There has never been a better time to simplify our labyrinthine tax code
6 December 2018
SUGGESTED
Government and Institutions
Markets and Morality
7 December 2018
Economic Theory
11 November 2024
Benjamin Franklin once noted that “nothing is certain, except death and taxes”. Given recent developments, I’d add government incompetence in levying those taxes to the list.
A damning new report from the House of Lords Economic Committee has accused HMRC of using disproportionate, even unlawful, measures to clamp down on suspected tax avoidance.
They highlight the injustice of HMRC’s use of so-called Accelerated Payment Notices (APNs), which force individuals deemed to have wrongly used avoidance schemes to pay tax upfront within 90 days. Those issued with APNs are encouraged to pay first, and only then to query the charges, often at great expense. In extreme cases, inaccurately calculated APNs force taxpayers to take out loans, sell homes, cash in pensions or even go bankrupt to pay these sums, which may also have incurred considerable interest and punitive fines. Given the hefty penalties at stake, many choose to pay up rather than risk incurring legal fees.
The Committee reserved particular condemnation for so-called loan charges, new fees set to be implemented next year. The loan charge purports to combat what HMRC calls “disguised remuneration” – schemes intended to avoid tax and National Insurance contributions for freelance contractors. Yet in an unprecedented move, these charges, imposed on known tax avoidance schemes, will be applied retrospectively. The allegedly underpaid tax can relate to periods of employment from many years ago.
In short; from next year onwards, thousands of people could see their work undertaken dating as far back as 1999 being retroactively taxed as a lump sum in a single year.
Many of those affected did not know they were even at risk of flouting tax rules. As the Committee’s testimonials make clear, these schemes were promoted by those who sold them as legal ways of contracting, and often had the backing of QCs and respected tax advisers. Worse, HMRC knew of these schemes for decades, since users freely declared them, and yet did nothing to dissuade people there was anything wrong with them – until now of course.
I am no tax expert, but this seems extremely unnecessary, and has serious repercussions for natural justice and the rule of law. Any policy that involves, effectively ‘changing the rules after the event’, weakens one of the central tenets of due process – that the law should be applied fairly, consistently, and never retrospectively. The resulting uncertainty is not only a cause of great anxiety for those directly affected, but also potentially harmful to wider business confidence.
So far, few – bar The Times, and Iain Dale, who’s done an admirable job of highlighting this issue – have reported on these measures (perhaps owing to Brexit-related policy myopia, or understandable focus on the rollout of Universal Credit). Yet the Committee’s conclusions are alarming and should concern us all. Imagine the outrage if HMRC decided tax rates over the past 20 years had been too low and began chasing people for underpayment of tax? Yet they are set to apply this exact principle to freelancers.
Much of the blame for this heavy-handed approach should rest with HMRC. Yet their excesses are also symptomatic of an inherently rotten system. HMRC are under-staffed, charged with enforcing an unwieldy, 17,000-page tax code which has more than trebled in size since 1997. For context, Hong Kong’s code, widely viewed by tax experts as the most efficient in the world, is 276 pages long.
It’s important to get this right, as a combination of complex taxation and short-termist policymaking is already distorting behaviour in perverse ways. In 2016, for example, the lifetime allowance for pensions tax relief was lowered from £1.25m to £1m. An unintended consequence of this has been to incentivise GPs, at a time of acute doctor shortages, to retire earlier, even in their early 50s. For many, there is now minimal benefit in continuing to pay into their pension fund, removing one of the main incentives for waiting until the usual retirement age.
Such are the perils of complex systems – they invariably have unintended consequences and create unexpected winners and losers. The politicisation of tax further exacerbates this problem. As we saw during George Osborne’s tenure as Chancellor, tinkering (even well-intentioned fiddles, like targeted tax relief) can render the system more complicated and unnavigable than ever. For non-experts, it can be extremely difficult to keep up when each year seems to herald further alterations to the tax code.
This means insecurity for the self-employed in particular, which can oblige even low-earning freelancers to hire external help, just to avoid falling foul of HMRC’s ever-changing stipulations. Some friends who make comparatively small sums from freelance writing or filmmaking still feel the need to hire an accountant – such is their anxiety about getting things wrong.
