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A heretical view of tax simplification

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The tax system is complicated because tax is rarely used solely to raise revenue. Any tax-neutral simplification would create winners and losers. Winners pocket their gains; losers complain – loudly. There are no votes for politicians in tax simplification; it is easy for most voters to comply with their obligations. The process by which tax legislation is created can perpetuate complexity. Consultation can add to complexity, by identifying anomalies and suggesting exemptions, but it contributes to scrutiny. Simplification should be focused on making it easier for taxpayers to comply with the rules, rather than attempting to simplify legislation. 

Imagine this meeting in 10 Downing Street:

Sir Humphrey: Good morning, prime minister. Bernard tells me you wanted to discuss a tax matter with me. Surely, the chancellor of the exchequer is best placed to help you complete your tax return.

Jim Hacker: Don’t talk to me about him! I want to talk to you about my grand vision.

Sir Humphrey: Another one?

Jim Hacker: Yes. I want to remind those clever clogs in the Treasury that I am the first lord of the Treasury. I am going to simplify the tax system. I want to win lots of votes – I mean, make life easier for hardworking taxpayers.

Sir Humphrey: That’s very courageous of you, prime minister.

Jim Hacker: [Panicking] Courageous?! What do you mean?

Sir Humphrey: I think it’s very brave of you to follow in the footsteps of your recent predecessors in treading down this path. One, you will recall, pushed through the community charge to reform local government taxation. Another stoutly defended his decision to abolish the ‘anomalous’ 10p income tax rate.

Jim Hacker: Bernard! Send a minute to the chancellor telling him that I expect to see bold measures to simplify the tax system included in his next budget statement.

Tax simplification is practically akin to motherhood and apple pie in unifying the entire tax profession. It is regarded as bad form to knock the cause, but here goes. Attempts to simplify the British tax system by reducing the complexity of tax legislation are a quixotic venture. The current system is far from ideal. According to the most recent review of the British tax system (Mirrlees, 2011), the hallmarks of the current system include a ‘jumble of tax rates, a lack of coherent vision of the tax base, and arbitrary discrimination across different types of economic activities’. Tax complexity makes it difficult for the government to administer the system. It imposes costs on taxpayers, and can impede their willingness and ability to comply with the tax rules.

Why is the tax system so complicated?

Complexity arises from trying to fit law around the natural facts of life; it doesn’t always achieve a perfect fit. The tax system is rarely used solely to raise revenue. Tax policy has to strike a balance between raising revenue and objectives such as fairness, redistributing income, promoting economic growth, correcting market failure and ensuring compliance in a rapidly changing political, social, legal, economic and international environment. Simplicity does not rank highly alongside the other objectives of tax policy. It is naive to argue that politics should play no part in tax design when taxation is one of the key functions of any government, and it is drenched in politics.

Another cause of tax complexity is the absence of information about the government’s wider strategy on tax policy, comparable to its long-term strategy for the administration of the tax system (as published by HMRC). This creates uncertainty over the direction of policy and a lack of transparency about the impact of actual and intended effects of individual changes on the system as a whole. Platitudes about promoting stability, predictability and simplicity are no substitute for a clear strategic direction.

Tax simplification is of importance to tax professionals and it should be of interest to all taxpayers, but there is no popular clamour for it. In contrast, businesses and special interest groups bombard the chancellor practically every day with suggestions for new tax breaks or requests for changes to existing ones. It is hard to imagine taxpayers mentioning the lack of progress on tax simplification as a concern alongside Brexit, the NHS, and other such issues when they are being canvassed for their votes. To put it bluntly, tax simplification doesn’t win any votes, but it can cost a government votes. Those who win from tax reforms bank their gains; losers make a public fuss and threaten to vote against the government.

