As we have said many times in our tax brief, and to adapt an American aphorism, the UK deserves a tax system which looks as though it was designed to be that way. Recent statements by the Chancellor of the Exchequer Philip Hammond suggest a willingness to overturn some of the piecemeal changes put forward by his predecessor, and to take a broader view of the UK fiscal system.
While it’s easy enough to understand that the idea of abandoning George Osborne’s proposed 17 per cent UK corporation tax rate might be important in demonstrating that the UK is not indulging in harmful tax competition while simultaneously negotiating the terms of its departure from Europe, there is much else to commend a simpler system.
Of course, many suggestions for simplification have been made – by the office for tax simplification and by others – over the years. Some have found their way onto the statute book. Others remain no more than ideas for future consideration, or to be quietly ignored.
It seems to us that, in his Autumn Statement, the Chancellor of the Exchequer might usefully turn his mind to five possibilities.
First, the balance between the taxation of income and short-term items on the one hand, and the taxation of longer-term gains on the other. With income tax rates and capital gains tax rates for individuals having been so different for so long, it’s easy to forget that the tax system consciously discriminates in favour of long-term returns. After all the lessons learned from the great financial crisis, this clearly has merit. However, topics such as the taxation of UK property returns – both rent and capital growth – have produced a discussion in which the distinction between income returns and capital gains is blurred. With UK housing remaining near the top of the list of public concerns, now would be an excellent time for the Chancellor to start a structured debate on how the tax system ought to deal with income and with long- and short-term gains, in a way which meets the broadest needs of the country in a demonstrably equitable fashion.
Part and parcel of this is the interaction between income tax and national insurance contributions on earned income. While the different rates and allowances mask the exceptionally high effective rate levied on the highest levels of earned income, now may be the time to contemplate different tax rates for different types of income and gains. The integration of income tax and national insurance contributions would be a necessary part of this. While deep thought would be required, it’s almost self-evident that a simpler and arguably fairer system should result.
Recent debates about fairness in the UK tax system have tended to centre on tax rates. However one looks at UK tax rates, and of course recognising here the development of separate taxing rights in parts of the UK, the current tax-rate regime is definitely a blunt instrument. It’s hard to address the nuances required of a progressive tax system when the structure of income tax rates bands is so unrefined. Leaving aside dividend taxation for the present, tax rates are a very unsubtle 20 per cent, 40 per cent and 45 per cent. It’s hardly surprising that, when coupled with national insurance contributions on the one hand and tax credit entitlements on the other, the result is anything but sophisticated, nuanced and progressive. While easy-number headline rates may be politically desirable, they don’t take advantage of the ability of computers to work out tax rates based on any number of rate bands and any percentage rates applicable within those bands. For the purposes of illustration, a system with 10 rate bands running from, for example, 20 per cent to 45 per cent might achieve far greater social goods without the cliff-edge effects of the current system. Definitely something worth thinking about.
The unsatisfactory nature of the current income tax rate-band structure is made clear in a recent report on UK poverty, causes, costs and solutions from the Joseph Rowntree Foundation, which demonstrates that a two-person/one-earner household, with two children, can be on the verge of paying 40 per cent income tax and still be defined as being in poverty. If anybody in the Treasury doubts that the starting point for the 40 per cent higher rate of income tax is out of touch with real life, this proves the case.
Then of course there’s Brexit. We’ve already noted that UK corporation tax rates are unlikely to decline to the 17 per cent level proposed by George Osborne. But freedom from European regulation means that the UK tax system will no longer be constrained by state aid rules. So, in the all-important area of stimulating small and medium-sized enterprises in the UK, the Chancellor now has the opportunity to consider relaxing some of the recent restrictions applied to tax-favoured investments such as venture capital trusts and the enterprise investment scheme.
Many too feel that UK business would be stimulated, jobs created and climate change obligations met if the Chancellor of the Exchequer reintroduced, perhaps only for a limited number of years, the tax and other incentives previously available to the renewable energy sector which were withdrawn at such short notice. As the Financial Times recently observed, you may not be interested in the climate, but you can be sure the climate is interested in you.
If you would like to discuss any of the points raised, please contact George Bull or your usual RSM contact.