The government claims to be in favour of fairness in the tax system, and the elimination of loopholes is seen as promoting the cause of fairness.
The foreign earnings deduction was introduced by a Labour chancellor as a relieving position for those working overseas for more than 12 months, and was abolished by a later Labour chancellor on the grounds that it was an unfair loophole.
After more than 35 years’ specialising in tax, it is my contention that one of the main sources of unfairness in the tax system is its complexity.
Unrepresented taxpayers, particularly now they are required to self-assess, are at a disadvantage compared with those who can afford professional advice.
One of the fundamental principles of tax is that the citizen can understand the basis on which he is being taxed. Successive governments have, in theory, espoused the cause of tax simplification, but in practice introduced practices that complicate an overcomplex system even further. Self-assessment began as ‘simplified assessing’, which was to be a simple change of basis without the need for any transitional provisions. In the event, not only were there highly complex transitional provisions, but also highly complex anti-avoidance provisions to prevent the exploitation of the transitional provisions. Few people today would claim that the current year basis of assessment, in all its manifestations, is simpler than the preceding year basis it replaced.
More recently, the introduction of taper relief, with complex matching provisions, tagged on to the system of indexation is not noticeably simpler than the system it replaces – particularly when, at the time of writing, the old system remains for companies.
I am in favour of legislation being written in a form that can be understood, and the examples so far of legislation written in ‘newspeak’ suggest that this is a worthwhile exercise. It is not, however, simplification, because every complexity of the ‘oldspeak’ legislation has to be rewritten into newspeak. This is throwing up some interesting anomalies and ambiguities.
The worrying point is that, even though some parts of the Finance Act 1998 are written, so far as practicable, in newspeak a large part of it is not, and there is a depressing certainty that the tax law rewrite project cannot be completed within the original five-year time scale. What is more probable is that it will be a struggle to rewrite existing legislation more quickly than additional legislation in the old style is enacted.
The sheer volume of legislation in recent Finance Acts is such that even tax professionals have difficulty in understanding the changes.
Tax law rethink
I would suggest that the time has come for a comprehensive review of the UK direct tax system, although I am not convinced that a Royal Commission is the ideal mechanism for such a review.
What I would like to see tried is a committee formed by members of the Treasury and the Revenue, with representatives from commerce, industry and the tax profession to consider the tax system that is required to raise the revenue the government needs, in a manner that is fair and certain for all concerned. It may be that the scheduler system has outlived its usefulness. It may be that the hallowed distinction, for tax purposes, between revenue and capital expenditure has no commercial relevance in the 21st century. It may be that accounting standards and principles can be sufficiently certain to be used as the basis of a fair tax system. It may be that a general anti-avoidance rule is a necessary part of any simplified system and that pre-transaction rulings need to become available as of right. I would not wish to pre-judge any of the deliberations of such a review body, but I do think that if we continue to complicate the system as we have done in the last ten years, we will end up with a system that nobody can understand.
We have a government that has shown itself prepared to innovate. Perhaps it should look anew at the whole system of tax.
Nigel Eastaway of TaxServe is chairman of the technical committee of the Chartered Institute of Taxation.
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