The average taxpayer’s attitude to tax complexity

He doesn’t care about it! Taxpayers often complain about the level of taxes and the complexity of the system, but only a tiny minority take any interest in the rules. This is unsurprising. The vast majority of British taxpayers have little other income besides their employment earnings. Their tax affairs are normally dealt with through the PAYE system. PAYE subsumes the complexities of personal income taxation, including the interaction between cumulative income tax deduction and non-cumulative NICs computed on different principles on different rates. Most taxpayers don’t have to complete an annual tax return and, if they have any queries about tax, they tend to approach their employer’s pay department in preference to HMRC.

Most of the ten million taxpayers who are required to submit SA returns do so electronically. Those who choose to submit paper returns can have their liability calculated by HMRC by submitting them earlier. The introduction of digital personal tax accounts and pre-populated returns will further ease the process. Most self-employed taxpayers with a turnover at the level of the VAT threshold (currently £83,000) are able to provide simple accounts information to HMRC, comprising turnover, expenses and net profit or loss (this is due to change under making tax digital). They don’t have to categorise their business expenses. They have no incentive or inclination to take any interest in tax rules, beyond completing their return. For such taxpayers and many of those who advise them, it is not cost effective to have regard to anything but HMRC’s published guidance on legislation and related case law and practice.

For all but a minority who do have to submit annual returns, tax is simply an irritating chore. Most of those who submit tax returns don’t seek professional advice. Even those who pay for assistance don’t always take any interest in the rules or detail underpinning the figures if they ‘look about right’. This lack of direct taxpayer interest in the tax system means that there isn’t a great deal of political interest in reforming it, as opposed to paying lip service to the notion.

A brief history lesson

The reason that the system doesn’t look like it was designed on purpose is that it wasn’t! Our tax system is one of the oldest in the world, and is the result of annual accretions of interlinked legislative changes. Like our unwritten constitution, it has evolved and adapted to meet the changing and growing needs of the nation since income tax was first introduced in 1798 to finance the Napoleonic Wars. A fundamental simplification of the British tax system would require a root and branch reappraisal of the whole system. There is little political appetite for the kind of upheaval this would create because it has no popular appeal for the average voter.

The phenomenal growth of tax legislation has been facilitated by the necessity of an annual finance bill to renew income tax, a ‘temporary tax’ that has been with us almost continuously since it was first introduced. Adam Broke (2000) suggested that the government could ‘amend the law so that income tax was no longer an annual tax … [and] remove at a stroke the excuse for annual Finance Acts and …. encourage governments to free up legislative time by having biennial or even triennial Finance Acts’. However, despite the acute pressure on legislative time, parliament will never give up its hard won control over the government’s ability to raise revenues.

How tax legislation is created

It is necessary to preface this section with a saying often misattributed to the great German statesman Otto von Bismarck: ‘Laws, like sausages, cease to inspire respect in proportion to what we know about how they are made.’ This applies in spades to tax legislation!

Unlike other government departments, the Treasury doesn’t formally need to seek approval of the Cabinet Legislation Committee for the annual finance bill. Other departments have to make out a case and compete for scarce legislative time. If they are successful, they cannot exceed the number of pages of draft legislation they have been given permission to introduce. The finance bill, on the other hand, is a veritable juggernaut – the chancellor has final say on its size and composition – that receives priority in parliamentary drafting and its passage through the Commons.

Respective roles of Treasury and HMRC

The Treasury and HMRC are jointly responsible for policy relating to the development of tax measures and the design and delivery of the legislation. All decisions on legislative changes that affect direct and indirect taxes, NICs and tax credits are made by Treasury ministers. All new measures, including new tax exemptions or amendments to existing measures, are analysed, costed and subjected to intense internal scrutiny and challenge, prior to being scrutinised by the independent Office for Budget Responsibility.

Preparation of draft legislation

Draft legislation is prepared by the Office of the Parliamentary Counsel on the basis of instructions written by HMRC officials, in consultation with departmental lawyers and Treasury colleagues. Those involved in drafting instructions to counsel usually have direct experience of operational and compliance work to ensure that these practical considerations are taken into account. Tax legislation is written in the style pioneered under the Inland Revenue’s tax law rewrite project (1996). It incorporates a logical structure, is written in modern language, uses short sentences and includes definitions, signposting and a layout that makes it easier to read. It has made legislation up to 40% longer than previously, but it would be a retrograde step to revert to the former practice of using condensed and technical language. The volume of tax legislation and the rate at which it is continuing to grow annually is daunting. No matter how clearly it is expressed, its sheer bulk reduces the speed with which it is possible to identify and understand the relevant material.

