Raise your glasses to 1798 and all that

As the rest of the world prepares for Christmas, the Inland Revenue kicks off celebrations to mark an anniversary of a rather different kind – 200 years of income tax.

Fears that the public may be less than enthusiastic about this milestone have not held back Revenue plans to commemorate the bicentenary. Financial secretary Dawn Primarolo is today due to open a major exhibition marking the event at Somerset House in London.

In what it promises will be an educational, interactive and artistic exhibition, the Revenue is offering three-dimensional exhibits which will tell the story of tax through the ages and into the future.

Visitors should not be alarmed if they are greeted by an eccentric figure sporting a white wig and breeches. He is not a clerical officer on the run from the Revenue, but an actor dressed as 18th-century prime minister William Pitt, the man with the dubious distinction of having introduced Great Britain to income tax.

Pitt the Younger brought in the tax on 3 December 1798 as a temporary measure to pay for the Napoleonic wars. The system was modified by his successor, Viscount Sidmouth, who introduced taxation at source and the schedule system still used today.

Apart from a temporary reprieve during a short outbreak of peace, the tax continued until 1816, a year after Napoleon was defeated at the Battle of Waterloo. Parliament then decided that all records connected with it should be destroyed, and taxpayers enthusiastically helped to stoke a bonfire of the records at Westminster.

In 1842, the tax was reintroduced by Conservative prime minister Sir Robert Peel, pressed by an empty exchequer and growing deficit. Herbert Asquith made some changes to the system in 1907, introducing the concept of differentiation between investments and earnings.

Income tax at this time was aimed at the very rich and did not hit the man in the street until the Second World War. As the country struggled to pay for the war effort, rates were increased and thresholds lowered to bring the joys of taxation to over 12 million workers.

Corporation tax and capital gains tax were introduced in 1965 by chancellor James Callaghan, a former Inland Revenue employee, and VAT was introduced in 1973.

Although stamp duty and all manner of weird and wonderful taxes, for example on wigs, bachelors and hair powder, existed prior to 1798, it is income tax which is the main ancestor of today’s extremely complex tax system.

The intricacy of a system that has developed over the last two centuries is a major bugbear for Nigel Eastaway, chairman of the Chartered Institute of Taxation’s technical committee.

Asked to comment on the bicentenary last week, he said: ‘The fiscal authorities in this country are probably responsible for creating one of the most complicated fiscal authorities in the world. It’s about time we sat down and had another look at the way things are done.’

Eastaway is in favour of a more radical approach than that taken by the tax law rewrite now underway, aimed at simplifying legislation. ‘In my view, the process highlights the ludicrousness of the attempt to rewrite concepts which are totally outdated,’ he said. He favours a thorough overhaul of the system and proposes the abolition of many hallowed concepts, such as the distinction between income and capital.

David Oliver, tax partner at Arthur Andersen, also has radical ideas about the future. ‘Isn’t it about time they privatised the Inland Revenue?’ he says, slightly tongue in cheek, but admitting the idea is not as improbable as it sounds.

John Whiting, tax partner at PricewaterhouseCoopers, takes the idea further, proposing that the Revenue should follow corporate trends and embark on a takeover trail of tax collection agencies around the world.

This thought is perhaps less fanciful than Whiting’s other idea, which is that the Inland Revenue should mark the bicentenary by granting some sort of amnesty to taxpayers.

It is generally agreed that the Revenue seems to be marking its bicentenary with a more robust approach towards tax collection.

Oliver comments that the man in the street is already starting to feel the effects of this. He predicts: ‘In the US, fear of the tax authorities starts with potty training. This respect bordering on paranoia about the taxman will become more common in the British citizen of the future.’

TIMELINE: A BRIEF HISTORY OF INCOME TAX

1798: William Pitt, the Younger, introduces income tax to fund Napoleonic wars

1803: Henry Addington, later Viscount Sidmouth, brings in taxation at source and the schedule system

1816: Income tax repealed one year after Battle of Waterloo. All tax records burned

1842: Sir Robert Peel announces reintroduction of income tax

1907: Chancellor Herbert Asquith introduces different income and investment taxes

1939-1945: Rapid increase in taxpayers as thresholds are lowered and rates increased to finance war effort

1944: PAYE introduced

1965: James Callaghan brings in corporation tax and CGT

1973: VAT introduced.