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The outside of 10 Downing Street| Election year gives hope for tax simplification| AccountingWEB
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Election year gives hope for tax simplification

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Philip Fisher suggests a number of radical changes to the tax system for whoever is the post-election Chancellor of the Exchequer. Could a change of government lead to a long-awaited review of tax simplification and equity? 

11th Jan 2024
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Although it is theoretically possible for the government to hold off the next general election until January 2025, the general assumption confirmed by Rishi Sunak is that it will take place at some point this year.

When Jeremy Hunt announced that he will be delivering his Budget as early as 6 March, that set commentators into a frenzy about a spring election, although late autumn is still the hot favourite.

Whenever it comes, we will see a new government with a fresh mandate. This might be Tory or Labour with an overall majority or there could be a hung parliament, leading to an alliance, coalition or another general election.

Our profession will inevitably focus primarily on the tax policies that will begin to come into play soon after the election.

Everyone will have their own priorities but for this accountant, simplification and equity should be the two prime considerations. To that end, here are some ideas that Jeremy Hunt, Rachel Reeves or whoever is the next Chancellor of the Exchequer should think about adding to the mix.

Income tax

The greatest simplification would be to index personal allowances and higher rate bands again. This would take many out of tax completely, while saving others from the privilege of paying higher rate taxes.

At the same time, if this humble accountant were to be Chancellor of the Exchequer, he might suggest restoring personal allowances to all, since the current law is unintuitive and unfair.

The obvious way of paying for these two measures is to increase tax rates in the higher bands.

National insurance contributions

This one is easy. Employee and self-employed contributions should be abolished forthwith and income tax rates adjusted proportionately.

There is also a strong argument for abolishing employer’s contributions, although this may be a longer-term project as an alternative means of raising the lost income would have to be debated and enacted.

Pension contributions

While any incoming government is likely to see the benefit in encouraging private pension saving, the removal of a fixed cap on lifetime contributions qualifying for tax relief was controversial and could easily be reversed. Going a stage further, there has been talk in the past of restricting relief to basic rate tax or even an arbitrary percentage that could be lower.

VAT

VAT is massively complicated. Perhaps it is time to consider removing it from more items? At the same time, there is a fairly strong argument for implementing it fully on certain goods and services that are exempt or zero rated at present.

Non-doms

This historical throwback is quite frankly ludicrous. If you tried to explain it to the average American, they would look at you in disbelief.

Even if the net result of abolishing the status was a loss to the Exchequer, which is hardly likely, getting rid of it would be fair and save HMRC and the courts a great deal of effort and anguish, not to mention expense.

Inheritance tax

The current government keeps floating the idea of abolishing inheritance tax. Since it only applies to around 27,000 estates in a busy year, that could be a valid argument.

In this particular case, there is a simple alternative, which is to replace inheritance tax with capital gains tax on death. The best way of implementing this would be to allow for a generous exemption to keep as many as possible out of the charge.

If that is too radical, an alternative is to increase the threshold thereby taking many more estates out of the tax. As a quid pro quo, the rate would need to be increased to avoid loss of funds to the Exchequer.

Windfall taxes

There are too many situations in which companies and even partnerships make inflated profits as a result of factors outside their control.

Whether this be a pandemic, or war or anything else, there must be a strong logic to taxing some or all of the excess gains made.

Business rates

The business rates system is antiquated and no longer fit for purpose. It needs an overall shakeup and, once again, abolition could be the way forward, though once again this will need to be paid for.

Multinationals

Far too many of the world’s largest companies make vast profits in the United Kingdom but pay negligible taxes. At the same time as re-working business rates, it might be appropriate to come up with an effective plan to levy far more tax from companies that can easily afford to pay it.

Loopholes

Tax legislation is ludicrously long and complex, meaning that there are innumerable loopholes used by those that can afford high quality advice. Closing as many as possible must undoubtedly bring in billions of pounds to the Exchequer, although it might not be good news for some firms of accountants, who make a significant proportion of their profits by advising on implementation of whizzy schemes and arrangements.

Funding HMRC

To achieve all of this, HMRC needs to be properly funded. Quite frankly, doubling the budget for investigations would pay for itself overnight and then some. Why is it that Chancellors of Exchequer cannot recognise the self-evident fact?

Replies (27)

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By Open all hours
11th Jan 2024 11:36

Gordon Brown said things were too complex - until he really got stuck in and meddled endlessly. The only way we will see simplification is via loss of accuracy (cash accounting) or loss of ‘fairness’ which politicians would find difficult.

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the sea otter
By memyself-eye
11th Jan 2024 12:26

Won't happen. Politicians will always 'tinker' to get votes.
Witness every budget since Moses levied a 'crossing tax' the Israelites after the parting of the red sea!

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By AndyC555
11th Jan 2024 12:42

"Non-doms...

getting rid of it would be fair ...

"If you tried to explain it to the average American""

Imagine a foreign citizen who comes to the UK but has a business in his home country. The factory and the workers are there. The schools, hospitals, roads, police force and all the other infrastructure that help maintain that business are paid for by that other country. The UK has spent not a single penny to help the earning of those profits. The UK government won't tax those profits, unless the foreign citizen chooses to bring those profits to the UK.