Enter complexity

Officials have a tendency to make instructions to counsel as comprehensive as possible, particularly those covering potential compliance and avoidance risks. It is not easy to amend primary legislation, once it has been enacted. Ministers are generally more interested in introducing new measures than in tinkering with those initiated by their predecessors, and often only agree to changes that pose severe risks to the public purse. To avoid the embarrassment of admitting to ministers after the event that they failed to act on potential risks or did not anticipate them, officials have a tendency to introduce overelaborate measures. Another important factor contributing to complexity is the lack of time to stand back from draft measures to see if there is a simpler or better approach towards achieving the policy objective. Once the policy is agreed, there is normally a mad rush to draft instructions for parliamentary counsel, prepare consultation documents and budget documentation, and comment on draft legislation.

Consultation does not necessarily lead to simplification. The bulk of consultations concern how measures should work, rather than the prior question of whether they should be introduced. Ministers are not keen to hear killer arguments about why their pet schemes won’t work after they have been publicly announced. Responses tend to highlight omissions and inadequacies, and generally, the greater the number of views that have to be taken into account, the more qualifications that need to be introduced, i.e. they tend to make legislation more complicated. However, consultation contributes immensely to the scrutiny of draft tax legislation. It is, in practice, the only stage at which measures receive proper critical scrutiny. As Professor Sir Alan Budd noted (2003), ‘the House of Commons has neither the time nor, apparently, the inclination to undertake any systematic or effective examination of whatever tax rules the government of the day places before it for approval.’

A possible way forward

Transactional simplicity, making life easier for taxpayers, appears to be a more pragmatic approach than aspiring to simplify tax legislation. It is predicated on the basis that tax will always be complicated, but that it can be made simpler for taxpayers to comply with the rules. For example, the operation of PAYE on those who are not within SA minimises what these taxpayers have to do to meet their obligations by withholding to a high degree of accuracy. The use wherever possible of deduction at source reduces collection difficulties, results in fewer points of collection and minimises costs for taxpayers. The availability of guidance, software and online calculators can also make life easer for taxpayers.

It is interesting to note that this is now the view of John Whiting, the distinguished former head of the Office of Tax Simplification (OTS). In a valedictory interview, he confessed with characteristic candidness that ‘cutting out pages of tax law … [is] not as powerful as administrative simplification [in] making the system easier to deal with’. Whiting and his colleagues were successful in obtaining views from those qualified to contribute, who don’t normally respond to consultations.

It is now up to his admirably qualified successor Paul Morton to build on these achievements and to take advantage of the OTS being on a statutory basis with increased powers. Much of the OTS’s future success will depend on engaging with HMRC about the way in which policy is delivered, rather than trying to simplify rules that have already been enacted or seeking to influence policy design. One of the most fruitful areas where the OTS can contribute is in the improvement of HMRC guidance, its processes for dealing with taxpayers’ enquiries, online forms, etc.

Tax utopia

Despite the elapse of 40 years since Lord (Geoffrey) Howe first launched his crusade to simplify tax, we are no closer to reaching the tax simplifier’s utopian state of Brobdingnag (described in Jonathan Swift’s Gulliver’s Travels, 1726) where: ‘No laws of that country must exceed in words the number of letters in their alphabet … They are expressed in plain and simple terms, so that people are not mercurial enough to discover above one interpretation.’

Before any readers book their fares to this ideal land, a word of caution: in Brobdingnag, it is a capital crime to write a comment on any law. Instead, ponder this thought: many of us would not be involved in the tax profession today but for the appeal of the frustratingly intellectual complexity of our chosen subject. It is why some of the best paid accountants and lawyers are those who specialise in tax. And ask yourself whether a simple tax system would be as much fun!