Opinion: the UK tax system needs to change

We look at how convoluted the tax system has become and what can be done about it.

‘Tax doesn’t have to be taxing’.

That’s the irritating catchphrase that has been used by HM Revenue and Customs for years to convince us the systems they have in place are straightforward.

But anyone that has completed a tax return, applied for benefits or tried to navigate their way around the Capital Gains Tax rules is likely to have a different take.

In fact, the complexities of tax law – and the constantly changing regulatory environment – make employing an accountant essential for many people.

The problem with UK tax

There have been a staggering 635 changes to the tax legislation between 2011 and 2016 alone, according to an analysis by advisory firm Crowe Clark Whitehill.

These include 165 alterations to Income Tax, 122 to Corporation Tax, 81 to National Insurance contributions and 49 to Capital Gains Tax.

Laurence Field, the firm’s head of tax, argues few people would say that the UK tax system has become any easier over the last few years as a result.

"The public don’t understand it, the press can’t explain it, changes result in unintended consequences and businesses struggle to keep up with the ever-changing regulations."

Compare car insurance with loveMONEY

What a new system could look like

Financial guru Alex Davies, the co-founder and chief executive of Wealth Club, believes a major overhaul of tax legislation is needed – and soon.

He argues that the outdated system not only needs to be radically simplified but a policy of working to lower taxation should be employed.

"The tax rules in the UK are very complicated," he says. "I also think they should lower all rates of Income Tax and get rid of the 45% top rate which is too high."

He proposes introducing a flat rate of Income Tax – such as 20% or 25% – to keep everything as simple as possible.

"You also want to reduce Capital Gains Tax, which has different rates on sales of property and sales of assets," he says. "This should be equalised as it’s just another complication.’

Then there is the dreaded Inheritance Tax.

"Everyone hates IHT as it’s a horrible tax and in an ideal world you’d get rid of it but there are lots of things you can do to pay a lot less," he adds.

However, Davies believes the most important tax-cutting factor should focus on helping small businesses, which he insists are the lifeblood of the economy.

"You want them to start and you want them to prosper so that they can create lots of jobs," he says.

"You need to do everything you can to simplify life for them."

Top of his wish list would be abolishing business rates.

"This is money that could be spent on employing someone," he says.

"I’d also like to get rid of employer National Insurance contributions as it’s just a tax on job creation."

He also believes that improving the incentives for investing in small businesses – such as increasing Venture Capital Trust (VCT) allowances – would be beneficial.

Is change possible?

Of course, such cuts are unlikely to be seen anytime soon as such taxes bring in a phenomenal amount each year to the Treasury.

For example, Income Tax contributed £168 billion in the 2015-16 financial year, Capital Gains Tax provided £7 billion and a further £4.6 billion came from Inheritance Tax.

It all represents a significant amount of income.

This is illustrated by Tax Freedom Day, which is a measure of when Britons stop paying tax and start putting their earnings into their own pocket.

In 2017, every penny the average person earned for working up to and including 12 June went to the taxman (10 days later than in 2016) – so only from 13 June are they paying themselves!

While substantial cuts are unlikely to be seen – at least for the time being – the good news is that there are plans in place to help streamline the tax world.

The Office of Tax Simplification was established in 2010 as an independent department of HM Treasury to make recommendations on how to simplify tax in the UK.

It states: "The OTS has a vision to make it easier for the millions of individuals, self-employed people and businesses who live and work in the UK to interact with the tax system, by playing a key role in making it simpler and so more understandable."

In its strategy document – which, ironically, runs to 12 pages and makes 75 points – it pledges to look ahead at changing business and economic structures.

Its successes so far include setting in motion a series of reforms to largely eliminate P11Ds (which employers use to report expenses and benefits), as well as making a set of detailed changes to simplify share schemes.

Looking ahead, its priorities include finding out what happened to the 400 recommendations it has previously made to HMRC.

Compare car insurance with loveMONEY

Not to be missed this week:

UK Autumn Statement 2016: date, predictions and rumours

Food waste: average person 'throws away £12,350'

Opinion: why the Government’s new housebuilding plan still falls short