There has never been a better time to simplify our labyrinthine tax code
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.