It has been widely reported that the Chancellor, Jeremy Hunt, will unveil plans to simplify the tax system next week, but will we just see procedural tweaks or the major changes the system really needs?
While there have been promises of tax simplification in the past our tax legislation has continued to grow and with it more and more complexity. As a timely example, the Government has only just reintroduced more complex procedures, with marginal rates and Associated Companies for Corporation Tax reinstated from 1st April.
It has been suggested that The Chancellor’s measures will mainly surround Customs procedures and cryptocurrency. Whilst a reduction in the administrative burden for both would be welcome – and in particular the streamlining of Customs red tape would help businesses that import or export goods or services - to limit any tax simplification process to these areas would miss an important opportunity to simplify the tax system more widely, something successive governments have promised to do but in fact have delivered the opposite.
In our view, substantial reforms are needed to make the system simpler and fairer for everyone. For example, simplification of self-assessment tax is necessary, given the recent cut in dividend and capital gains tax allowances, which has brought more people into scope for filing a tax return.
It is unlikely that the announcements next week will really break ground on simplifying our tax regime, some areas that we would suggest could have a significant impact on transparency and simplicity for taxpayers include:
Removing the distortion of marginal rates of income tax and corporate tax at various levels is a good starting point for tax simplification. High marginal tax rates create a disincentive for individuals to work and earn more, which can affect the overall labour market and businesses. Simplifying the tax brackets and rates can make the system more transparent and fairer for everyone.
Merging income tax and National Insurance (NI) would simplify the system and reduce the administrative burden for businesses. The distinction between how the government uses these revenues is largely gone, and there is no need to keep them separate. Merging the two taxes would make it easier for businesses to calculate their tax liabilities and make it simpler for individuals to understand their tax obligations.
Simplifying the system of capital allowances would provide businesses with the certainty they need to invest confidently over the longer term. Full expensing is a welcome change, but businesses need more long-term certainty to encourage investment. A simplified system of capital allowances would make it easier for businesses to understand their tax obligations and make investment decisions accordingly.
Basing taxable profits on simply the accounting profit or eliminating the need for most tax adjustments would be a brave step towards simplification. This would reduce the complexity of the tax system and make it easier for businesses to understand their tax obligations. It would also reduce the burden of compliance and administration, freeing up resources for businesses to focus on other areas of their operations.
A simpler and unified regime for employee ownership schemes would make it easier for companies to allow employees to participate in ownership without tax issues. The current complex schemes can be a barrier to employee ownership, and simplification would encourage greater employee engagement and commitment.
In conclusion, tax simplification is essential to make the tax system more transparent, fairer and easier to understand for everyone. The proposals mentioned above are just a starting point, and in our opinion more reforms are needed to simplify the system further. We look forward to reviewing what the Chancellor does indeed announce later next week…