This spring’s surprise election campaign and the impact it has had on HMRC’s plans presents an opportunity to take a longer, deeper look at how to reduce the tax burden on business.
One of the arguments surrounding the beleaguered Making Tax Digital (MTD) project has been that the government would be better advised to simplify the tax regime first before digitising it. Now that the enabling legislation has been dropped from the Finance Bill, politicians have a chance to address those broader business concerns in their manifestos.
They have a wealth of research and policy work to draw on, ranging from the output of the Office of Tax Simplification (OTS), to business organisations and professional advisers. To set the scene for the debates ahead, AccountingWEB delved into those archives for ideas worth of inclusion in our own business tax simplification manifesto.
According to the Institute of Fiscal Studies, the government that takes office in June faces a structural problem with its tax base. Taxable profits have been falling since the global financial crisis to reduce the corporation tax base, and losses accumulated over that time continue to diminish the amounts collected.
The recovery from recession has also been “employment heavy”, the IFS notes, with a visible shift towards self-employment. Meanwhile, low wage inflation and the 82% rise in the personal allowance since 2010/11 has narrowed the income tax base
The UK’s poor growth is also a feature of poor productivity, which reflects the reluctance of companies that have cash to put it into expansion projects, and the difficulty those without cash have in gaining access to funding.
CBI economist Anna Leach looked into the sources of the UK’s productivity problem across a number of sectors. Poor infrastructure, planning regulations, workforce skills, investment, innovation and R&D all play a part in the country’s poor productivity - but increasing regulatory burdens have not helped, with new compliance regimes for financial services, transport and construction eating into available resources.
During the past few years businesses everywhere have also had to wrestle with pensions auto-enrolment and real time information for PAYE, with Making Tax Digital looming on the horizon.
The central issue for business tax is crystal clear. “Taxation in the UK is more complicated than it need be,” the IFS told MPs on the Treasury select committee in a written submission last year - and few accountants would argue with the institute’s assertion.
The unnecessary complexities and opportunities they present for tax avoidance stem from the urge to use taxation as a tool to stimulate or impede certain kinds of economic activity. A legion of buy-to-let landlords and personal service company owners will attest to some of the drawbacks of this approach.
The IFS explains that the problems arise when tax policy makers attempt to draw distinctions between different activities by offering preferential tax treatment for certain products, assets or income sources. Each of these targeted measures demands clear and detailed definitions as to what qualifies for support and what doesn’t - a simple, but deadly recipe for unnecessary complication.
“Moving towards a more neutral underlying tax policy, which taxes similar activities more similarly, would be the biggest step towards simplification,” the IFS argued.
This principle is not new. It goes back to the epic Mirrlees Review (and beyond) which emerged in 2011 with an agenda for tax reform. The proposals included:
- Taxes on earnings should be based around a progressive income tax with a transparent and coherent rate structure, with all income subject to the same rates
- Indirect taxes should be largely uniform – VAT on almost everything – with a small number of targeted exceptions on economic efficiency grounds
- A single rate of corporation tax with no tax on the normal return on investment
- Equal treatment of income derived from employment, self employment and running a small company
The Office of Tax Simplificiation, a child of the Tory/Lib Dem coalition, carried some of these ideas forward, but has so far achieved “small improvements around the edges”, according to an IFS review in 2014. The slow progress is down to a lack of resources and its focus on the existing tax system rather than policy formulation. Which brings us back to the dreaded tax policy short-termism - or “hyperactivity” driven by the need to pull headline-grabbing rabbits out of the Budget hat.
A truly business-friendly Chancellor would go back to some of the Mirrlees proposals and give the OTS a wider remit to dig into the principles underlying tax policy and set the Treasury on course for true simplification.
Practical proposals from the profession
Some of these points are patently obvious to accountants, who like the OTS are often asked by the Treasury and HMRC to comment on proposals that have already been formulated rather than being asked for what they would really like to see from the tax system.
A 2016 collaboration between accountants Grant Thornton, Prelude Group and the Insitute of Directors resulted in a report entitled Britain unlocked that drew on the experience of successful entrepreneurs to suggest ways of removing barriers to growth.
Britain is good at producing new businesses, with over 600,000 started in 2015, the report noted. But it falls down when it comes to scaling up their operations. One of the barriers to SME progress, the report suggested, was the UK’s punishingly complex tax system.
The tax system starts to bite when firms take on more staff, move to larger premises or solicit bigger deals. At each stage, the growing business will often lack the resources and time to overcome the new administrative hurdles. As well as endorsing the idea of merging income tax and national insurance, Britain unlocked suggested a few more proposals for simplifying business tax:
- Expand reliefs to encourage entrepreneurial investment
- Raise the small business rate relief cut-off point to £25,000
- Restore the annual investment allowance to £500,000 a year following last year’s reduction back to £200,000.
- Allow companies to pay Corporation Tax annually rather than quarterly until their profits reach £5m (up from the current £1.5m threshold)
- Consolidate the various employee share schemes into one share allocation scheme. The design should be simple and easy to self-certificate.
- Increased annual Capital Gains Tax exemption of £50,000 (up from current £11,100) to encourage entrepreneurs. This measure would have to be accompanied by “necessary anti-avoidance measures” - proving once again that tax stimuli almost always have a sting in the tail.
Let’s face it. Tax is more of a trap for politicians than a source of excitement, but the hyperactive tinkering through the early part of this century is having a visible impact on the economy, business and individual taxpayers. Failing to grasp the simplification nettle now could rebound on politicians if voters wake up to the source of many of their complaints and vent their frustration in the polling booth.
Help us refine the AccountingWEB business tax manifesto for the 2017 election. What do you think of the simplification and business support measures suggested here? And what tax reforms would convince you to switch your allegiance to a different political party?
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AccountingWEB’s Editor at large has been with the site since 1999, rising from news editor to editor in chief, global editor and head of insight. As a roving editor, he continues to investigate the profession's use of technology around the world. He devotes his spare time to technology history and an oddball collection of stringed instruments...