FT: In pursuit of a far less ramshackle tax system

In pursuit of a far less ramshackle tax system By David Martin

Financial Times Published: March 6 2005 19:48

The debate on what is the right level of tax for Britain will continue in the run-up to the election and beyond. But what nearly everyone can agree on is the need for a simpler tax system.

Today, the complexity of tax law makes it difficult for ordinary citizens to understand their liabilities, creates expense, distortion and uncertainty, and encourages artificial tax planning. Tax law cannot continue to grow in complexity forever. Substantial reform is not only desirable but also achievable.

The Inland Revenue tax rewrite project is a welcome step but it is intended only to make the law more intelligible, not to make it simpler. Income tax is currently being redrafted but corporation tax is not expected to be addressed before late 2006. There is now an opportunity to review the latter to see how it might be rationalised.

Sadly, the Treasury/Inland Revenue consultation process on corporation tax launched in 2002 looks likely to disappoint. Only a few modest proposals are now on the table concerning early objectives to reform the tax treatment of capital assets, rationalise the system of taxing different sources of income under different schedules and remove distinctions between trading and investment companies.

This is not enough. Far more could be achieved. For example, almost all the remaining schedule A provisions (mainly directed at taxing lump sums paid in connection with leases) should be abolished, so as to bring land taxation into line with general accounting principles. About 55 out of 88 provisions for taxing capital gains of companies that could impact on tax profit could be abolished because they have become redundant, because the rules are duplicated elsewhere or because they are not appropriate for companies.

Much anti-avoidance legislation should also go because it has become redundant, or because it should be restricted to individuals or because it actually serves to promote avoidance.Many of the remaining avoidance provisions need to be refocused on the real mischief. The current law on depreciation should be simplified. Complex rules such as those governing relief for companies in the same group could be improved and substantially shortened. Rules for the timing of realisation and the deductibility of costs should be brought in to line. Overall, it is estimated that tax law for companies should be reduced by at least half and possibly by as much as three-quarters.

Naturally, some rationalisation will carry a cost either for the exchequer or for the taxpayer. Each side should be ready to give and take on a package of measures in order to create a more transparent and user-friendly system, with fewer distortive effects, that would be the envy of international competitors.

Following a review of corporation tax, many of the lessons learnt could then be applied to income tax. Self-employed people could, with few exceptions, calculate profits in the same way as companies. Hundreds of sections introduced over the years applying to employee benefits should be reviewed to extract the principles involved and apply common charging provisions where possible.

Similarly, capital gains tax is grossly complicated and correspondingly expensive to collect. It could be simplified in many ways, for example, by revising the rules for share pools, simplifying the rules for leases, and repealing miscellaneous small reliefs and exemptions. The complex rules for national insurance contributions also impose heavy compliance costs on employers. Admitting that NICs are in reality a form of income tax would mean that the same tax base could be used for both NICs and income tax, thereby allowing them to be combined into one system. The difficulties in achieving this would appear to be more political than technical.

The prime objective of most direct taxation is to identify and tax profit. This is not always easy. In most situations, however, the objective can be achieved much more simply than at present. We have a ramshackle system of miscellaneous tax rules that has grown over decades without any overall review of tax law and of how its various areas should fit together. The opportunity should now be taken to do this on corporation tax.

The writer, former head of tax at a leading City law firm, is author of Tax Simplification: How, and Why, It Must Be Done, published today by the Centre for Policy Studies. The CPS and the FT are co-hosting a debate this evening entitled Can Britain Afford NOT to cut Taxes?

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