Budget 2010: It’s a laugh - cutting the cost of tax administration

How do you make an accountant laugh? Tell them that the government has once
again promised to make the tax system simpler and easier to understand.

In 2005, HM Revenue & Customs calculated that the total administrative
burden placed on UK business by the tax system equated to approximately £5.1bn a
year.

In the Budget earlier this week, HM Revenue & Customs revealed three
targets for reducing this administrative burden on businesses over the next
year.

The first target is reduce the overall administrative burden that the tax
system places on business by at least 10% by March 2011 – equivalent to a total
reduction of about £510m, although this is a drop in the ocean compared to total
UK tax receipts of £541bn.

The second target is to reduce the amount of tax forms forms they have to
complete by at least 10% over five years, equivalent to a total administrative
reduction of £337m; the third target is to reduce red tape in the audit and tax
inspections of compliant businesses by 10% over three years and at least 15%
over five years -administrative reductions worth £14m and £21m respectively).

The targets, part of an ongoing drive to cut red tape in the tax which began
in 2006, were welcomed by small businesses and tax experts. But many were still
deeply skeptical, arguing that the latest measures had been tried before in
slightly different forms and failed to make a big impact.

“It sounds great but I wish it would work,” said Richard Mannion, national
tax director at Smith & Williamson, the top ten accounting firm. Mannion
notes that UK tax legislation currently runs to more than 8,000 pages – a
technical blockbuster that makes simplifying the system an uphill struggle.

One problem, Mannion added, is that the government has been unable to stop
tinkering with the tax system.

Some new rules, for example, such as restrictions on tax exemptions for
workers eating at their company canteens have made things unnecessarily
complicated and forced people to change their behaviour, Mannion said.

Cathy Corns, partner at Mercer & Hole, was also skeptical about the
taxman’s promises. “HMRC hasn’t said how it will reduce the administrative
burden,” she said, adding that the finance bill, which is due in the next few
months, will likely introduce new tax rules to an already complicated system.

Still, the taxman can point to some success in reducing the paper burden on
business. Since 2006 HMRC said it has made £950m worth of savings to business
through administrative savings, and been flexible over tax payments by allowing
businesses to make payments in installments.

Technological developments will also help to reduce paperwork in the tax
system.

HMRC has said that filing tax returns and accounts online, which will become
compulsory for companies from April 2011 will make compliance easier for
businesses.

That might trigger a rueful laugh from tax advisers and their clients.

IN OUR VIEW

The government boasted this week that it had met its own targets for
cutting the cost of tax administrations for business. At 10% and equivalent to
£50m, that’s not exactly small beer. But it’s not entirely sure that the
government is tackling the root cause – the endless expansion of tax
legislation. There’s clearly more to be

done and perhaps the government should take the issue more seriously and
consider allowing an outside body to review the process and make
recommendations. Without that the heavy burden looks here to stay.