Fans of the Channel Four sitcom, the IT Crowd, will remember the advice given to hapless office workers when they called the IT service desk following their latest laptop meltdown. “Have you tried turning it off and on again?” would be the world-weary response to any and all queries.
The UK tax system is in need of a similar reboot. If you were building a tax framework from scratch then you would not have ended up with the current system.
Here’s a case in point: the Ten Commandments contains 200 words, the US declaration of independence has 1,300 and the Magna Carta has 4,000 words. The UK tax code clocks in with an excessive 10 million words.
It’s a slightly facetious example but the point remains that the UK tax code is verbose, complicated and always changing. It is in need of bold reform.
Some might say that the Government should be focusing all its energy on Brexit and it would be a mistake to use precious headspace engaging in an overhaul of the UK tax system.
But now is precisely the right time. The UK economy is at a cross roads – while recent GDP figures have shown better than expected growth, BDO’s own data shows that UK services output is hovering around recessionary levels. At a time of great change businesses crave simplicity and certainty. Anything policymakers can do to facilitate a more pro-business environment is welcome.
Of course, the Brexit negotiations will be complicated and will naturally dominate the Government’s agenda in the years ahead. We understand that leaving the EU will cast a long shadow over domestic policy but that is precisely why changes in the UK must be made to reflect the international realities.
Let’s look at the UK tax code in the context of Brexit
While Government may be tempted to reach for the lever of tax subsidies and tax breaks to encourage growth, these policies will be difficult to enact, especially if they contravene EU state aid rules and so complicate already difficult Brexit discussions.
Another alternative could be to cut corporation tax to a bid to attract more inward investment into the UK. The EU has already warned the UK about becoming a tax haven and it’s likely that the Government would also face a backlash from voters worried about the impact of tax cuts on public services like the NHS and schools.
There is a third way. The Government has the opportunity to make a virtue out of a necessity and, where possible, choose simplicity over subsidy to support the economy. Simplicity in doing business will give the UK a competitive advantage that does not breach EU rules. A poll of 500 of our clients also found that the majority would even accept a small tax increase in response to great simplicity in the code.
So how do we go about simplifying the tax code?
Earlier this year we launched the New Economy campaign looking at what policy changes are needed to help UK businesses thrive after we leave the EU. One major area in our thinking is tax simplification.
First of all we would like to see an alignment of National Insurance and Income Tax.
National Insurance no longer covers the costs of the benefits it was set up to finance back in 1911 (and expanded again after World War Two) and has developed in parallel with Income Tax, yet with a separate set of rules and regulations.
Having parallel taxes creates unnecessary bureaucracy and added compliance costs for employers. Aligning both taxes with an ambition to merge both into one payroll tax would remove economic distortions, reduce burdens on business, and improve fairness and transparency.
We would also like to see the Government take bold steps and agree a moratorium on all new business tax policies that do not simplify the system until 2020 or until the Brexit negotiations are finished (which ever comes first). In the last 30 years the UK tax code has increased more than tenfold. A commitment to simplicity would be a clear signal to the world that the UK is a destination where businesses can flourish.
Simplifying the tax system in the UK is a necessity for the short term and a way of ensuring competitiveness. Policymakers must use Brexit as an opportunity for bold thinking and create a tax system fit for the 21st century.
Jo Gilbey is Tax Partner at BDO.