The Taxpayers’ Alliance has released some interesting research coming out of its 2020 Tax Commission. HMRC is simply failing to collect tax revenues – to the tune of about £25 billion over the past five years.

It’s difficult to know if those of a free market disposition should laugh or cry.  On the one hand, this does seem to point to yet another expensive bureaucratic failure by the state. On the other, most of us surely wish to see tax receipts falling.

The intriguing question is why so much – about £200 per household per year – is being lost by HMRC in remissions or write-offs.

The Tax Commission research points to the incredible length and complexity of our tax rules as the principal culprit. Tooley’s corporation tax guide, for example, has nearly trebled in length in the last decade. It now has a word count not dissimilar to the complete works of Shakespeare. The TPA amusingly illustrates the farcical scale of our tax code by showing that one of the fastest readers on the face of the Earth would take five days to read it out loud.  Goodness knows how long it takes to understand it.

The taxman, of course, will plead that the unrecoverable slice of revenue (they don’t dispute the TPA’s numbers) is largely down to company liquidations (you can’t claw in money from an enterprise that has folded) and that administrative errors or the complexity of the rules are not a measurable part of the problem.

One might well treat with scepticism any assertion from HMRC concerning the ease with which they avoid errors and are comfortably across the mushrooming tax rules. After all, they recently managed to get wrong around 6 million income tax payments.  Now, this could just be a deeply unfortunate one off. But it hardly inspires confidence that an ever more complicated set of tax rules will be comfortably absorbed by the slick, efficient workers at Her Majesty’s Revenue and Customs.

But let us assume that liquidations are the real reason for such a dramatic failure to collect revenues. To what extent is the complexity of the tax code potentially causing such company failures? Research by the IEA last year showed that merely attempting to comply with tax laws costs businesses around £20 billion a year and the burden falls disproportionately on small and medium sized enterprises. This is before a single penny in revenue has been handed over to the Exchequer. This can, of course, be soaked up by successful companies. And simplifying the rules won’t stop all failing companies from going to the wall. But for some companies at least, this must be the straw that broke the camel’s back – the actual difference between being viable and foreclosing.

The TPA’s Tax Commission is surely right to argue that over-complexity inhibits efficient tax collection. But there is an additional cost too. Businesses are finding it harder and harder – and more and more expensive – to abide by the law.

Director General, IEA

Mark Littlewood is the Director General of the Institute of Economic Affairs and the IEA’s Ralph Harris Fellow. Under his leadership, the IEA has continued to communicate the benefits of free markets to an even wider audience around the world. In 2014, Mark was ranked 38th on The Times’ ‘Right-wing Power List’, and in 2011 was named ‘Liberal Voice of the Year’ by the Liberal Democrat Voice. Mark frequently comments on political and economic issues on television and radio including BBC Question Time, Any Questions, Newsnight, Channel 4 News, Sky News, Radio 4's Today Programme and LBC. Prior to the IEA, Mark was Head of Media for the Liberal Democrats before going on to found Progressive Vision, a classical liberal think tank. Mark was educated at Balliol College, Oxford.

1 thought on “Urgent need to simplify the tax code”

  1. Posted 26/08/2011 at 14:16 | Permalink

    Too many politicians pontificate about the need for ‘fairness’ in our tax system. Even apart from obvious disagreements about what this is supposed to mean, a serious disadvantage of striving for ‘fairness’ is that it inevitably involves still more complications to an already incomprehensible tax system.

    A key benefit from significantly reducing government spending would be that it might allow some reduction in the overall burden of taxation, even while aiming to reduce the huge government deficit. Until we have that prospect, it is difficult to make sweeping simplifications without provoking political protests.

    If the public felt there was a real chance of improving our egregious tax system — which has been crying out for major reform all my lifetime — there might be a chance of restoring confidence in the economy. The one good thing to be said about banging your head against a wall is the evident improvement when you stop!

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