The future of tax simplification

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Attempting tax simplification is like painting Brighton Pier while someone else is extending it to France.

Debate

This analogy was originally used by the late Lord Geoffrey Howe in relation to the Tax Law Rewrite Project, but John Whiting adopted it to describe the task of tax simplification while recounting the work of the Office of Tax Simplification (OTS).

Whiting was speaking as the former tax director of the OTS at a debate hosted by the Institute for Fiscal Studies (IFS) and the Chartered Institute of Taxation (CIOT). The other speakers were; Judith Knott independent commentator on tax, and Jonathan Riley head of tax at Grant Thornton.    

Why try?

Whiting’s arguments for attempting to simplify the tax system include:

  • it would make tax easier to understand;
  • tax would be easier to deal with;
  • fewer errors would be made by both sides, and less time would be wasted;
  • it increases trust and confidence in the tax system.

 The ultimate goal of simplification would be when the taxpayer understands what is required by the tax system and how to comply.

Causes of complexity 

To understand how to simplify tax, you first have to appreciate the causes of complexity. The OTS produced a complexity index which examined ten factors which cause complexity in the tax system. They found these were a mixture of technical issues which need simpler tax rules, and administration factors which pointed to easier procedures. The administrative factors were enormously important.

The OTS also identified that solutions to complexity must work for all parties. Something which might be simpler for HMRC may cause more complexity for taxpayers (MTD anyone?). Of course a procedure which is easier for taxpayers (filing on paper) may give HMRC a shed load of extra work.

Rocks on the road  

Even where tax simplifications are identified there are a number of hurdles to overcome which include:

  • cost to the exchequer;
  • how to deal with those who will pay more, who always shout the loudest;
  • risk of creating tax loopholes and the potential loss of revenue;
  • getting the change through Parliament in the face of inertia and vested interests;
  • lack of involvement of MPs in tax law process;
  • how will the policy will play politically – how will it be sold in a soundbite; 
  • the stock and flow of legislation.

The last point is illustrated by the Finance Bill 2017, which was the longest in history. We have an enormous amount of tax legislation and stemming the flow of new law is as important as dealing with the stock on the statute books.

Manage the rocks

Whiting emphasised that the task of tax simplification was not easy and it would require perseverance. He urged his successors in the OTS to communicate what can and cannot be done, and make practical suggestions. However, the key would be to get HMRC onside and create some deliverables. There needs to be capacity for change within the department, and it will be necessary to tackle the “it won’t be worth it” attitude.  

Where to start?

Whiting concluded that the best place to tackle tax complexity is at the start of the law making process. Simplicity should be built into policy development, so it should be included as a point to monitor on the Tax Information and Impact Notes (TIIN).

 The OTS suggested four principles to avoid complexity in the tax system:

  • ensure the proposed tax measure meets the policy aims;
  • focus the measure carefully;
  • design the measure to meet the aim; and
  • keep it up to date.

Knott agreed that the OTS needs to play a stronger role in the consultation process, as at present no one holds the brief for simplification.

Riley pointed out that the tax profession largely earns its fees from tax complexity, and that more co-operation between bodies to speak with one voice would help the cause of simplification.    

Nichola Ross Martin speaking from the floor at the end of the debate, suggested that the future of tax advice lies with artificial intelligence (AI). The task of tax simplification should be looked at from the position of making the AI solution work. The question should be: if AI was designing the tax system – how would it do it.

What would be your key deliverable for tax simplification?

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

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16th Jun 2017 09:20

The irony of the OTS is that since its creation tax has become by a factor of many degrees considerably more complex.

With the claw back of personal allowance, child benefit, dividend allowance, interest allowance, the new rules on lettings businesses the whole thing is a real mess and increasingly hard to explain to clients.

The key deliverable would be the ability to compute someone's tax bill in 3 or 4 lines on a bit of A4 and a pen.

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16th Jun 2017 15:56

I don't think that it's the complexity that's the real problem. It's HMRC's search for ways of increasing the take without putting up basic rate tax.

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16th Jun 2017 16:18

Really need an announcement that MTD will be scrapped very soon. Disaster aversion. It will be one massive mistake too far

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By Bill H
to steve 12321
19th Jun 2017 12:20

Totally agree Steve. Country is in a mess what with Brexit and this additional burden on our businesses is not the time. RTI was also a disaster and has not resulted in any benefit to the taxpayer so they should learn from that. Keeps civil servants in jobs though!

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16th Jun 2017 16:23

The cynical side of me thinks that the government likes tax being complicated because the public then don't realise how much they are actually paying.

The split of income tax and NICs is a classic example of this. They could have merged them years ago, but don't want people to see that they are paying 32% income tax, which they already are.

