Office of Tax Simplification - Small Business Taxation

 I agree that a "flat-rate" tax regime should at least be considered in a logical and rational manner.

Set a flat rate of say 31% and get rid of the out-dated notion that NIC is not a "tax" for a start. So no more word games by any government now or in the future that tax rates will not rise but National Insurance contributions will! The flat-rate could also cover investment income with dividends being paid gross, at least by close companies. This would help the government recover its "missing" NIC contributions from "dividends" paid to "director/shareholders" of close companies.

There would be no higher rate tax band: after all why should the person who earns £100K+ (or even £40k+) by working 50, 60, 70 etc hours per week have to pay a higher rate of tax than the average person who chooses to work a standard 35-40 hours per week? Where is the incentive in that? On a logical basis the person earning £100k pays more tax than the person earning £30K.

In line with this thinking, why are businesses penalised for employing people through Employers NIC? Surely it would be better to abolish this to encourage businesses to take on more staff. It would make more sense (to me at any rate) to abolish Employers NIC and instead increase the national minimum wage to a more liveable amount so anyone claiming benefits would be better off working (once the welfare system has been overhauled!).

Finally, I don't think you can overhaul the tax system and make it simpler AND fairer without overhauling the welfare system. The two must go hand in hand.

I know of no evidence to suggest that the most highly paid people necessarily work harder than poorer people. In fact,some of the worst-paid jobs seem to have some of the worst working conditions (nurses, toilet cleaners, call-centre operators). In addition, some people get paid simply for being born rich.

Richer people should pay more tax than poorer people.

With a flat rate tax people who have a higher income would pay more tax.

Good point Peter. Failure to appreciate basic arithmetic on my part!

I should have said that people with more money should pay a larger proportion of their income in tax (as the poor do currently).

Can you give an example of two people with differing incomes and their tax to show me how the lower income person would pay a higher proportion of their income in tax?

I must admit that, when writing that point, I knew that I would be unable to support it with hard facts. So if you flat contradict me Peter (or anyone else), I will not be able to support my assertion, and will have to withdraw it.

I based my comment on anecdotal evidence and the fact that indirect taxes such as VAT, IPT, fuel tax etc hit everyone equally, regardless of income. However, do  not forget my first paragraph.

That would be far too technical for a simple bookkeeping/basic-compliance man like myself, but I have found this (a bit old, I admit): http://www.timesonline.co.uk/tol/money/tax/article2461295.ece , ashamed though I am to be enlisting a Rupert Murdoch publication in my defence.

"I based my comment on anecdotal evidence and the fact that indirect taxes such as VAT, IPT, fuel tax etc hit everyone equally, regardless of income."

Why do they hit everyone equally? Poor people are likely to spend less of their income on VATable items than better off people.

It would still appear to me that people with larger incomes are more likely to pay more direct tax as a proportion of their income.

The article to which I posted a link gives the example of private school fees, which are not VATable. The figures it gives are 44.2% tax paid by the lowest 10% of earners, and 35% paid by the richest.

Another reason the rich pay less tax is that they can afford to pay for tax advice. Obviously savings are free of VAT too.

Rich and poor both have to pay vat on essential services so in spite of taking into account increased costs of heating a larger house the poor will pay a higher % of their income on tax. Gym membership, larger cars eating out and luxury items are a lfiestyle choice.

I don't think somebody on £23k a year spends a third of their income on heating.

 If we are talking about a fairer tax system (society?) then we should also look again at the subject of indirect taxes as opposed to direct taxes.

With VAT, the rules could (should?) be made more simple and should go back to the original precept of VAT being a tax on "luxury" goods only, ie no vat on any food and fuel for home use for a start!!

I don't think making tax simpler has anything to do with making it fairer.

The problem with making tax simpler is that it usually creates the possibility of more loopholes.

One area to should be looked at is P11Ds. Most people don't know how to complete P11Ds and HMRCs advice doesn't seem to be simple to follow and is spread all over the place. I think this is an area that could be simplified by considering why P11Ds are needed and making it easy for preparers to understand what should be reported.

 I don't think making the tax system simpler will necessarily make it fairer per se, but, if the tax system was fairer then it is more likely that the system would be simpler, more transparent and easier to understand!!

I disagree. If the tax system is simplified in a lot of ways people want it wouldn't promote fairness due to the loopholes created.

