Our tax system is a total mess

The kinds of negotiations and deals made between HMRC and large firms, which have been the subject of much attention lately, are essentially undesirable, especially when one compares this to the treatment of SMEs and individuals by HMRC.

However, they are inevitable given the kind of tax code we have. If we had a proper tax system that was simple and transparent then it would be pretty clear how much a company (or individual) owed and there would be no need for these negotiations. Given the total mess of a system that we have, negotiations of this kind are inevitable and better than the alternative.

This is because the system is so complicated that in many cases neither side can be sure what the true tax liability is – both are engaged in a ‘best guess’ exercise. Given that these are large firms, the sums involved are considerable.

A company advised by its lawyers that a tax estimate from HMRC was questionable would be failing in its legal duty if it did not seek to address this.

It is not possible to simply give the HMRC the power to set a tax bill that would simply stand without question  because the opacity of the system we have means that estimates of this kind would have an arbitrary and uncertain quality which is very bad for business – firms would rather have high but certain taxes than unpredictable and inexplicable ones.

Moreover the real current alternative to negotiations is expensive and destabilising litigation, which will benefit neither the companies nor the Revenue.

Secretive negotiations of this kind undermine the rule of law and give large firms an advantage over small and medium sized ones. Large firms will quite honestly try to negotiate to establish their liability when the tax system is so unclear that nobody can act with any certainty. So we need to eliminate the need for these negotiations by reforming and simplifying the tax system.

This article was written for LondonLovesBusiness and can be read here.

Dr Steve Davies is the Head of Education at the IEA. Previously he was program officer at the Institute for Humane Studies (IHS) at George Mason University in Virginia. He joined IHS from the UK where he was Senior Lecturer in the Department of History and Economic History at Manchester Metropolitan University. He has also been a Visiting Scholar at the Social Philosophy and Policy Center at Bowling Green State University, Ohio. A historian, he graduated from St Andrews University in Scotland in 1976 and gained his PhD from the same institution in 1984. He has authored several books, including Empiricism and History (Palgrave Macmillan, 2003) and was co-editor with Nigel Ashford of The Dictionary of Conservative and Libertarian Thought (Routledge, 1991).

3 thoughts on “Our tax system is a total mess”

  1. Posted 22/12/2011 at 11:59 | Permalink

    Agreed. Simple is good.

    Another benefit of simplification is that if we rolled all existing taxes on income, profits and output (PAYE, income tax, corp tax, VAT) as well as WTC withdrawal into a single flat tax on all income, people would be horrified to see that the single flat rate is approx 50 per cent.

    Of course, taxes on the rental value of land are better than taxes on income, profits or output.

  2. Posted 22/12/2011 at 14:06 | Permalink

    Steve is quite right. In the course of writing a book about margins of error in accounting, I discovered that in 2006 both British American Tobacco and GlaxoSmithKline reported tax adjustments relating to previous years amounting to about 10 per cent of their annual tax charge. These are both huge multinationals (another reason for complexity in tax matters), and the absolute amounts involved were very large.

    One difficulty with simplifying the UK tax system is that any significant change which is revenue-neutral is likely to lead to many ‘winners’ and many ‘losers’. Human nature being what it is, the losers will whinge about the changes much more vociferously than the winners will purr.

    I conclude that significant tax simplification will be possible only if concurrently total tax revenues (now nearly 50 per cent of national income) are substantially reduced. But this requires (at least over the medium term) substantial reductions in government spending — which, as we all know, is politically tricky.

  3. Posted 26/12/2011 at 19:51 | Permalink

    The only winners of a complex tax code are large corporations that can take advantages of its loopholes through complex structures that extract value of the ever-increasing complexity. Those are the ones that can efficiently invest its vast resources in exploiting the advantages. They have the economies of scale to deal with government!

    New business school term: “government-driven economies of scale”.

    So much for the political discourse of protecting the small enterprise,

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