George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Memo to the Chancellor: ten top tips to simplify the tax system

The first foray of Chancellor of the Exchequer Sajid Javid into tax policy doesn’t seem to have gone as well as he might have hoped. Attempts to win support through declaring himself ‘a low-tax guy’ with a wish to do more for low-income groups don’t stand up to analysis. Only around 55 per cent of UK adults currently pay income tax. And an overwhelming 92 per cent of UK adults pay no tax or pay income tax at the basic rate only. It’s good to see that the Chancellor is concerned about the position of low-income groups, but I suggest that the solution is not to take more people out of tax. Instead, perhaps he should concentrate on wider aspects of the economy, to help create more jobs which pay better.

The Chancellor didn’t do much better on stamp duty land tax (SDLT). Interview comments suggested a forthcoming and possibly wide-reaching review of this unpopular tax, perhaps shifting the burden from home buyers to vendors. That possibility was quickly dismissed with a disclaimer so broad that it’s left us scratching our heads as to whether the Chancellor has left himself any scope to do anything except to possibly tinker with SDLT rates in his first Budget.

When it comes to the Chancellor’s desire to simplify the UK tax system, we can only applaud his good intentions. To get him started, I asked some of my colleagues in RSM’s tax team to suggest changes which they know their clients would like to see. Here’s a summary of what they said.

1. VAT and food

There are some magnificent food pairings. Lamb and apricots, for example. Cucumber and dill. Chocolate and chilli. Goat’s cheese and beetroot. The combination of VAT and food, however, often leaves a nasty taste because the complexity of the rules is an absolute nightmare. If the Chancellor wants to make life easier by simplifying the UK tax code, he should rewrite the zero-rating rules for food to make them more straightforward. Cutting through the red tape would be very welcome to everybody who has to apply the current rules, and it probably wouldn’t cut the tax yield at all.

2. VAT and the building industry

We urge the Chancellor to reconsider the implementation of the domestic reverse charge for construction services. 

3. Income tax – clawback of personal allowance

For nearly 10 years, income over £100,000 has attracted an effective income tax rate of 60 per cent as personal allowances are withdrawn at the rate of £1 for every £2 of income. With National Insurance Contributions (NIC), the effective rate is generally 62 per cent for income between £100,000 and £125,000. Matters could be simplified and made fairer by adjusting the level of income at which the 45 per cent tax rate starts.

4. Abolish the High-Income Child Benefit Charge 

An unpopular and complicated tax that was introduced in 2012/13 is the High-Income Child Benefit Charge (HICBC). This claws back through the tax system child benefit paid to couples where the higher earner earns over £50,000 such that at income of £60,000 it is all clawed back. Someone on £50,000 having four qualifying children would pay an effective 81.26 per cent tax rate in these circumstances. A couple with children, often relying on one income as a result of child-care duties, are hardly rich with £50,000 or so of income. Abolishing HICBC would make the tax system simpler and fairer.

5. Cut technical complexity for companies

The UK’s corporate tax regime has an overly complex system of using different rules to tax different kinds of income. This system evolved for historical reasons which are now becoming increasingly irrelevant, making the compliance burden unnecessarily technical and intricate for the vast majority of businesses. The abolition of this system would allow for a significantly simpler regulatory framework with a minimal impact on revenue for the Exchequer.

6. Tax treatment of expenses

The taxation of workers – employed/self-employed and partners – is a hot topic where differences abound. Make life easier by harmonising the tax treatment of expenses.

7. Align NIC and income tax

For that matter, how about merging NIC and income tax? They are both systems that an employer has to run and for small business (and employers of nannies!) it is overly complicated to run a dual system so why not just have one?

8. Get rid of the remittance basis for non-domiciled individuals

This phenomenally complex piece of legislation is almost impossible for taxpayers to fathom without professional assistance. For foreign nationals who come to work in the UK for a few years, the tax relief is very difficult to achieve in practice. This makes no sense for two reasons. First, if the idea is to encourage foreign companies to send workers to the UK, there are many easier ways to achieve this. For example, a time-limited deduction from taxable earnings. Second, the remittance basis obliges individuals to keep their salary and other foreign income outside the UK. Why not encourage them to bring their money to the UK and spend it here!

9. Making Tax Digital

Make future versions of Making Tax Digital more practical. In particular, make multiple returns optional as they seem to serve no practical purpose for HMRC.

10. But do not…

…reform Capital Gains Tax and pensions yet again. There have been so many changes already it is bewildering. 

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