Blogs/Vlogs

Is this the UK’s most difficult job? Tax simplification?

11 January 2017

Although we have not yet completed all of our 2015/16 tax returns (of course we fully expect to complete the task by 31 January as usual) we are quite rightly talking to our clients about their tax liabilities for the current year 2016/17. Many of them are concerned about the effects of two new measures: dividend tax and personal savings allowance. Some will be affected by the introduction of two new rates of Capital Gains Tax (CGT) and the way they react with each other and with Income Tax rates. On the face of it all these look simple changes but, like most of the UK tax code, they are exceedingly complicated, especially for taxpayers whose income falls into the higher or additional rate bands. In fact, in spite of the work of the Office for Tax Simplification (OTS), I would venture to suggest that the computation of an individual’s Income Tax and CGT liability is more complex in 2016/17 than at any time in my career!

As I carried out calculations to advise various clients on their potential 2016/17 liabilities I noted that there were no less than 13 different rates of tax involved. If you take into account the progressive withdrawal of personal allowances on incomes exceeding £100,000 yet another rate emerges (60%). This only takes account of taxes on individuals’ incomes and gains. There are many other types of tax and duties.

I turned to the Institute of Fiscal Studies for further information. In 2016/17 it is expected that the Treasury’s total income from all types of tax will be £665.1bn. Of this, £629.7bn will be derived from 23 different taxes and duties and the rest from something described as ’other taxes and royalties’. These are different taxes (not rates of tax). Most of them comprise several different rates. The four that produce most revenue are: Income Tax (£182bn); National Insurance (£127bn); VAT (£120bn); and Excise Duties (£48bn). Corporation Tax produces £44bn and, somewhat surprisingly, CGT, with all its complicating effects on the computation of personal tax liabilities, only raises £7bn.

If we look at HMRC, the agency which is responsible for collecting most of the £665bn, we see an organisation that is struggling to cope. In 2014 nearly four million letters to HMRC were left unanswered for more than 15 working days; in 2015 the average time it took for HMRC to answer a phone call was 47 minutes – in fact, it is estimated that the telephone companies made £97 million from HMRC customers kept on hold!

It is no wonder that HMRC cannot cope given the immense complexity of the UK tax code. It is probably the longest and most intricate of any in the world. At 121,000 pages and ten million words it is 12 times longer than the complete works of Shakespeare, 12½ times longer than the Bible and nearly 18 times longer than Tolstoy’s ‘War and Peace’. By comparison the shortest and some say most efficient tax code is that of Hong Kong with 276 pages.

All this complexity is wasteful and inefficient. A recent survey found that the average sole-trader (63% of whom complete their own tax returns) spent nine and half hours last year on completing his or her self-assessment form.

How have we ended up with such a monster of a tax code? One reason is no doubt the length of time the legislation has existed. In the UK, Income Tax was first introduced in 1799 and since then we have obviously been much better at adding legislation than repealing it. But the main reason is politics. Taxation funds the Government and the State. Government gets involved in more and more aspects of our lives and the Welfare State will always absorb as least as many funds as the Government is able to extract from the public. Many complexities arise purely as a result of social engineering, or, put more charitably, in pursuit of equality and fairness. The Government responds to lobbyists and special-interest groups and devises ever more tax reliefs and incentives to assist those it favours. On the other hand it seeks to prevent the exploitation of loopholes and practices of which it disapproves. One recent cause of complexity is the promise of Tony Blair’s Government to fix the basic rate of Income Tax at 20%. That has now become a sacred cow. No Government dares change the rate and therefore has to find less obvious measures of increasing revenues.

So every year more measures are added. Of those I mentioned above, Dividend Tax is intended to reduce the benefits of incorporation (reducing tax-avoidance), and the additional rates of CGT are part of the Government’s clamp-down on residential lettings (social engineering).

The OTS’s measures have so far been a drop in the ocean compared with the volume of new legislation introduced with each successive Finance Act. What is needed is the abolition of the entire tax code to be replaced with a new one starting from scratch, with clear objectives to create a society and economy fit for the next generation. That is the kind of Herculean task that I fear no UK Government will be audacious enough to undertake.

If you would like to talk to us about any of these issues; in particular about planning your tax strategy, please do not hesitate to contact me or your usual UHY partner.

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