Yet taxation complexity doesn’t just stem from incompetence and the law of unintended consequences. It is also a political choice, and there are many who benefit from it, aside from the vast apparatus of tax experts our system creates. For one thing, it allows politicians to cement their position through patronage, winning over electorally significant groups with targeted giveaways or reliefs to be theatrically unveiled on Budget Day. It also allows them to pander to popular demands for ‘something to be done’, to address some perceived problems, often lacking any real evidence that the proposed measure will help, or even that the problem exists at all.
Such incentives suggest that rolling back our gargantuan tax regime will prove tricky in the short-term. Indeed, tax reform would create ‘diffuse’ winners, in the millions who benefit from simplification and clarity, but might not immediately recognise the difference to their day-to-day lives. The ‘winners’ from short-termist gimmicks and giveaways, on the other hand, are far more easily identified. Unless accompanied by changes elsewhere to enrich affected groups, tax reform could also inspire firm opposition from the ‘losers’.
What can we do about it? Well, establishing a tax system comprehensible to ordinary people would be a start. We might follow the example of Hong Kong, whose tax return form sits at an eminently manageable four pages. Merging National Insurance (NI) and income tax would be an honest first step. After all, there is no ‘special fund’ in the Exchequer that somehow funds welfare, social care and pensions, as NI’s existence implies. In the long run, I’d like to see future Chancellors reviving Nigel Lawson’s famous pledge to abolish a new tax each year, as well as considering flat taxes and other forms of simplification.
It will be a bold leader who pursues a radical tax cutting agenda anytime soon. Yet they could face a warmer-than-expected reception at the ballot box. A new poll out this week showed strong support to the vision of a post-Brexit UK as “the lowest tax, business-friendliest country in Europe, focused on building strong international trade links’.
HMRC’s increasingly authoritarian behaviour is inconsistent with a proportionate and just tax system. And with tax burdens set to remain at 50 year highs, the time is ripe for a new era of tax reform and reduction to ensure our economy remains competitive after Brexit. Thankfully, the British public – if not many of its politicians – seem to share this sentiment.
A damning new report from the House of Lords Economic Committee has accused HMRC of using disproportionate, even unlawful, measures to clamp down on suspected tax avoidance.
They highlight the injustice of HMRC’s use of so-called Accelerated Payment Notices (APNs), which force individuals deemed to have wrongly used avoidance schemes to pay tax upfront within 90 days. Those issued with APNs are encouraged to pay first, and only then to query the charges, often at great expense. In extreme cases, inaccurately calculated APNs force taxpayers to take out loans, sell homes, cash in pensions or even go bankrupt to pay these sums, which may also have incurred considerable interest and punitive fines. Given the hefty penalties at stake, many choose to pay up rather than risk incurring legal fees.
The Committee reserved particular condemnation for so-called loan charges, new fees set to be implemented next year. The loan charge purports to combat what HMRC calls “disguised remuneration” – schemes intended to avoid tax and National Insurance contributions for freelance contractors. Yet in an unprecedented move, these charges, imposed on known tax avoidance schemes, will be applied retrospectively. The allegedly underpaid tax can relate to periods of employment from many years ago.
In short; from next year onwards, thousands of people could see their work undertaken dating as far back as 1999 being retroactively taxed as a lump sum in a single year.
Many of those affected did not know they were even at risk of flouting tax rules. As the Committee’s testimonials make clear, these schemes were promoted by those who sold them as legal ways of contracting, and often had the backing of QCs and respected tax advisers. Worse, HMRC knew of these schemes for decades, since users freely declared them, and yet did nothing to dissuade people there was anything wrong with them – until now of course.
I am no tax expert, but this seems extremely unnecessary, and has serious repercussions for natural justice and the rule of law. Any policy that involves, effectively ‘changing the rules after the event’, weakens one of the central tenets of due process – that the law should be applied fairly, consistently, and never retrospectively. The resulting uncertainty is not only a cause of great anxiety for those directly affected, but also potentially harmful to wider business confidence.
So far, few – bar The Times, and Iain Dale, who’s done an admirable job of highlighting this issue – have reported on these measures (perhaps owing to Brexit-related policy myopia, or understandable focus on the rollout of Universal Credit). Yet the Committee’s conclusions are alarming and should concern us all. Imagine the outrage if HMRC decided tax rates over the past 20 years had been too low and began chasing people for underpayment of tax? Yet they are set to apply this exact principle to freelancers.
