Chancellor in the 1980s during the Thatcher government, worked on the tax law re-write, which was disbanded in 2010. Months later the new coalition government created the Office of Tax Simplification (OTS).

Chancellor George Osborne promised a simpler tax system and an end to government “meddling and intervening” in people’s tax affairs.

Two tax experts - Michael Jacks, a former financial secretary to the Treasury, and John Whiting, a former tax policy director at the Chartered Institute of Taxation, were appointed to run the organisation, which is part of the Treasury.

Four years later, what has the OTS achieved?

The UK tax system isn’t simpler. One measure is the length of the UK tax code in the 2014 Finance Bill, which was a similar size to the previous one.

Some experts reckon the tax system has got more complicated, in part due to new legislation against tax avoidance.

However there has been progress. Some tax reliefs have been cut and cash-based accounting has been introduced, which can reduce paperwork for small businesses.

The Federation of Small Businesses is pleased with this change but said that the OTS, which has about six workers compared to 64,000 at HMRC, needs to have more resources if it’s to “radically simplify” tax for small business.

Overall, though the OTS hasn’t managed to persuade ministers to make major changes to the tax system

Most of its boldest suggestions, such as merging income tax and national insurance, have been ignored by the government.

“Lots of talk and very little action,” is how Alastair Kendrick, tax director at MacIntyre Hudson, assesses the OTS’s performance.

Kendrick, a former tax inspector at HMRC, said that although the OTS has some smart and experienced staff it doesn’t have enough resources or power to make a real difference.

The OTS is “just handed down bits to do” by the government and “isn’t given free reign,” Kendrick said.

The Treasury has in effect outsourced the task of streamlining some of the most complicated parts of the tax system to an organisation with little influence, he added.

Philip Fisher, a partner at BDO, isn’t as scathing but only has mild praise for the OTS.

“If you want the cynical view [the tax system] is probably more complex than it was four years ago but it would have been even more complex without the OTS. The increasing complexity that the government is introducing is going at a faster pace than the simplification that the OTS is proposing.”

Fisher reckons that the government takes the OTS seriously. But sometimes the OTS will make proposals that the government doesn’t like for political or economic reasons.

“Simplifications can lead to higher tax on occasions but all too often they lead to reductions on tax,” Fisher said. "The OTS has been handcuffed by the fact that its general thrust has had to be tax neutrality.”

Accountants often complain that tax reforms don’t go far enough, of course.

But neutral observers, such as the Institute for Fiscal Studies (IFS), are also disappointed about progress towards simpler tax.

In May, Paul Johnson, director at the IFS, told an audience at the CIoT that progress on tax simplification had stalled since 2010 and that it was hard to be optimistic about the chances of reform. “In some ways the economic crisis was wasted as an opportunity to think about tax policy,” he said.

At the OTS, John Whiting, who is also a non-executive director at HMRC, is aware of these and other constraints.

“Does the man or woman on the Clapham Omnibus say ‘gosh the system is much simpler’?” Whiting said. “No. And I expect the [tax] practitioner doesn’t think the system is much simpler either.”

“If you look at what is coming out every year in the Finance Bill we get more and more legislation.”

But Whiting said the OTS was making progress – for example, simplifying tax reliefs and making proposals to make employee benefits in kind, such as company cars and medical insurance, easier to administer.

“I’d like to think we’ve had some impact given the size we’ve got,” he said. “Let’s be clear the OTS is by nature something of an experiment [into] if it’s possible to simplify the tax system and how best to do it… we’re learning what can and can’t be done.”

Measuring whether the tax system has got more or less complex would be a start. The OTS has published a 'complexity index' to measure the complexity of some of the tax code and potentially the entire tax code.

France has something similar. “Any tax legislation going to the French parliament has to have a one to five complexity rating on it,” Whiting said. “If it’s a four or five-star rating the minister has to explain why it has been done in such a complex way.”

It’s a good idea but is the government listening? Short-term political and economic considerations normally take priority over simplifying the tax system. But if the government really is serious about de-cluttering tax, it needs to give the OTS more money and power. If not, then what's the point of the end of the pier show?