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16th Jun 2017 17:14

There would be very little point adding a metric of tax simplicity to the TIIN unless MPs started to use the TIINs to scrutinise legislation before they pass it. For example there were thirty measures in the draft Finance Bill which had TIINs showing no exchequer effect, administrative burden savings or HMRC savings. (So why were they being proposed in the first place?) Would MPs have noticed this and voted against them? What odds would you give...?

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to wendybradley
18th Jun 2017 10:23

Very good point Wendy.
Compliant Parliament stuffed with MPs who only ever follow the party line is one of the reasons why we have such a complex mess of tax legislation.

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19th Jun 2017 11:05

An old boss of mine once said "sometimes you just have to get the train rolling out of the station". What he mean was that sometimes complex arguments rage on and no one does anything. However, if you can agree the end objective, then you can make a series of small moves, with less objections, moving towards that end goal.

Let's hold that thought in relation to merging tax and NI. Everyone seems to think it a good objective, but no one has got the train rolling.

There was a politically stupid attempt to align NI for the self employed with employee's NI under PAYE in the last budget. This was not a bad idea in itself, but it went against a commitment in the manifesto and no amount of weasel words about it not being in the Finance Act could cover the political fall out.

If this had been explained as part of a wider policy objective to simplify the tax system plus realign benefit and pension entitlements so the employed and self employed are treated the same it could have worked. The key is to phase in any change gradually, so those who may be worse off have time to adapt.

The really big issue with merging tax and NI is Employers NI, which is really a disguised employment tax. Small businesses are being given relief from it, which is a start. For many large international businesses, Corporation tax is easily avoided, so Employers NI is the main tax they pay. Maybe a re-think on the fundamentals of how Employers NI and Corporation tax work together for large employers is a better route, whilst exempting all small businesses from Employers NI. Just a thought.

One other important matter is that Brighton Pier has been called the Brighton Palace Pier for almost a year now. It was named the Palace Pier when it was opened in 1899, because of its proximity to the Royal Pavilion, a Royal Palace. New owners changed its name to Brighton Pier in 2000, but after a massive local campaign, the latest owners once again agreed to include Palace in the name last year. Just saying!

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19th Jun 2017 11:23

The solution is staring us in the face.

Its not good for tax professionals though.

It couldn't be done before now, but now it can.

Solution:

Paper/coin cash is ceased, electronic means of payment only via regulated 'income' bank accounts. Regulated 'capital' bank account also exists. Every legal person has one of each by law.

20 to 25% (my estimate, depends on how much is saved from ceasing cash economy, and savings from ending HMRC) is skimmed from all monies flowing into the income bank a/c.

End of, no other taxation exists, no vat, no ers , no anything but this.

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to SJH-ADVDIPMA
19th Jun 2017 14:11

SJH-ADVDIPMA wrote:

The solution is staring us in the face.

Its not good for tax professionals though.

It couldn't be done before now, but now it can.

Are you sure, because I'm pretty sure the communications infrastructure still doesn't exist to allow electronic payments to be taken anywhere.

I'm also unconvinced about your regulated "income" and "capital" accounts. How will the two be defined? What is to stop people putting money in to the capital one that should be accounted for as income? What about transfers between people that aren't taxable income? If HMRC "skim" from money going into the income account, how will refunds (which would reduce income) be addressed? For that matter, how can a flat rate of tax on all income possibly be fair? Everyone will move into businesses with low overheads, since genuine business expenses will no longer reduce the tax bill.

Another over-simplified solution for someone that hasn't really thought about the details.

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to stepurhan
19th Jun 2017 14:39

Yer and then a hacker gets in and no transactions can be done for 3 days and you end up with a suitcase with holiday clothes on your doorstep which doesn't even belong to you.

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to stepurhan
19th Jun 2017 15:03

Seems like it might be a good idea as its frightened you into making an attack on me!

You have had a cursory think about it, reached a few road block's in your own mind and given up.

Ive had a deeper think.

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to stepurhan
19th Jun 2017 15:41

Are you sure, because I'm pretty sure the communications infrastructure still doesn't exist to allow electronic payments to be taken anywhere.

Such a project to change from cash & coin to electronic payment only would of course require investment. My assertion is that it is entirely possible, no technological impediment. The majority of residents in the UK do have the ability to pay for goods and services electronically, those that currently don’t (remote locations) would have to be provided for by installing the necessary infrastructure.

I'm also unconvinced about your regulated "income" and "capital" accounts. How will the two be defined?

