Guy Kendall, Associate Partner at Claritas Tax, ponders whether tax will ever be simple, and whether it matters to business.
He can be contacted on guy.kendall@claritastax.co.uk.
One of the less prominent announcements in the recent mini-budget was the abolition of the Office of Tax Simplification. In the words of the government’s Growth Plan: “A simple tax system is critical for growth. Instead of having a separate arms-length body oversee simplification, the government will embed tax simplification into the institutions of government. It will therefore abolish the Office of Tax Simplification and set a mandate to the Treasury and HMRC to focus on simplifying the tax code.”
Well, I shall be the first to applaud if this actually comes to pass. Unfortunately, history shows that simplification is usually the first casualty when a Chancellor wants to incentivise or disincentivise something, often at short notice and with little or no consultation. The result is often a tweak here, a tweak there, a new rule shoehorned in or bolted uncomfortably onto an existing one. Inevitably this results in loopholes and unintended consequences.
This is all very irritating for tax advisers (although it does keep us in a job). But does it really matter to business generally ?
I think it does. A complicated and unpredictable tax code is a constant source of grit in the wheels. As any tax adviser will tell you, there are usually half a dozen ways of commercially getting from point A to point B, all with wildly differing tax outcomes which are not generally predictable unless you are a tax specialist. No one (or nearly no one….) minds paying their tax once when they make money, but there are plenty of traps which can result in tax being due twice (or more) on the same profit, or tax being due before a profit is actually realised into cash.
Some complexity is inevitable, of course. Life is complicated, business is complicated, so it’s too much to hope that tax will be entirely simple and easy. But it could be a lot simpler than it actually is, and unfortunately the UK is one of the worst culprits in this area – surveys regularly remind us that we have one of the longest tax codes (measured by the number of pages of legislation) in the world. Frequently those who are caught out by all the complexity are those who are least able to afford it.
When it was set up, the Office of Tax Simplification (“OTS”) was designed as a kind of buffer against the constant rule-making and tinkering of successive governments.. It couldn’t make policy, but it could take a wider and more long-term view of the tax landscape, point out anomalies or redundant rules and generally seek to suggest ways of tidying things up and simplifying them. One of its more refreshing approaches was to try to take a more business-centric approach in some of its reviews – what does tax look like if you are a growing small business? What does it look like if you are thinking about taking on your first employee? And so on. The traditional approach taken by HMRC (somewhat forgivably) and government (considerably less forgivably) is to make rules separately on a tax-by-tax basis, with seemingly little attempt to use consistent definitions or consider the overall combined effect of the different taxes.
Part of the OTS’s job was to call out the worst discrepancies thrown up by this piecemeal approach and to suggest ways of improving things, for example by aligning definitions, getting rid of duplication or pointing out unintended behavioural consequences – for instance the large number of businesses which deliberately choose not to grow further when they get close to the VAT registration threshold. No one even knew how many different tax reliefs we had, until the OTS went to the trouble of listing them all out (over a thousand of them, it turns out, an alarming number of which few people had ever heard of and which were being claimed by even fewer).
And now the OTS is to be abolished, and for myself I shall be sorry to see it go. If it has not always had the simplifying impact its leaders hoped, then this may be due to the fact that government has often ignored or de-prioritised its findings. Now we are reliant on that same government (OK the new one, but you know what I mean) to take the simplifying agenda forward in future. I hope I’m wrong, but I suspect that this will mean that principle of tax simplification will simply be lost among all the many other competing priorities of government finances.
On the plus side, it should keep tax advisers busy for some time to come.