Much of the blame for this heavy-handed approach should rest with HMRC. Yet their excesses are also symptomatic of an inherently rotten system. HMRC are under-staffed, charged with enforcing an unwieldy, 17,000-page tax code which has more than trebled in size since 1997. For context, Hong Kong’s code, widely viewed by tax experts as the most efficient in the world, is 276 pages long.
It’s important to get this right, as a combination of complex taxation and short-termist policymaking is already distorting behaviour in perverse ways. In 2016, for example, the lifetime allowance for pensions tax relief was lowered from £1.25m to £1m. An unintended consequence of this has been to incentivise GPs, at a time of acute doctor shortages, to retire earlier, even in their early 50s. For many, there is now minimal benefit in continuing to pay into their pension fund, removing one of the main incentives for waiting until the usual retirement age.
Such are the perils of complex systems – they invariably have unintended consequences and create unexpected winners and losers. The politicisation of tax further exacerbates this problem. As we saw during George Osborne’s tenure as Chancellor, tinkering (even well-intentioned fiddles, like targeted tax relief) can render the system more complicated and unnavigable than ever. For non-experts, it can be extremely difficult to keep up when each year seems to herald further alterations to the tax code.
This means insecurity for the self-employed in particular, which can oblige even low-earning freelancers to hire external help, just to avoid falling foul of HMRC’s ever-changing stipulations. Some friends who make comparatively small sums from freelance writing or filmmaking still feel the need to hire an accountant – such is their anxiety about getting things wrong.
Yet taxation complexity doesn’t just stem from incompetence and the law of unintended consequences. It is also a political choice, and there are many who benefit from it, aside from the vast apparatus of tax experts our system creates. For one thing, it allows politicians to cement their position through patronage, winning over electorally significant groups with targeted giveaways or reliefs to be theatrically unveiled on Budget Day. It also allows them to pander to popular demands for ‘something to be done’, to address some perceived problems, often lacking any real evidence that the proposed measure will help, or even that the problem exists at all.
Such incentives suggest that rolling back our gargantuan tax regime will prove tricky in the short-term. Indeed, tax reform would create ‘diffuse’ winners, in the millions who benefit from simplification and clarity, but might not immediately recognise the difference to their day-to-day lives. The ‘winners’ from short-termist gimmicks and giveaways, on the other hand, are far more easily identified. Unless accompanied by changes elsewhere to enrich affected groups, tax reform could also inspire firm opposition from the ‘losers’.
What can we do about it? Well, establishing a tax system comprehensible to ordinary people would be a start. We might follow the example of Hong Kong, whose tax return form sits at an eminently manageable four pages. Merging National Insurance (NI) and income tax would be an honest first step. After all, there is no ‘special fund’ in the Exchequer that somehow funds welfare, social care and pensions, as NI’s existence implies. In the long run, I’d like to see future Chancellors reviving Nigel Lawson’s famous pledge to abolish a new tax each year, as well as considering flat taxes and other forms of simplification.
It will be a bold leader who pursues a radical tax cutting agenda anytime soon. Yet they could face a warmer-than-expected reception at the ballot box. A new poll out this week showed strong support to the vision of a post-Brexit UK as “the lowest tax, business-friendliest country in Europe, focused on building strong international trade links’.
HMRC’s increasingly authoritarian behaviour is inconsistent with a proportionate and just tax system. And with tax burdens set to remain at 50 year highs, the time is ripe for a new era of tax reform and reduction to ensure our economy remains competitive after Brexit. Thankfully, the British public – if not many of its politicians – seem to share this sentiment.
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Agreed. However there is one tax regulation above all others that will soon engulf all self-employed freelance operators. HMRCs expansion of IR35 false self employment regulation will have serious consequences for sub contractors and contractors alike. Since its inception in 1999 IR35 has massively increased labour costs in the construction industry and in public services. If there was ever a tax regulation that needs abolishing it is IR35.
https://www.contractoruk.com/ir35/ir35_why_it_should_go_4901.html
Socially Just Taxation and Its Effects (17 listed)
Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?
Adam Smith (“Wealth of Nations”, 1776) says that land is one of the 3 factors of production (the other 2 being labour and durable capital goods). The usefulness of land is in the price that tenants pay as rent, for access rights to the particular site in question. Land is often considered as being a form of capital, since it is traded similarly to other durable capital goods items. However it is not actually man-made, so rightly it does not fall within this category. The land was originally a gift of nature (if not of God) for which all people should be free to share in its use. But its site-value greatly depends on location and is related to the community density in that region, as well as the natural resources such as rivers, minerals, animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015).