I assume you are an accountant, do I need to add much to these descriptions at this stage? (Yes!) Ok, the capital account is by statute, and by regulation (by which I mean an national electronic/software banking system, controlled by BOE & banks) usable by certain transactions from certain institutions, e.g. the flow of cash for selling ones home or receiving loans. The exact nature of what is and isn’t included, and what institutions are permitted and their whereabouts, would have to be thrashed out.

What is to stop people putting money in to the capital one that should be accounted for as income? What about transfers between people that aren't taxable income?

The capital bank account is controlled by the national banking system, and not freely used by people as is today. I,e. if a person arrived at a bank wanting to put money in they would be turned away. Any money entering the income account would be taxed at a single rate.

If HMRC "skim" from money going into the income account, how will refunds (which would reduce income) be addressed?

This is an easy one? If my employer pays into my income bank account and makes a mistake, or if I buy something from Marks & Spencers and decide to send it back, then the unique transaction is partially reversed, there is a national banking/commercial system behind the scenes of this replacing cash and coin.

For that matter, how can a flat rate of tax on all income possibly be fair? Everyone will move into businesses with low overheads, since genuine business expenses will no longer reduce the tax bill.

If you’re going to be paying 20% tax on everything that comes into your ‘income’ bank account, and there is no longer a large and complicated tax regime, then it will be a great relief for everyone just to do business?

Another over-simplified solution for someone that hasn't really thought about the details.

I didn’t put in my original posting, you have to use your income bank to spend (apart from the permissible prescribed uses of the capital account)i.e. those are the only cards that would work on the high street, or making payments to suppliers etc. So sell your house and decide not to use the monies to buy another or other permissible capital account expenditures, transfer it to the income account and pay 20% tax, so nothing in it and you cannot spend, and therefore cannot live in the UK. There will of course be arrangements for those visiting the UK

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to SJH-ADVDIPMA
19th Jun 2017 17:00

SJH-ADVDIPMA wrote:

Such a project to change from cash & coin to electronic payment only would of course require investment. My assertion is that it is entirely possible, no technological impediment. The majority of residents in the UK do have the ability to pay for goods and services electronically, those that currently don’t (remote locations) would have to be provided for by installing the necessary infrastructure.

So you admit it does require infrastructure that does not yet exist. That's a pretty big hurdle to just ignore. What about reliability of that infrastructure? A telephone outage, such as we had due to a BT error last week, would bring business to a halt.
Quote:

I assume you are an accountant, do I need to add much to these descriptions at this stage? (Yes!) Ok, the capital account is by statute, and by regulation (by which I mean an national electronic/software banking system, controlled by BOE & banks) usable by certain transactions from certain institutions, e.g. the flow of cash for selling ones home or receiving loans. The exact nature of what is and isn’t included, and what institutions are permitted and their whereabouts, would have to be thrashed out.

I'm going to ignore the cheap ad hominem attack for the moment, since you don't appear to have a clear idea of the distinction yourself. Saying they will be "thrashed out" is just evading the issue. If you, as the person putting it forward can't come up with a clear split, who can? To take a simple example, selling a house is usually a capital item for an individual. Selling a house is a revenue item for a house developer. How does your system proposing distinguishing these two similar transactions?
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The capital bank account is controlled by the national banking system, and not freely used by people as is today. I,e. if a person arrived at a bank wanting to put money in they would be turned away. Any money entering the income account would be taxed at a single rate.

So who would it be controlled by? Hopefully not HMRC or similar. This very morning I had a conversation with HMRC where no-one was able to tell me where a substantial refund due to our client had gone. I don't want people like that in charge of my bank account.

I still don't see how you can prevent people putting money into the capital account though. If there is no cash, no-one can turn up at a bank with it anyway, so your example is meaningless. But what is to stop someone asking their customers to pay into the capital account. I know (from below) you are saying that transfers between the two accounts will be taxed. It still seems far too easy to at least defer tax by putting money in the wrong account.

Quote:

This is an easy one? If my employer pays into my income bank account and makes a mistake, or if I buy something from Marks & Spencers and decide to send it back, then the unique transaction is partially reversed, there is a national banking/commercial system behind the scenes of this replacing cash and coin.

Easy one if it's your employer or a major retailer. What if it is simply a customer who is a private individual? How does this system identify payments to them as these "unique" transactions? For that matter, how does it identify the receipt by them as non-taxable?

For that matter what if I transfer taxed money to my wife, or vice versa. Will that part of our collective funds drop 20% each time we move money between us? What about if I lend a friend some money when they come up short before payday? Will 20% be lost for my wanting to help a friend out?

Quote:

If you’re going to be paying 20% tax on everything that comes into your ‘income’ bank account, and there is no longer a large and complicated tax regime, then it will be a great relief for everyone just to do business?

