Government should focus on genuine tax simplification

The nation’s attention is shifting towards what may be announced in the first budget of the new government, which will be delivered on 30 October 2024. When it comes to any tax changes, it is important that tax simplification plays a significant role. 

What tax changes may be on the horizon? 

Labour’s manifesto included a handful of significant tax pledges, including a promise to ‘ensure taxes on working people are kept as low as possible’. Notably, the manifesto failed to make wider promises relating to capital gains tax (CGT) or inheritance tax (IHT).

Not so long ago, many taxpayers were hoping that the former government would abolish IHT. Abolition of IHT looks highly unlikely under a Labour government; the only mention of the tax in Labour’s 2024 general election manifesto was a promise to close a perceived ‘loophole’ available to non-UK domiciled individuals (non-doms). 

The relative silence on CGT and IHT has fuelled speculation of potential changes, and it may not come as a surprise if a consultation on the future long-term policy for these taxes is announced in an Autumn Budget. Any such consultation would likely take inspiration from reviews undertaken by the Office of Tax Simplification (OTS), published between 2018 and 2021. The government has already issued a call for evidence regarding the tax treatment of carried interest, a form of performance related reward received by fund managers primarily in the private equity industry and which, unlike other similar rewards, is currently taxed as capital gains, and hence at CGT rather than generally higher income tax rates.

In addition to a new tax regime for non-doms and potentially broader changes to CGT and IHT, a handful of other significant tax changes are expected in the short to medium term, including some that were promised by the former government in this year’s Spring Budget. This includes the abolition of the furnished holiday letting (FHL) tax regime and significant reform to the high-income child benefit charge (HICBC). Whilst draft legislation concerning the future treatment of income and gains from FHLs has now been published, very little detail regarding proposed changes to the HICBC has been announced. 

Why is tax simplification needed? 

The new government’s spending plans rely on both economic growth and reducing the difference between the tax theoretically due and the amount actually collected (the tax gap). Almost £1bn of additional HMRC funding has been pledged specifically to target the tax gap, which was most recently estimated at £39.8bn. More than half of this amount is attributable to taxpayers failing to take reasonable care, making errors, or relying on a different interpretation of tax law to that used by HMRC.

As part of HMRC’s targeted activity, taking steps to move towards a more simplified tax code should help improve compliance, reducing the likelihood of taxpayers making errors or arriving at alternative interpretations of tax law. A simpler tax code could also play its part in helping the economy grow as existing complexities may create barriers to growth. Simplification could therefore play a significant part in the government raising the required tax revenue, without having to increase the tax burden on the wider population. 

Whilst it is generally acknowledged that there is need for some complexity in our tax code, taxpayers with straightforward affairs deserve to have a simple and understandable tax system. Any tax announcements genuinely intended to reduce complexity should therefore be seen as a statement of intent from the new government. It is in the best interests of the government, taxpayers and HMRC to ensure tax simplification is a key consideration in any proposed tax changes.

For further information, please get in touch with your usual RSM contact.