Reform is the surest way to guarantee tax simplification

There has been much talk among tax advisers in the last two years about simplifying our tax system. Tax law has become increasingly lengthy and complex with ever fatter Finance Bills. In response to concerns over this, the Government commissioned the Inland Revenue to consider possible improvements.

In July this year, the Revenue published detailed reform proposals in a consultative document. These focused on rewriting tax legislation in ‘plain English’, centring around redrafting and reordering existing tax law. The Revenue proposes to take the current legislation apart into its constituent propositions, rewrite it all in plain language – understandable to the layman where possible – and put it back together again in a more logical order.

KPMG survey

Tax advisers have been vocal in the debate on how to simplify UK tax law. Taxpayers have been less involved, so KPMG decided to give them an opportunity to voice their concerns. A survey was sent to the finance directors of 1,200 UK-based listed companies. Over 25% responded, which itself indicates a high level of interest. The survey invited comments on the costs of the UK tax regime, on whether current legislation is too complex, and on possible solutions. It also specifically canvassed views on the Revenue’s proposals for tax simplification.

When the results were analysed, it was evident that almost no one was satisfied with the existing state of UK tax legislation. One of the most dramatic statistics to arise from the survey was the cost which companies incur in complying with tax law. These have rocketed over the past five years by more than double the rate of retail inflation. The 2,100 UK listed companies currently spend around # 265m a year on their tax compliance.

Businesses made a clear link between this burden and the complexity and uncertainty in tax legislation.

‘Black spot’ areas

The most popular solutions identified were removing legislative ‘black spot’ areas (82% support) and rewriting in shorter, plainer language (80% support). The Revenue’s proposals hopefully will achieve much along these routes. More radical solutions involved abolishing some existing taxes completely (71% support) and adopting an accounts basis for tax (68% support). Proposals put forward by the respondents included a ‘flat tax’ and abolishing the Schedular system. Most abolitionist respondents wanted to abolish National Insurance Contributions as a separate tax and replace it with a higher rate of income tax. Several of the minor taxes were clearly perceived as ‘sterile in yield and fertile in dispute’.

Sixty-one per cent suggested abolishing the current capital gains regime.

These results and suggestions point towards major policy reform as a method of simplifying the tax system. The Revenue’s recent proposals fall somewhat short of this level of change. Major UK companies would clearly prefer the proposed reforms to extend further into the field of policy simpli-fication.

To do what the Revenue proposes will still lead to much improved clarity.

A traditional consolidation of tax legislation is in any event overdue: there has been no consolidation of ICTA since 1988 and the amount of new legislation in this period has exceeded that of the previous few decades combined. If the Revenue can add further to the readability of tax legislation, they will be achieving a great deal indeed.

Legal issues involved

Legal and procedural issues will of course need to be addressed. These will relate both to the process for approving the rewritten law and to the interpretation of the new law. The Revenue might completely discard the old system and replace it with a new one. Or, there may be a transitional period of two partial systems of new and old tax law working together.

The intention, presumably, would be not to change meaning: there will, however, inevitably be small changes in meaning as otherwise the whole exercise would be unworkable. Many of these legal issues will require Parliamentary input.

The Revenue operates within the constraints of Parliament and Government and may therefore not be able to deliver everything which taxpayers would like to see. The Revenue rewrite will constitute significant progress towards simplification. But UK business’ message is that policy reform will be required to achieve the 100% solution. A movement in this direction from Government would therefore be desirable, as long as it does not slow the progress of reform.

Ian Barlow is head of tax at KPMG.