Comments
johnjenkins's picture

So it's now

johnjenkins | | Permalink

official that everybody thinks OTS is a waste of space. Something most of us said years ago.

When you are working around an area that says "simplify" but don't change (as is WT) then you've really got nowhere to go. So the sooner OTS is disbanded along with all the other PR crap coming out of government (HMRC) the better.

While I'm on the subject. There is no such thing as "tax avoidance". There is tax evasion. Anything artificial is tax evasion so these schemes that include an artificial element shouldn't even be on the table. So you don't need legislation. Tax planning is a different subject, but again if there is an artificial element it is evasion not planning. How have HMRC gone this far wrong that they will have to resort to nicking what they think is owed out of tax payers accounts although they are not preferential creditors? I suppose that's as simple as it gets.

Don't forgot how much the OTS has achieved in its short life!

StuartJones | | Permalink

Take the example of Black Beer.

As I say in the article - how much difference will this make to the typical small business trying to understand the complexities of Self Assessment, corporation tax, VAT and PAYE? And now RTI and auto-enrolment.

waste of time    1 thanks

Jekyll and Hyde | | Permalink

The establishment is only interested in tax simplification if it increased tax yield. This is the only simply bit to it.

The reason OTS doesn't work is because simplifying the tax system is likely going to bring with it less tax yield.

On a secondary note. If the tax system was simplified there would be fewer jobs than in the financial, tax and legal sectors as well as HMRC gov.. so this would not fit with expanding jobs, this in my view, is why the gov started and allowed the dotas rules to exist and now tackling them, to keep the economy in the finance sector going. Just my view.

Time for change's picture

I'm sure I remember

Time for change | | Permalink

Ken Clarke starting a similar process way back in 1996? Now, what happened too that research?

There's obviously no appetite for tax simplification but a need to provide the public with lip-service and to demonstrate that the administration is showing good intentions.

I presume no one's been paid for this exercise?

 

johnjenkins's picture

I disagree with

johnjenkins | | Permalink

you J&H. I think that simplifying the tax system will bring in more money.

The psychology is quite simple. The more people are allowed to keep the more they will spend. So in terms of vat the take will more than compensate for any loss during simplification.

If you are taking it away you only get it once. Giving more you get it back over and over again.

Trouble is Government, since John Major, have been trying to control growth at the lower end of the scale, yet house prices still went through the roof and will continue to do so until the next recession in about 2024. 

JJ not in dispute with your comments    1 thanks

Jekyll and Hyde | | Permalink

Which echos my view of tax avoidance schemes and the gov allowing this to happen to create a financial sector to boost the economy.

I would agree the long term solution would be better for gov as it could potentially yield more in vat, however short term (span of parliament) it would likely reduce tax yield (direct taxation) and hence a non starter.

The next problem is how do you control the majority of the people. Putting more money into the pockets of people takes away more control from gov. It is people's choice to spend. But this only extends the problem gov has with this type of issue where they use the tax system for alternative motives (again my opinion).

I am a little more pessimistic than 2024, I feel 2016 is equally likely followed by ww3 in 2018. But these are due to other topics and reasonings and not those of OTS.

nogammonsinanundoubledgame's picture

@ Time for change

nogammonsinanun... | | Permalink

Ken Clarke lost all credibility for me when he restricted indexation allowance on CGT losses, "as an anti-avoidance measure"

With kind regards,

Clint Westwood

johnjenkins's picture

I think

johnjenkins | | Permalink

China have got the best idea. They are using capitalism to finance communism and it does seem to be working.

As far as us Brits are concerned we don't like control and will eventually fight tooth and nail against it.

Bob Harper's picture

Focus and compulsory

Bob Harper | | Permalink

Focus on one thing at a time. My vote would be year end compliance for micro businesses. Just make Cash Accounting compulsory.

The software houses will role reporting into their offering and there will be less cost for businesses.

I may even start a Govt petition.

