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Is our tax system perfect?

12th Aug 2019
Partner An unnamed firm
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AccountingWEB's anonymous partner in practice anticipates stormy seas ahead for HMRC over the next few months and years.

I can’t believe that any reader will respond “yes” to the question used in the title.

If nothing else, they will have read numerous articles in this column and elsewhere on AccountingWEB suggesting that almost no element of the UK’s tax regime is currently fit for purpose.

However, there seem to be two or three influential men (and this one is gender-specific at the moment) who believe otherwise.

Unless my memory is playing tricks, when a new government is appointed one of the first things that it does is announce proposals to overhaul large swathes of tax legislation and operation.

While there has not been a change of government as such, when a new Prime Minister, Chancellor of the Exchequer and Chief Secretary to the Treasury with demonstrably different policies from their respective predecessors take office, I would have expected them to charge in fists flying with taxing proposals designed to make them look good, ideally improving the operation of a massively flawed and depressed department at the same time.

Instead, Boris Johnson, Sajid Javid and Rishi Sunak have been making bold statements about spending pledges but given no indication of having any thoughts or plans regarding any of our taxes.

Even worse in my eyes, those charged with overseeing HM Revenue and Customs have gone on record as stating that for the next three months (and presumably a much longer period after the fateful Halloween day) they expect staff to concentrate on preparations for leaving Europe rather than administering the tax code.

To date, the only publicly stated tax proposals from the new regime came from its head. Mr Johnson notoriously deciding that the only thing wrong with our tax system is the threshold at which higher rate tax should be paid. This will be increased from £50,000-£80,000, with some minor tweaks to National Insurance Contributions added into the mix.

I have to ask the question – is this blind-eye approach a tax avoiders’ and tax evaders’ charter? If the government does not wish to close any further loopholes, many of which allow the richest in society on both corporate and personal levels to make hay while the sun shines, the tax take is going to go down at a time when we need it to bolster the flagging economy.

If nothing else, one might have expected Mr Javid to understand tax avoidance strategy and its potential cost to the Exchequer given his former career as a senior Managing Director of Deutsche Bank, a company which implemented a highly artificial tax avoidance scheme that failed spectacularly in court.

One might also wonder whether those involved in the seamier side of the tax business might conclude that if large numbers of HMRC officers are tied up with Brexit business, this could be the perfect time to rob the economy blind.

More specifically, I would imagine that pretty much any inspector dedicated to VAT is going to be commandeered far away from their usual role of exposing wrongdoing.

I could be wrong, but I anticipate that HMRC is going to go through a rough time over the next few months and possibly years. Staff morale is at rock bottom the years and therefore cannot go any lower. However, more employees might decide to leave in despair or disgust, as their vocations are ignored in favour of new projects that may well fill them with little enthusiasm.

The need to address issues of tax simplification, avoidance and evasion more seriously might also be forgotten for years to come.

What will happen when we leave Europe, particularly if this happens in a peremptory fashion? Will we just chuck away all of the existing VAT legislation, reduce corporate tax rates to become a haven, conveniently ignore abusive tax avoidance by big players and hope for the best?

Who knows – quite possibly nobody including the Big Three mentioned at the start of this article.

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By AndyC555
12th Aug 2019 12:44

"I have to ask the question – is this blind-eye approach a tax avoiders’ and tax evaders’ charter? If the government does not wish to close any further loopholes, many of which allow the richest in society on both corporate and personal levels to make hay while the sun shines, the tax take is going to go down at a time when we need it to bolster the flagging economy."

I'd expect such a comment from some of the more lurid and ill-informed ends of the media but not on here.

It's a gross caricature to suggest that the current tax system is like some lawless wild-west with evil rich companies and individuals running rings round a hapless taxman. The majority of the sensationalist media stories portray a tax system working how it's supposed to. Overseas companies don't pay tax here but the ignored flip-side is that UK companies don't pay tax in every country they sell to. Companies paying huge bonuses to staff will of course reduce their taxable profits but the ignored flip-side is those staff paying tax at higher rates.