This is the point at which I think you're just trolling. Are you really saying that someone with a 30% gross profit percentage is going to be happy paying the same as someone with a 90% gross profit percentage? For that matter, what about businesses that legitimately make losses in a particular year? Are they really going to be happy to be paying tax on top of those losses?
Quote:
So sell your house and decide not to use the monies to buy another or other permissible capital account expenditures, transfer it to the income account and pay 20% tax, so nothing in it and you cannot spend, and therefore cannot live in the UK.
Given I now think you're trolling, I'm not going to get into the detail of how this could screw people over through no fault of their own.
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There will of course be arrangements for those visiting the UK

You will, of course, not be providing details on how you expect these to work. Simple tax system, so there must be a simple way to do it.

Presumably they will somehow prevent them getting customer receipts paid direct to overseas accounts, which would get round your system in its entirety at a stroke. I'm sure other countries will be fine in you imposing restrictions on their citizens in this way.

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19th Jun 2017 11:29

Looking at the tax system today, I have come to the conclusion:-

Tax can never be simplified.

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19th Jun 2017 11:54

Hire out HMRC to the EU for free instead perhaps of paying Brexit leaving charges. The EU would be pleading for mercy within days (ha,ha).

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19th Jun 2017 12:47

It is actually all rather simple.

Finance Acts embody moronic politician's latest wunderkind vision for raising yet more tax in order their profligacy might continue, unabated.

Politicians only identify one concept to change society and "Make society fairer": TAXATION!

Unfortunately, for the poor majority, the corollary to all the rhetoric and high sounding pomposity, is that idiot Governments spend far too much tax revenues.

Central, Regional, County and Local government know this all too well and screw up the services they are meant to be delivering with the permanent mantra "Lack of resources!" Despite the singular fact they have far more funds than ever before...

Since politicians lack the basic core skills to themselves operate a hotdog cart at a profit, then clearly they are bereft of any vision of how to adjust the socio-economy.

Which is precisely why, from Thatcher on, they welcomed their employment rescue from "Inwards Investment". And from Tebbit onward, crowed how successful they had been!

Except...

Inwards Investors are not philanthropists: rather they are heard-nosed and uber-successful business people. Which is why, obviously, they exploited Britain's asset pool and utilised Double Taxation Treaties to ship their corporate profits abroad.

And who was it, precisely, who actually signed such treaties? Why it was a government minister!

Since Gideon Osborne, the towel folder, then after the event they themselves created, they then scream "Rape! Unfair! And whitter on about abusive Tax Avoidance etc.

Office of Tax Complification, more like! Mainly since the people driving it were the usual top ten practice honchos.

Only one way to honestly simplify taxation: junk the current codes, have a bonfire of the collective political vanities; and start again, from square one.

Simultaneously, savagely decimate government at all levels. Since this is where far too much of your and my hard earned cash evaporates!

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By Mike18
19th Jun 2017 12:51

What would happen if we were ALL self-employed, subject to protection of working rights. We could all look after our own tax affairs by submitting a statement of total net taxable income, mostly pre-populated, and merge direct taxes? Simple?

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By Crestax
19th Jun 2017 13:05

Haven't we been here before?
Simplification was supposed to have been implemented with the abolition of Surtax many moons ago! it was re-vamped with the introduction of Independent Taxation , which led to the treatment of husbands and wives as individuals when again the promise was to make tax 'simple'.
What has happened is ridiculously lengthy finance acts with repeated changes that far from simplifying the tax system has made it more complex than ever.
I have no doubt that any proposed 'simplification' will have the opposite result if history is anything to go by!

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By rbw
19th Jun 2017 22:03

I felt the analysis reported still missed important issues.

One is that IME practioners very rarely want simplicity at the expense of uncertainty. A simple (I hope) example is benefits in kind. Complex legislation could in principle be swept away and replaced by a simple "market value" rule. But I suspect practitioners and HMRC would be aghast at the lack of certainty.

Then there's fairness and economic efficiency. That's more than a matter of managing losers. It's also about not mucking up the economy. Unless of course there is now appetite for getting rid of the different treatment of income and gains.

And on a point of detail, I never understood why the OTS recommended merging tax and NICs without more on how to dealing with the well-known little difficulties (eg pensioners, pension entitlement). I wondered if it was Michael Jack's revenge on successors for his having to handle the same hot potato when he arrived as Financial Secretary.

Finally, don't overlook the harm done by the theatre of the annual Budget Statement. Modern Chancellors have to have something to say. So Treasury bright young things doing a couple of years on tax think up yet more cunning plans that'll sound good.

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