By Niamh Tracey | 12 July, 2023
Government is making tax system too complicated, say MPs
MPs have criticised the overcomplicated tax system as an obstacle to growth, creating compliance burdens, confusion and disincentives to grow a business, while abolition of the Office of Tax Simplification has made the situation worse
Members of the Treasury Committee are calling for a simplification of the tax system and are highly critical of the government’s decision to close the independent Office of Tax Simplification (OTS).
The MPs argue that, given the Chancellor has stated his intention to ‘make progress in simplifying the tax system’, the government’s performance must be subject to public scrutiny. However, now that responsibility for simplification sits with the Treasury and HMRC, there is no transparency about how they are reviewing the tax system.
The government does not have a framework to assess the complexity of tax rules despite announcing its abolition last November. Earlier this year, the Chancellor told the Treasury Committee: ‘Due to the variety of taxpayers, there is no single indicator to measure tax simplification. The government is considering how best to measure its progress in this area.’
This view was endorsed by Victoria Atkins, financial secretary to the Treasury, who said the department was ‘genuinely considering how to develop a suite of metrics to measure progress on simplification, working with businesses and representative bodies to ensure that measures reflect the real-world experience of taxpayers’.
In the absence of any real accountability, the Committee is calling for an annual report from the Treasury and HMRC providing an update on progress on addressing the overly complex tax rules.
There are over 1,180 separate tax reliefs, as well as numerous ‘cliff edges’ littering the tax system, such as the threshold for tax-free childcare and the £85,000 VAT threshold for small businesses.
Katharine Arthur, head of private client at haysmacintyre, said: ‘Calls from the Treasury Committee to scrutinise the UK government’s ever more complicated tax system are long overdue. If the last year in tax has taught anything, it is that confusion does not breed confidence and that we are at a point where the system is buckling under its own weight, reform is nigh.
‘Leaving aside the revolving door of disastrous tax changes last year, the government has made seemingly little progress towards simplifying the system. Against a backdrop of calls for reform, the abolition of the Office of Tax Simplification looks like another ill-conceived decision.’
Even HMRC has problems with the complex tax system, with Jonathan Athow, a director general at HMRC, telling the Committee that ‘most commentators would say that the tax system has, over time, become more complex’.
Athow highlighted the research and development (R&D) tax relief as a particular area of complexity which is open to wide abuse.
‘What qualifies as research and development is more open than other reliefs. There is also no third-party data we can go to. We cannot look up your R&D status in the way we can for other reliefs. It is a burden on us. There are also 80,000 claims in the small and medium-sized scheme. That is a lot of claims for us to process,’ Athow said.
MPs also criticised the cliff edge nature of the tax system, which acts as a disincentive to workers, which affect low and high earners.
Tom Clougherty, head of tax at the think tank, the Centre for Policy Studies, explained the consequences of the interaction of the income tax system and the withdrawal of both the income tax personal allowance and tax-free childcare at income levels above £100,000. For example, a family with full-time childcare for two children in London would be better off earning less than £100,000 than they would earning nearly £150,000. That is an extraordinary distortion in the tax system and one that could have been easily avoided.
The high income child benefit charge (HICBC) is another overly complex tax charge which catches out thousands of taxpayers every year.
The Treasury Committee report said that ‘the tax system is overcomplicated. This overcomplication creates compliance burdens, confusion and disincentives to work or grow a business. It is an obstacle to economic dynamism’.
Harriett Baldwin MP, chair of the Treasury Committee, said: ‘It’s widely acknowledged – including by the Chancellor – that our tax system is over complicated, confusing and inefficient. It contains numerous cliff edges which disincentivise work, business growth and personal development.
‘Disbanding the office established to champion tax simplification risks signalling the government is not serious about the task at hand.
‘Action needs to be taken, and public scrutiny of government efforts are vital. That’s why we’re calling for the government to report to our Committee each year on the success of the Treasury’s tax simplification efforts.’
There is clear evidence that taxpayers and businesses find the tax system difficult to navigate.
Alex Baulf, senior director of global indirect tax at Avalara, said: ‘I’m not surprised that MPs are outraged by the debated closure of the Office of Tax Simplification. This really is a missed opportunity as 71% of UK businesses find tax legislation overly complex – leading to inaccurate and late VAT returns, resulting in hefty fines. The current system seems almost designed to trip businesses up, rather than to help.’
Members of the Committee have tabled two amendments to the Finance (No. 2) Bill, due to be debated in the House of Commons on Tuesday. Amendment 7 seeks to prevent the abolition of the OTS, while New Clause 2 would require the Treasury to report annually to the Treasury Committee on tax simplification should the OTS be abolished.