Bob Harper

Old Greying Accountant's picture

One things for sure ...

Old Greying Acc... | | Permalink

... the government is never going to base tax on a value pricing model!

(although they should, if they actually educated children, cured the sick and looked after the old people would likely be happy to pay more)

The question is...

AndrewV12 | | Permalink

Who (and why) makes tax rules complicated, HMRC, Lawyers, tax advisers, Accountants, the government, the EU?, once we can find an answer to that question we can start simplify the tax system    

cash accounting does not help business!    1 thanks

dmmarler | | Permalink

Cash accounting is the quickest way for smaller businesses to go bankrupt - SME's lose track of how much they are owed and how much they owe and forget completely about financial planning for their business.  Accountants should not encourage such a retrograde system - I was appalled that the FSB persuaded HMRC to go down this route at all.   

Simples

richards1 | | Permalink

Flat tax system 20% on everything and a simple set of allowances.

 

Of course it won't happen. Politicians exist to pass laws. They are the original make work lot.

Complexity

Paulsoper | | Permalink

One very important factor is that no-one at government level seems to have an appetite to ask questions of HMRC - do you actually need more and more complex corporate legislation?  Do you actually need the power to raid individual's bank accounts?  Do you actually need more and more complex DOTAS regulation?  Do you need IR35 or could a similar result have been produced by attacking false self-employment with the legal powers HMRC already had?

It seems to me that HMRC are allowed completely free reign without any questioning by our politicians.  Some years ago it was discovered that only one MP in five even bothers to read the Finance Bill (most daunted by the extreme length, no doubt) and Margaret Hodge, whilst criticising both taxpayers and, sometimes HMRC, displays an alarming level of ignorance of the way our tax system actually works.  It would seem that if HMRC say it is needed to combat tax avoidance then any old nonsense is passed without query.

To what extent has HMRC used the GAAR legislation, if at all.  No cases, no comments from the esteemed panel, no evidence that any schemes have been referred to it.

 

Bob Harper's picture

Penny dropped

Bob Harper | | Permalink

@OldGrey - I reckon the penny just dropped for you. When you focus on value everything changes.

@Dmmarler - reducing the annual cost of tax compliance is a separate issue to cash flow management. Accountants should campaign for cash accounting and then work with their clients to improve everything in the business.

Bob Harper

raybackler's picture

Bob you are wrong

raybackler | | Permalink

I agree with dmmarler.  There is no place for cash accounting - it is the wrong type of simplification for the immediately obvious reasons he outlines.  How do you keep track of what is owed by customers and suppliers?  How do you cope with the recording of VAT, loan balances, CIS, PAYE liabilities etc?

I have trouble explaining tax computations for smaller clients.  It would be simpler if the accounts were able to include the tax computation.  Depreciation doesn't help small businesses - they need to see capital allowances in the accounts and not depreciation.

As an example, if a plumber buys a new van for £16000, he might have four years of depreciation, which has no effect on his tax.  He also has a £4000 annual adjustment between the accounts and the tax return, with £16000 of annual investment allowance in year one.  Not to mention mucking about with deferred tax.  I believe that small clients know the value of their assets and when a van needs replacing it doesn't need to be shown in a confusing way in the accounts.  In year one when there is a £16000 annual investment allowance the tax bill is always much smaller and clients get caught out with the increased tax in year two, because their expectations have been lowered, even though they get warned by us at the time of the first year drop.

Simplified accounts could show tax on operating profit and then tax saved from capital allowances as two items netting down to the correct tax total.

The main problem is

pauljohnston | | Permalink

that politicians only have last the life of Parliment so all measures are short term.

The amount of tax taken by the Govt has to fall if the UK is to grow and be able to fund politicians hopes.

 

Fat chance of that.  Just put me in charge.

Wild Billy's picture

Have you applied?

Wild Billy | | Permalink

pauljohnston wrote:

that politicians only have last the life of Parliment so all measures are short term.

The amount of tax taken by the Govt has to fall if the UK is to grow and be able to fund politicians hopes.