Point this out to critics and there is just mumbling about unverified and unnamed cheating that "must be going on".

A scathing criticism of Richard Murphy's 2010 figure of a £120bn 'tax gap' (google House of Commons briefing paper 7948 and read p13 onward) pointed out that such gross distortions ran the risk of encouraging tax evasion. If everyone was 'at it' and 'getting away with it', why not join in?

Just as bad, a government running scared of a media constantly telling us that the rich pay nothing in tax and laugh maniacally at us as they do so is going to result in ill-thought out legislative attempts to be shown as acting tough.

If HMRC staff have low moral and are leaving, constantly saying that they're rubbish at collecting taxes is hardly going to help.

Is the tax system perfect? Of course not. Is it as hopeless as portrayed? nowhere near.

Thanks (2)
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By Justin Bryant
12th Aug 2019 13:05

Yes, I agree with AndyC555. What are these loopholes etc.? This isn't Italy you know. Also, I read recently that the richest 1% pay 27% of all UK income tax. Is that not enough?

Thanks (1)
By mrme89
12th Aug 2019 13:21

If the richest 1% paid their staff more, their staff would pay more tax and the profits of their business would reduce meaning less dividends, and in turn, less income tax.

The gap would then shorten.

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Replying to mrme89:
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By AndyC555
12th Aug 2019 15:17

What 'gap' would be shortened?

And why does it have to be shortened?

To be in the top 1% of income earners you need earn £162k p.a. before tax. How many staff are you expecting they employ? And on what salaries?

Many on such salaries don't own a business. They are employed themselves. I don't suppose their employers are paying those salaries out of the goodness of their hearts. Those salaries are being earned.

If you're suggesting all salaries be reduced so that 'inequality' is reduced, the question has to be why? Should those on £162k have their salaries reduced by 50% so that the £81k be redistributed among the other 99%?

On £162k a year you're likely paying tax/NIC of £65k. Isn't that enough of a redistribution?

Thanks (4)
Hallerud at Easter
By DJKL
12th Aug 2019 14:41

Frankly the last thing I want is a bunch of cack handed politicians blundering through the tax code creating even more chaos.

When I am made Chief Financial Guru (a life appointment) I will actually commission a tax study to consider things like-

1. Is profit the base that ought to be taxed in the 21st century? If not what is?

2. If we are carrying on taxing income and gains can we consider removing the incentives for artificial shifting from one to the other. For property rental treating as a trade,introducing NI on same but allowing BPR etc might be sensible etc.

3. Possibly scrap IHT but consider CGT on pregnant gains on death (will spousal exemption). Maybe tax gains on PPR if not reinvested but widen reinvestment categories.

3. Can we at least invent a legal entity fit for purpose for contractors, and those engaging them, who currently jump through stupid hoops to stay on the right side of the law- the Germans have a type of entity one can register as, a professional service provider, why can we not do similar?

4. Consider being honest and scrap NI, just have a headline tax rate covering both and covering all income- always struck me as daft that earnings from sweat are taxed higher than earnings from a bank deposit- why, both are earnings and I do not really trust the state to provide the services the NI bit is intended to cover in future- how long until state pension gets means tested etc.

I am sure there are plenty of other areas to consider.

If one good thing ever comes out of Brexit let it be a proper rewrite of what we tax and how we tax it fit for the next say 100 years.

Thanks (3)
Replying to DJKL:
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By AndyC555
12th Aug 2019 15:25

"...how long until state pension gets means tested etc."

I can see that coming.

The state second pension and SERPS went by the wayside. The idea that someone contributing hugely more income tax and NIC might reasonably expect a higher state pension was deemed 'unfair'.

So now it's possible to pay £0 tax and NIC over a whole career and still get a full state pension.

Pension costs will continue to rise and the current direction is that more and more people will pay no tax at all. Those increased costs will need to be met from somewhere and another attack on 'the rich' will be justified, once again, in the interests of 'fairness'.

Robbing Peter to pay Paul always goes down well with Paul and there are many more Pauls than Peters.

What happens, though, when there aren't any more Peters left?

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