Quite why that needs explaining to the average American and why we should care what they think anyway, is another question.

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By AndyC555
11th Jan 2024 12:45

Far too many of the UK’s largest companies make vast profits in other countries but pay negligible taxes in those other countries.

it might be appropriate for those other countries to come up with plan to levy far more tax from UK companies that can easily afford to pay it.

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By ireallyshouldknowthisbut
11th Jan 2024 13:49

I think you missed, "ditch the doomed project MTD". This would save a huge amount of cash and administraiton.

On IHT I favour a gift tax to assist with wealth redistribution. IHT is supposed to be there to help level the playing field and not entrench wealth. It utterly fails in that respect as its so easy to avoid. The low number of estates falling to it to me demonstrates its a failed tax, but this is not an argument to remove it.

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Replying to ireallyshouldknowthisbut:
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By tralala
11th Jan 2024 14:43

Over time MTD is saving companies money and time - primarily by encouraging them to use software to generate tax returns, rather than relying on calculator and pen.

Accuracy is also up, apparently, and it's becoming easier to find and fix errors. Self Assessment in particular will help individuals stay on top of tax liabilities, by being able to get their real-time tax position given current earnings.

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Replying to tralala:
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By Tom+Cross
11th Jan 2024 15:03

From your commentary you seem to have a very positive outlook, which conflicts with the general tone, on this forum.

It would be interesting to know the source of your positivity.

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Replying to Tom+Cross:
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By D V Fields
12th Jan 2024 17:07

Probably sarcasm being the "source".

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Replying to tralala:
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By Open all hours
11th Jan 2024 15:07

Well done. Yours is the opposite of my experience.

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Replying to tralala:
Ivor Windybottom
By Ivor Windybottom
11th Jan 2024 16:49

Nurse! Nurse! He's out again!

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Replying to tralala:
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By AdamJones82
11th Jan 2024 17:01

Joined today to answer this. Smells like a software vendor

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Replying to AdamJones82:
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By Tables Force
11th Jan 2024 17:07

Have a look at their profile...

Links to https://gofile.co.uk/ (file a VAT return in 30 seconds)

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Replying to tralala:
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By Tables Force
11th Jan 2024 17:06

Would have been appropriate to add a software house disclaimer to your post!

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Replying to Tables Force:
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By tralala
19th Jan 2024 12:03

Oh help! Oh no! It's a ... software company!!

Sorry, I hadn't realised a disclaimer needs to be added to all posts - thought a profile with associated logo was fine. But noted!

In answer to all your comments above: the experience I have is based on over 1/4 of a million VAT returns filed through our service, and associated feedback from customers. The first time our clients file a MTD return can be a small learning curve, but it only takes doing it once to get used to the new format.

And b) errors in filing are absolutely down. We've seen this much more as people are using software to generate VAT Returns rather than pen and paper... especially given that some VAT rules are relatively complex, so software can reduce the potential for mistakes in understanding the rules as well as in making calculations themselves.

I totally get that some clients and even some accountants have had issues with adjusting to MTD, but over the long term the feedback (at least that we've had on our end) is the opposite.

*disclaimer: #GoFile provides MTD software services

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Replying to tralala:
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By johnjenkins
19th Jan 2024 14:17

Tralalalalalala land

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Replying to tralala:
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By johnjenkins
12th Jan 2024 09:40

You must be reading from the 2015 script.

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paddle steamer
By DJKL
11th Jan 2024 17:50

Increasing IT rates to pay for NI removal will have the pensioner lobby up in arms, and with age demographics there are a lot of them and a lot looking forward to being them , all these have a vote, so in the words of Sir Humphrey, "That is brave, Prime Minister"

(my wife for instance, age 64, occupational pension in payment, state pension in two more years, cannot see her welcoming increased IT (though we have it already living in Scotland) and I know she welcomes now no NI for her (In fact when she did work NI was usually greater than her IT)

If you have worked all your life paying NI, thinking you are getting something back for the thousands you and your employer have paid, to be hit in retirement with extra IT so that others can be spared paying NI is going to be a pretty hard sell . (Especially if, like me, you just completed your tax return today and spotted that broad slug of earning over £43,663 up to £50,270 where you are already paying 41% IT- that cost me £1,387.47 extra tax for the joy of having the camper van party in power with the Greens)

Agree scrapping IHT, agree CGT on death (I would include a PPR not passing to spouse), I can endorse extra IT on rental income, but I think I would wish to see pensions excused the increase.

