I had a pile of cold towels ready to wrap around my head on “tax day” this week, when the Treasury released 30 separate tax consultations and updates.
The purpose of this, ministers said, was setting out the government’s 10-year vision towards “building a trusted, modern tax administration system”.
Following so soon after Budget giveaways, tax advisers to the wealthy feared this was shorthand for taxing the bejesus out of their clients to pay for the pandemic.
Far from it. Most tax experts concluded that Tuesday’s announcements were “underwhelming” and a “damp squib”. I even had one email entitled “Phew!”
Aside from a minor clampdown on holiday lets, there was little to worry the richest. But there was plenty to trouble millions of self-employed and owners of small businesses who could have to pay two years’ worth of tax in 2024 thanks to a consultation on “timely” payments.
Keeping those cold towels on ice, the puzzling thing about tax day was the missed opportunity for wider reform of a tax system that is neither modern, nor trusted. Here are four areas where the Treasury and HM Revenue & Customs really need to get their thinking caps on.
Cut the complexity
We don’t need more tax legislation — the priority should be reducing and simplifying the UK tax code, already one of the longest in the world.
In the year 2000, when I started working as a financial journalist, the tax rules were published in two huge tomes (A and B) which you could just about fit into a rucksack. Twenty years later, the volumes stretch from A-H and would pack out a large suitcase.
“The problem isn’t the tax system, it’s the laws that sit around it,” says Nimesh Shah, chief executive of accountancy firm Blick Rothenberg. “Each tax has its own set of rules, but there’s little link back to other taxes.”
These silos of specialism mean UK tax laws are riddled with inconsistencies, cliff edges and tax traps waiting to snare the unwary and unadvised.
Where is the eagerness you’d expect from a chancellor such as Rishi Sunak to chuck some of those dusty volumes on to the bonfire?
We need a system that people can understand and have confidence in, yet too many require the services of a tax adviser to get it right.
Be honest about politically difficult taxes
“The tax system needed considerable attention even before we had Brexit, the pandemic and a climate emergency,” says George Bull, senior tax partner at RSM, bemoaning tax day’s lack of ambition to tackle these issues or other long-running problems.
Businesses and individuals weighing investment decisions in the UK still have little idea of the expected direction of travel on green taxes or the digital economy.
The radio silence on wealth taxes was palpable, despite recent reviews of both capital gains and inheritance taxes from the Office of Tax Simplification (maybe they’ll be brave enough to return to these in the next Parliament).
One welcome change? Sparing more grieving families from inheritance tax (IHT) form-filling — first recommended by the OTS in 2018. If it had been enacted at that time, this would have helped many who lost relatives to Covid-19.
Barnett Waddingham, a consultancy, complained there was “barely a bullet point” about the taxation of pensions, another area that has become too complex for ordinary people to understand.
Readers may have been relieved to see no hints of changing pensions tax relief (let’s see what the autumn Budget brings) but the nightmare of the tapered annual allowance did not merit a mention.
Nor did the Money Purchase Annual Allowance (MPAA), a tax trap that penalises over-55s who dip into their pensions, only to find their annual allowance drops from £40,000 to £4,000 for the rest of their lives. Last year, around 5,000 people a week were snared by this.
A strategy for the ‘gig economy’
How we tax employment remains one of biggest issues, but the Treasury is laser-focused on how quickly those taxes are collected.
We have employees; we have “workers” (a distinction highlighted by the recent Uber case); we have the self-employed. We also have limited company directors who pay themselves via dividends.
On top of this we have the unfortunate “PAYE freelancers” (taxed at source on the company payroll, with none of the benefits of employment) and professional contractors who face a similar fate under IR35 rules designed to tackle “disguised employment”.
The different tax treatment of these groups was laid bare by the furlough scheme, yet no consultations were launched to tackle these complexities — just speeding up tax collection.
The “timely payment” consultation suggests moving millions of self-employed people and small businesses to real-time tax payments as early as 2024, with monthly or quarterly bills replacing annual returns — meaning many face paying two years’ worth of tax in a single year.
The cash flow challenges alone led many experts to question the timetable. “There has to be a balance between the benefit to government, and the costs and difficulties this will impose on the self-employed and small businesses,” says Bull.
Who pays the penalty?
More frequent tax reporting increases the risk of making mistakes. The new tax penalty regime outlined at the Budget will work more like a driving licence, with errors attracting “penalty points”. The more points you have, the higher the fine.
Shah notes that the operative date for this is April 6 2023 for self-assessment, coinciding with the suggested timeline for real-time reporting. “Is this a coincidence or intentional?” he asks, adding that Budget documents forecast raising more than £400m from penalties by 2025-26.
Another question that this consultation needs to address is how you pay your taxes in real time if you haven’t been paid yourself? Chasing late payments is the scourge of freelancers and small businesses. It’s currently estimated that £23bn of late invoices are owed across Britain, despite various government initiatives.
This great squeezing forward of tax payments underlines the strategy of going after people who are already on the books (see also the renewed £1.7bn push on disguised remuneration schemes).
This is a much easier way of raising tax revenue than tackling the £12bn estimated to be lost to tax evasion and the shadow economy. And we still don’t know the true cost of fraudulent furlough claims and bounce back loan applications, estimated at several billion pounds. I’m sure you won’t be surprised to learn there was no consultation paper on that either.
Claer Barrett is the FT’s consumer editor, and a financial commentator on Eddie Mair’s LBC drive-time show, on weekdays between 4-7pm: firstname.lastname@example.org; Twitter @Claerb; Instagram @Claerb