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?