Re tax relief on pension contributions restricted to basic rate, implement that you implement no contributions, the lack of flexibility using a pension means I would not contribute if basic rate in basic rate out, I want more to compensate me for tying up the funds
These days I am shoveling more cash into my ISA than my SIPP (notwithstanding retirement proximity and HR tax paid), and if fewer have adequate pensions this is going to hurt future governments paying for shortfalls (people already save too little)

Only way it could have persuaded me to pay in more is if pension access had been made broader pre retirement /through life etc. (Remember with pensions we trust that what we think will be the rules are still the rules when we retire, that lack of current access increases the risk someone in government can nobble your savings in the intervening years, so makes me, certainly, contribution cautious)

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By FactChecker
11th Jan 2024 18:50

"Employee and self-employed (NI) contributions should be abolished forthwith and income tax rates adjusted proportionately" ...
... well that's just lost the votes of the powerful 'pensioner' lobby (which includes a majority on close to the breadline with nowt but SP and maybe Pension Credit coming in).

Of course I suspect you're merely trying to 'ginger up' a dry topic ... but there's absolutely no point to that unless you put a bit of effort into integrating the proposals (for instance the above might make more sense if allied to a universal PA of say £25k p.a).

As it is, the above is just a series of ill-defined clickbait paragraphs (you know, the kind that promise something interesting but don't actually deliver anything ... just complaints without solutions).
Even the politicians can do that!

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By matthewleitch
12th Jan 2024 09:44

I'm getting near the end of doing the probate and tax work on my late mother's estate. What a nightmare. HMRC and the court service have made this much, much more difficult than it needs to be by badly designed forms, software glitches, and general over-engineering.

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By indomitable
12th Jan 2024 14:18

"arranging the deckchairs when the titanic is sinking"

The biggest issue is government spending and lack of growth (and I mean GDP per head NOT GDP overall)

There are so many structural issues to solve that I fear it will be a generation before anything changes

Tinkering around with rates here and there wont make a blind bit of difference, but I agree with the sentiment of simplifying taxes

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Replying to indomitable:
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By Tom+Cross
12th Jan 2024 17:14

Briefly, I think you agree with my sentiments. The UK is on its buffers (a*s*).
I can't remember a time when I was more disappointed for the next generation.
There is no growth. The latest administration had the opportunity to use flair and imagination to promote true growth. With hindsight; George Osborne failed and successive Chancellor's have failed.
Yes, Covid had a massive effect on the economy. However, there were many years, before that period, where opportunities were missed and those opportunities are still being overlooked.
The man with the short trousers looks lost, for much of the time. And don't get me started on many in the cabinet.
Can't think that Sir Starmer will make much of it, either.
Seems that we're doomed.

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Replying to Tom+Cross:
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By matthewleitch
12th Jan 2024 18:18

It's time to look for something more specific and directly beneficial than growth of the GDP or GDP / capita numbers. We know the various ways these can be deceptive and, now that our economy is mature, those problems matter a lot more.

It is more important to focus on health, longevity, contentment, sustainability, capabilities, fairness, truth seeking, and so on.

In the push for sustainability we could measure separately (1) how satisfying our lifestyles are, (2) how demanding our lifestyles are in terms of resource consumption (including human labour) and (3) how efficiently those demands are met by our current technologies.

We don't have many of those measures in place at the moment, but we do know that CO2 per capita in the UK has fallen hugely. I think energy use per capita has also improved but I haven't checked those figures specifically recently.

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By Marlinman
14th Jan 2024 15:07

I'd like to see council tax scrapped and councils funded by central government. It's the most evil tax ever invented, completely unrelated to ability to pay, continues to increase every year and could cost you well over a hundred grand over a lifetime.

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Replying to Marlinman:
RLI
By lionofludesch
18th Jan 2024 18:22

Marlinman wrote:

I'd like to see council tax scrapped and councils funded by central government. It's the most evil tax ever invented, completely unrelated to ability to pay, continues to increase every year and could cost you well over a hundred grand over a lifetime.

Mmmm, well, the theory goes that, the bigger the house you live in, the more able you are to pay. Not saying I agree with that.

Council tax increases - and service cuts - are directly linked to cuts in central government funding, so you're on to something there.

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By matthewleitch
14th Jan 2024 15:26

Our taxes should be gradually switched towards taxing wasteful consumption and pollution, and away from taxing things we would like people to do more of, such as working, passing on wealth to family, buying insurance, and moving house (often downsizing or to find work elsewhere).

All income from working, whether from employment, self-employment, or partnership should be calculated and taxed in the same way. It also should make no difference how a business owner takes money from their business. Any means one chooses should result in exactly the same tax charges payable at the same times.

An intelligent person with some mathematical ability and the right motivation could devise the tax scheme in a few months. More work would be needed to devise the transition to simpler calculations and collection methods.

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RLI
By lionofludesch
18th Jan 2024 18:20

The National Insurance one is pie in the sky.

Who's going to risk their voting base on increasing basic rate tax to 40%?

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Replying to lionofludesch:
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By matthewleitch
18th Jan 2024 18:41

Shifting taxes from one type to another typically gives advantages to some people and disadvantages to others. It also means that people have a tax rise to complain about even though there is a tax cut that should please them.

The solution in both cases (that I have never seen used) is to explain to the electorate how the total tax take is being regulated and how the impact on different people is being controlled. Ideally, do the tax shifts in small increments over time, and show that each shift has had no effect on the overall tax burden and has not had a catastrophic effect on any small group of tax payers.

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