An article in this week’s Sunday Times (not available online)  nicely captured how complex the tax system is. The paper enquired about how long it takes for staff to respond to mail from taxpayers; the outcome shouldn’t be surprising for those who have had to sit and wait for HMRC to get back to them. Staff told journalists that letters received at the start of this week may not be acted on until August. Letters they have outstanding stand taller than Ben Nevis.

I can answer this one, the rest are too complicated

Of course, this can cost individuals and small businesses money while they await the outcomes of their enquiries, appeals, or whatever the case may be. Not only that, it can cause quite a lot of stress, too.

The HMRC rep for the Public Commercial Services Union said the problems are down to HMRC not having enough staff. I’d say that the bewildering tax system is actually to blame. If we had a drastically simpler tax system then taxpayers and businesses would not have to write so many letters. Stories about HMRC over or underpaying taxpayers are all too common and they are apparently due to computer systems, not staff. The tax code is far too long. Simplify the system, cut out the mistakes and stop the letters. Make it easy for individuals and businesses to understand what they are paying, and how much. We need a simpler tax system, hopefully the 2020 Tax Commission the TaxPayers’ Alliance is running with the Institute of Directors can get us there.

See this video to find out how absurdly complicated the tax system has become

Jo Johnson writes in today’s Financial Times (£) about the disaster of high taxes in the United Kingdom. He points to a KPMG survey that showed the UK has the 4th highest top rate of income tax of 86 countries – beaten only by Sweden, Denmark and the Netherlands. Johnson also mentions a World Economic Global Competitiveness Report – which looks at the tax system to assess incentives to work and invest – that placed the UK 95th out of 135 countries. Our tax system hinders competitiveness.

Interestingly, he notes that Sir Nicholas Macpherson, permanent secretary to the Treasury, disclosed that 63,000 out of 275,000 taxpayers liable for the top rate work in “financial intermediation” in a letter to the Public Accounts Committee. Many of the others, Johnson notes, are entrepreneurs we need to create jobs and help drive the recovery. Unsurprisingly, numbers from the Treasury finally confirm the tax politically deployed to sate public anger of ‘bankers’ is misguided.

Benedict Brogan at the Telegraph notes that George Osborne might “put down a marker” on the 50p rate at the Budget next week. It should make for interesting viewing.

Today the Office of Tax Simplification (OTS) released its final report after a review of tax reliefs. George Osborne set up this unit to tackle the “spaghetti-bowl” our tax system has become, and their report follows a release in November which listed a staggering 1,042 reliefs. In fact, that list was so large that the today’s report only attempted to tackle 155 of them. The system is so complex that the authors found that they couldn’t look at many reliefs in isolation as they had to be considered in the context of the policy rationale framing them. The long and short of this is we can’t simply take a hatchet to the long list of reliefs. Complexity begets complexity, unfortunately.

Five key themes emerged from the OTS’s latest work: merging income tax and NIC; employee benefits and expenses; inheritance tax and trusts; capital gains tax; environmental taxes. The report admits that they need further review, but in their work they found that ideas like merging PAYE and NIC were very popular. It’ll be interesting to see what their subsequent studies find. Today’s report does outline some reliefs in those areas that should be abolished. One is daily relief for the first 15p of Luncheon Vouchers – introduced in 1946 at the time of rationing. Another is tax relief for trade union subscriptions that are used to pay for superannuation, death benefits or funeral expenses – which the OTS see as obsolete because pension arrangements now do that job.

These two reliefs are seen as outdated – but I did notice one that has simply expired; and some time ago too. Relief for Millennium gift aid, intended to encourage charitable giving in the run up to the year 2000, still exists. There have been annual Finance Bills since then but this has remained on the statute books the whole time; presumably Treasury ministers and civil servants have been too busy adding to the tax code rather than looking for ways to cut it back.