 Sorry  about the previous reply, tapped the wrong key.

Surely it would depend on what the "simplified" legislation states.

If there is a flat-rate of direct tax and all individuals pay tax on all their income (after personal allowance) of say 31%, then where is the loophole in that? This does of course assume that you consider a flat-rate of tax to be "fair" which is a different issue.

I think there's a lot of sense in scrapping NICs.

I'm not sure why you think it's a good idea to not allow tax reliefs on interest on certain loans, pension contributions, investment schemes, giving to charities.

Would you tax adoption allowances. armed forces operational allowances. awards for damages, betting winnings, child benefit, tax credits, disability allowances, ex-gratia payments from employers, income support, ISAs, insurance payments, premium bond prizes, etc.? There's many more types of income which are presently tax free. 

 I haven't actually said anything about not allowing reliefs on pension contributions etc.

You have to start somewhere and build on from that if you want to "simplify/make fairer" the tax system and that for me would be a flat-rate for all individuals on their taxable income. On that idea alone I don't see any loopholes.

What constitutes "taxable income" on the other hand is another matter and possibly another discussion.

“I haven't actually said anything about not allowing reliefs on pension contributions etc.”

You did. You said pay tax on all their income (after personal allowances) – not some of it - see below.

“If there is a flat-rate of direct tax and all individuals pay tax on all their income (after personal allowance) of say 31%, then where is the loophole in that?”

“You have to start somewhere and build on from that if you want to "simplify/make fairer" the tax system and that for me would be a flat-rate for all individuals on their taxable income. On that idea alone I don't see any loopholes.

What constitutes "taxable income" on the other hand is another matter and possibly another discussion.”

But isn’t that the most fundamental concept which tax deals with. Many of the complications in the tax system arise from trying to make the system fairer and encouraging certain actions.

All you appear to be saying is go back to an unsophisticated system and then when people explain that there should be more complications you seem to accept it.

I agree that changes can be made to make some areas simpler but I don’t think it needs to be accompanied by the mantra of simplification otherwise some people will ignore the fact that tax has to be complicated.

 Just because tax  is complicated doesn't mean it has to be complicated!

If you want to make this country a "fairer" country you have to start by simplifying legislation so ordinary people can actually understand what is happening and what is supposed  to happen. Tax is just one aspect of this and the starting point for this particular aspect is that a flat rate of tax is "fairer" and "simpler"!

You will find that if tax is simplified in the way you want people will simply have plenty of opportunity to not pay tax. It wont be fair.

 Not if everyone has to complete a "return of income"!

(NB this phrase is deliberate - if I used the term "Tax Return" or "Self Assessment Return" this would suggest that the form would be as complex as the current Tax Returns are to complete for the bod in the street!!)

How do capital gains fit in your new system?

The only change I have seen you suggest is a flat rate of income tax and combine income tax and national insurance.

What other changes do you recommend?

 On reflection, I don't see why we need to have a separate "capital gains" tax as such. If all such gains (proceeds less costs) were taxed as "income from the sale of capital assets" they would then be taxed at the flat rate.

With regard to the traditional family business, ownership passed from generation to generation (prior to death or on death) would be exempt from tax. Tax would be due only on the sale, or winding up as appropriate, of the business.

You do of course have to address the question of what constitutes a business - it would no longer be relevant with a flat rate tax to have to have a different tax treatment for an investment business.

Simplifying the tax system cannot be done by mere tinkering with the existing rules - it needs a radical re-think and overhaul of the whole tax/welfare regime! 

I accept I can't expect you to give a total rewrite here but I would have thought you could have mentioned a few more changes to the present system. From what you say there wouldn't be many changes other than flat rate tax, no NICs, exemptions when business passed down the generations. I don't think that can justify a total rewrite.

 Assuming those are my only ideas/thoughts then I accept that the words "total re-write" may be inappropriate.

Instead, all relevant legislation would be abolished and a very simple, easily understood set of rules, would take its place!

However, as we don't live in a simple world, I doubt very much that the vested interests who make lots of money and/or obtain huge powers from legislative complexities would allow anything so simple to actually happen!

The tax regime is only one part of the bigger picture and cannot realistically be looked at out of context; this effectively starts an ideological debate which I think could continue indefinitely and is probably not suited to AWeb.