 

Fat chance of that.  Just put me in charge.

Have you applied to the OTS? This sounds like an excellent opportunity for people who really think they know how to make a difference and would prefer to do that rather than moan on a message board. 

Thanks fior the suggestion

pauljohnston | | Permalink

but as alluded to by others HM Govt dont fund it because they dont want real results

Cash Accounting: SME's suffer....

Rusty Irons | | Permalink

 No whats wrong and where cash accounting helps SME's is bad debt and late payment of invoiced goods or services some payments stretching to 90 days. Cash accounting is simple to use but causes accountants extra work - truth hurts.

Wild Billy's picture

?

Wild Billy | | Permalink

pauljohnston wrote:

but as alluded to by others HM Govt dont fund it because they dont want real results

I don't understand. Presumably it is all quite straightforward and could be done in your spare time as it is just a matter of applying what you know. Admittedly, it would need to be longer than a couple of throwaway non-evidenced statements on a message board but it can't be that difficult. Unless we are saying that it is quite difficult or we strictly only want to help make the system better at a cost to the taxpayer for our services. Seems to me offering your services free of charge saves you a lot of hassle in the long-term if you come up with workable proposals that meet all the considerations that need to be given to tax policy. 

 

HMRC is responsible

Rusty Irons | | Permalink

For the interpretation of VAT EU Regualtion. If their poicy units get it wrong as they have in the past it costs businesses money - there are examples where company accountants of multinationals have challenged HMRC where HMRC has lost. HMT stands remote from HMRC and Government  works with both lobbyists and their senior civil servants to agree change then its up to policy sections to deliver the changes. This is much simplified by way of explanation but government HMRC and HMT will always engage 'business' to seek solutions or if Government and Whitehall Departments need to implement change without consultation there seems to be a period delaying implementation or consultation after the legal process has begun.    

China

malcolmhUK | | Permalink

Only problem with China as johnjenkin says above is that you don't seem to get taxed as simply self employed.  You have to set up a formal business to start paying taxes (and send out formal invoices)......... and VAT is at about 6%.

Secondary Note

Rusty Irons | | Permalink

HMRC has never really learned and your point is not fully accurate - simplification would allow HMRC to re-deploy staff on tax evasion rather than dealing with low level SME mistakes - however HMRC staff know this and I'm sure they would take the other view - its easy to deal with the grind of SME mistakes rather than risk a small reduction in staffing and re-training to deal with the real problem of evasion - HMRC tends to forget the results of its job can be a level playing field for businesses but they seem to have the blinkers on and the narrow objective of protecting the revenue at all costs even if that means ignoring real possible progress and increased tax revenue. 

Wild Billy's picture

Tax gap

Wild Billy | | Permalink

Rusty Irons wrote:

HMRC has never really learned and your point is not fully accurate - simplification would allow HMRC to re-deploy staff on tax evasion rather than dealing with low level SME mistakes - however HMRC staff know this and I'm sure they would take the other view - its easy to deal with the grind of SME mistakes rather than risk a small reduction in staffing and re-training to deal with the real problem of evasion - HMRC tends to forget the results of its job can be a level playing field for businesses but they seem to have the blinkers on and the narrow objective of protecting the revenue at all costs even if that means ignoring real possible progress and increased tax revenue. 

At the danger of letting reality into a conversation about myth and perception, you should read the HMRC work on the tax gap, particularly page 4. It shows almost half the tax gap comes from SMEs so why wouldn't HMRC focus at least half its resources on that group. If SMEs are 99% of businesses then you would surely focus more than half your resources on that group because presumably large businesses are fewer (but each proportionately responsible for large sums) and so need less people to cover them. 

And those numbers don't suggest failure to take reasonable care/error by SMEs are more than about a sixth of the tax gap so I suppose there must be some avoidance and evasion going on in SMEs too....

Old Greying Accountant's picture

Cash accounting ...

Old Greying Acc... | | Permalink

... just creates a tax snowball, every year many clients will accelerate payments and defer income to keep pushing the tax bill away!