It’s certainly a monumental task to simplify the UK’s tax system. The work of the OTS is detailed and expansive in its scope, and very welcome too. Annual Finance Bills rack up new and more complex ways to increase the tax burden, adding thousands of pages to our tax code. Policy agendas and pet projects mean that endless loopholes and reliefs are put in place to make the tax system “fairer”, but of course the irony is that the better-off can pay expensive accountants to utilise them, so complicated reliefs are part of the problem. The favourable effective tax rates large companies enjoy over small ones reported yesterday (£) is an example of this, and lead to calls for big business to pay more tax, despite the same report finding that 81 per cent of all corporation tax is paid by the biggest 1 per cent of companies.  What is actually needed is reform to ensure all businesses pay fair, low taxes.

The system’s a complete mess and the 2020 Tax Commission will work throughout the year looking at ways to simplify it. It’s encouraging that the Treasury seems willing to do this too but the OTS are focussed on minor changes at the edges of the tax system, the 2020 Tax Commission is getting to the core of the issue and thinking about much more fundamental changes.

Last week, there were suggestions that George Osborne was preparing the ground for tax cuts in March’s budget. David Cameron put paid to that yesterday in an interview in the Sunday Telegraph:

“when you’re borrowing 11% of your GDP, it’s not possible to make significant net tax cuts. It just isn’t. It’s no good saying we’re going to deal with the deficit by cutting spending, but then we’re going to make things worse again by cutting taxes. I’m afraid it doesn’t add up.”

So no joy, then. A VAT hike, fuel duty increases and 750,000 taxpayers being pulled into the higher rate tax band mean that the cost of living for millions of families is sky-high, and getting higher. Many areas of spending are being increased; the Department for International Development’s budget will be increased by £3.7 billion by the end of the Parliament. The bonfire of the quangos mysteriously morphed from a cost cutting exercise into an accountability measure, so there is plenty of fat left to trim in that sector. Huge and wildly expensive projects like High Speed Rail have been proposed with flawed business cases. More can be done to cut back spending meaning, as Matthew Sinclair pointed out on The Daily Politics last week, there absolutely are opportunities to make welcome tax cuts to reduce the burden on taxpayers:

Calculations from the Centre of Economics and Business Research suggest that the 50p rate will lose money yet it’s being kept for political expediency. The media last week pitched scrapping the 50p rate against raising the lower threshold as a direct choice, one or the other, rich or poor. But if the 50p rate loses the Treasury money and they want to plug the gap, how will it do this? Ordinary families will be taxed more. The Government seems to be reluctant to articulate coherent arguments against the 50p rate, in case they are rounded on by the media, unions and a whole host of interest groups as friends of the rich. But if they told families across Britain that the 50p rate would lose money, and they’d be paying more tax just to have it, then taxpayers might think twice.

Without the Government presenting any dynamic analysis, these kinds of dichotomies presented by the media will continue to hinder debate. We’d love to see the lower threshold significantly increased; we’ve consistently called for it and it’s part of our Manifesto. Reducing the tax burden on low income families – and in some cases taking people out of tax altogether – will also increase the incentive to work. But to mitigate for this, the IFS say that a further 850,000 people would be brought into the higher rate bracket by 2015–16 if the government manages to achieve a £10,000 allowance by then. Most of these people will not be rich by any means, but their cost of living will go up, especially if the VAT increase is maintained, air passenger duty is increased and fuel duty remains obscenely high. In our report on entrepreneurship we set out how high the combined marginal tax rates on income earned, saved, invested in a company and passed on to children is: as high as 92 per cent with the new 50p top tax rate. The big rewards that make entrepreneurship, and the associated risks, worthwhile are hit particularly hard by the tax system. Small businesses tend to create the most new jobs too. But all the public are presented with is two stark but wholly misleading choices: tax the rich or tax the poor.

In the Government’s defence, the current system is a complete mess. If you started from scratch, not a single person would concoct what we have now. It’s a system that has evolved and developed, being added to annually with Finance Acts. No one planned this to be the finishing point of the tax system, and it’s certainly not the path to a simpler one. This makes governments’ decisions going in to Budgets fiendishly difficult, and worse, it makes tax decisions political and not economic, helping certain groups or raising revenue depending on what is politically sell-able. It’s the same this year: George Osborne has a false choice of taxing the rich or taxing the poor.

The system can’t be fixed in a day, and that’s why the 2020 Tax Commission will be working hard throughout the year to work out what the solution could be.