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