However, due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place, like other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used, or if it is to be held out of use, until the city grows and the site becomes more valuable. Thus speculation in land values is encouraged by the law, in treating a site of land as personal or private property—as if it were an item of capital goods, although it is not (see Mason Gaffney and Fred Harrison: “The Corruption of Economics”, edition 2, 2005).
Regarding taxation and local community spending, the municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without the landlord doing anything—he/she will always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Then when this news is leaked, after landlords and banks corruptly pay for this information, speculation in land values is rife.
There are many advantages if the land values were taxed instead of the many different kinds of production-based activities such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all their regulations, complications and loop-holes). The only people due to lose from this are those who exploit the growing values of the land over the past years, when “mere” land ownership confers a financial benefit, without the owner doing a scrap of work. Consequently, for a truly socially just kind of taxation to apply there can only be one method–Land-Value Taxation.
Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land values is created by the community, after an initial difficult start and not by the natural resources. As the village and city expand, speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have permitted their site-values to grow. Meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. The limited availability of useful land means that the high rents paid being by tenants make their residences more costly and the provision of goods and services more expensive. It also creates unemployment when entrepreneurs find the rents too high for them to operate and employ workers. This speculation causes wages to be lowered by the monopolists, who control the big producing organizations and whose land was previously obtained when it was cheap. Consequently this basic structure of our current macroeconomics system, works to limit opportunity and to create poverty, see above reference.
The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access rights to the land on which the work must be done. The useful land is monopolized by a landlord who either holds it out of use (for speculation in its rising value), or charges the tenant heavily in rent for its right to access. In the case when the landlord is also the producer, he/she has a monopolistic control of the land and of the produce. The product becomes more costly–this monopolist can effectively charge more for it, than what an entrepreneur normally would, were he/she able to compete on an equal basis, because of the excessive rent demanded by the landlord.
A wise and sensible government would recognize that this problem derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed almost 140 years ago by Henry George, a (North) American economist, but somehow most macro-economists seem never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) In “Progress and Poverty” 1879, Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains, etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords and banks, who/which do nothing productive and wrongly find that land dominance has its own reward.
17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics
Four Aspects for Government:
1. LVT, adds to the national income as do all other taxation systems, but it can and should replace them.
2. The cost of collecting the LVT is less than for all of the production-related taxes—then tax avoidance
becomes impossible because the sites being taxed are visible to all.
3. Consumers pay less for their purchases due to lower production costs (see below). This creates
greater satisfaction with the government’s management of national affairs.
4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due
to periodic speculation in land values (see below).
Six Aspects Affecting Land Owners:
5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
6. The land owner pays his LVT regardless of how his site is used. When fully developed, a large
proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-
value but a significant “rental”-value (even when it is not being used).
7. LVT stops the speculation in land prices and any withholding of land from proper use is not
worthwhile.
8. The introduction of LVT initially reduces the sales price of sites, (even though their rental value can
still grow over long-term use). As more sites become available, the competition for them becomes less
fierce so entrepreneurs are more active.
9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced
competition for access to the additional sites that come into use.
10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their
mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced
gradually, to allow these speculators sufficient time to transfer their money to company-shares etc.,
and simultaneously to meet the increased demand for produce (see below).
Three Aspects Regarding Communities:
11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available
sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up
their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
13. Investment money is withdrawn from land and placed in durable capital goods. This means more
advances in technology and cheaper goods too.
Four Aspects About Ethics:
14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this
extortion by gathering the surplus rental income, which comes without any exertion from the land
owner or by the banks–LVT is a natural system of national income-gathering.
15. Bribery and corruption on information about land cease. Before, this was due to the leaking of
news of municipal plans for housing and industrial development, causing shock-waves in local land
prices (and municipal workers’ and lawyers’ bank balances).
16. The improved and proper use of the more central land reduces the environmental damage due to a)
unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling
between home and workplace.
17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT
provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural
way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the
product or service. Consequently, after LVT has been properly introduced it will eliminate poverty
and improve business ethics.
TAX LAND NOT LABOUR; TAX TAKINGS NOT MAKINGS!
732733 371005An interesting discussion is worth comment. I think that you need to write more on this matter, it may not be a taboo subject but usually individuals are not enough to speak on such topics. To the next. Cheers 344998