A tax system close to collapse?

A tax system close to collapse?

In just over a month's time, the Chancellor will deliver his third Spring Budget. We all know that predicting the future performance of a Chancellor based upon his past performance is a hostage to fortune. However, it seems likely that he will announce, in addition to the measures already at the consultation stage or which were mentioned in the Pre-Budget report, a further tranche of tax changes.

At one of our meetings with Revenue staff last summer, they indicated that with the material they had already on hand, the Finance Bill 2000 would be a ‘monster’. Sadly, over the last few months, their passing comment has been proven to have been rooted in harsh reality. The amount of draft legislation currently out for comment makes for depressing reading:

Corporate Venturing 57

Employee share schemes 38

Enterprise Management Incentive 28

Tonnage Tax 53

Climate Change Levy 93

Total 269

With these five initiatives alone, the Government has already clocked up 269 pages of A4 size pages, including a monumental 93 pages on the proposed Climate Change Levy.

There are others not in the list, for example the proposed new powers for tackling serious fraud.

There are other consultations about which we know some things but for which there are as yet no draft rules, for example the proposals for personal service companies, the reform of intellectual property and research and development tax credits.

Then there are possible changes to the existing rules for double tax relief, as well as the cryptic remark in the Pre-Budget report suggesting a fundamental reform of stamp duty.

Need we go on? Make no mistake about it; the 2000 Finance Bill will be huge. As accountants, should this huge round of new legislation not excite us? More work for us advising clients on the complexities and more fees?

On the contrary, it appears that we are not alone in thinking that this relentless increase in the quantity of new tax rules is not encouraging.

It is not just that these new rules are likely to be excessively complicated. That goes without saying. What is worrying is that most of us would probably agree that many of the 269 pages of new legislation mentioned above are not worth the paper they are printed on – they appear merely to tinker at the edges.

There is lots of style perhaps, but precious little substance.

Take corporate venturing. This proposal is designed to provide companies with 20% tax relief on investments into other companies. Rather than adopt a ‘bottom-up’ approach to a novel relief, the approach adopted is ‘top-down’, namely the wholesale lifting of rules from the enterprise investment scheme (EIS), but made even more complicated and restrictive. Any person who has had to try and make sense of the enterprise investment rules will despair at this development.

It seems a long time ago since Mr Lamont, in his 1992 Budget, proudly announced the end of the business expansion scheme (BES) – and with it ‘over 30 pages of complicated legislation’. How wrong he was. BES may be dead, but the rules have merely mutated like some virus to infect further parts of the tax system.

It is ironic that the draft legislation on corporate venturing was published at about the time that the CBI published a report into EIS. In a nutshell, the CBI believe that EIS is a failure because:

it is far too complicated;

the risk that relief will be withdrawn is too great; and

almost no one understands the scheme.

The charge is serious and the evidence damning. A jury would give EIS short shrift. However, in this topsy-turvy world of taxation EIS, far from being summarily dismissed, is now to be ennobled in yet another relief.

This sorry tale merely confirms, if any were needed, that we need a serious debate about the shortcomings of the current UK tax system. The Tax Faculty has started the debate with our discussion paper ‘Towards a Better Tax System’. We intend to follow this up with further papers this year. It will be a long haul to change attitudes, but we think it is our duty to do so, before the UK tax system collapses from within.

This article first appeared in the February edition of Taxline, the journal of the English ICA’s tax faculty. They can be contacted on [email protected]

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