Analysis - 'It's all your fault for practising avoidance'.
The Chartered Institute of Taxation recently issued a challenge to all MPs to complete their own tax returns, without the help of a tax adviser and using only the Revenue’s calculation guide.
Early indications are that few will be brave enough to accept this gauntlet, but we are convinced that those who do will swiftly understand why so many tax professionals feel passionately that it is time for real simplification.
There are a number of obstacles in the way. The first stone usually lobbed by the Revenue or the Treasury is that it’s all our fault for practising harmful tax avoidance and hence making the poor draftsman sit up all night writing ever more complicated anti-avoidance rules to stop us (and if we don’t stop soon, we might end up with a general anti-avoidance rule, after all).
This view may well have some truth in it, but it is a long way from being a complete answer. One fact which the Revenue seems not to have grasped yet is that complex anti-avoidance rules often give rise to the ‘best’ (ie most technically sound and most difficult to defeat) tax planning ideas. After all, if a transaction is structured so as to fit precisely within those rules, it must be taxed according to them, even if that result is not one which the draftsman had in mind at the time.
Conversely, radical simplification or reduction in tax rates can lead to a rapid fall off in creative tax planning – I have heard several capital gains tax experts muttering darkly into their beer that it is hardly worth their fees for clients to try to reduce the ten per cent rate which they can now achieve merely by qualifying for taper relief.
But the much larger rock which can be lobbed back at the government is that much of the complexity has nothing at all to do with tax avoidance.
The work of the Low Incomes Tax Reform Group has starkly exposed the bewilderment many elderly people feel when faced with the full panoply of the self-assessment system. And I have yet to hear anything remotely resembling a coherent explanation for the fact that the definition of earnings for Working Families Tax Credit is different from that for income tax – and differs again from that for the new Children’s Tax Credit to be introduced next year.
At this end of the scale, complexity bears heaviest on those least able to cope with it: if this is not a concern to politicians, and to the rest of us, it should be. Stating the problem is much easier than finding a solution. One of the biggest difficulties is that simplification, if it is to be revenue neutral, always produces losers, and they will always shout more loudly than those who happen to gain. So there is a great temptation to put things back in the ‘too hard’ pile, and a strong disincentive for a Chancellor who might be inclined to wield a reforming sword. A corollary is that when new measures are introduced (such as a new type of share scheme, or stakeholder pensions) there is much vocal lobbying to leave any ‘old’ incentives in place rather than causing anyone to lose out – and so the tomes of tax law grow ever heavier.
It all boils down to the old question of simplicity versus fairness.
A flat rate poll tax would be simple, but unfair in the eyes of most people.
Conversely, absolute fairness (if it could be achieved) would be so complex that it would be impossible for most people to understand and so inherently unfair: is this where the UK system is heading?
To break the deadlock, we need two things to happen. Firstly, both politicians and taxpayers need to accept that there is a price to be paid for fairness: a conscious decision needs to be taken as to whether that price is worth paying. It will be better to accept some rough edges – the loss of a relief (luncheon vouchers?) for some taxpayers, or minor tax avoidance by others.
Secondly, politicians need to be convinced this is an issue which matters and could win – or lose – votes.
The question ‘What does your party intend to do about tax simplification?’ could be an interesting one to ask at this season’s political conferences.
– Heather Self is a tax partner with Ernst & Young and chairman of the Chartered Institute of Taxation’s technical committee.