Considering that the provisional title of my PhD is “tax simplification and better regulation”, and that the original purpose of this blog was to monitor and respond to all tax consultations, I’m a little embarrassed to have missed this one. It’s big.
In what will presumably be the last consultation document published by the Coalition, “A simpler tax system: the fast track to delivery” there are some far-reaching proposals put forward for simplification of the tax system. This is a surprisingly radical attempt to achieve, at a stroke, the first of the Coalition’s priorities for its tax policy making (which, I’m sure we all recall, were that tax should be simpler, fairer, greener and more competitive).
As anyone involved in taxation knows, there have long been calls for the tax system to be simplified, and as anyone involved in tax policy making knows, it isn’t as easy as it looks. Anyone who gains by tax simplification is unlikely to show any gratitude to the government responsible, whereas anyone who loses under simplification is likely to be vocal in their opposition. However in a gratifyingly statesmanlike-display of cross-party agreement, the new proposals are being put forward in a multi-lateral document endorsed by all the major parties and are widely expected, if enacted by the next administration, to bring about a major simplification of business and personal taxes across the UK.
Building on the proposals in the Budget document “Making Tax Easier: the End of the Tax Return” where there is the aspiration that “it will feel like paying a single tax“, the change – in a project provisionally named unitary taxes – will retain all existing taxes and national insurance, but move to a per person, rather than a per tax, administration. Everyone will have a basic allowance of £12,000 below which they will not pay any tax on any income, gains or transactions. Between £12,001 and the current VAT threshold of £81,000 they will pay 20%, whether on income from employment or self employment, gains from capital transactions or interest on investments. Between £81,001 and £120,000 the rate will be 40% and from £120,001 it will be 60%. There will be no mansion tax, but neither will there be any exemption from capital gains for only or main residential property with the gains from any house sales folded into the unitary tax. There will be no exemptions, allowances nor deductions – a change likely to have serious repercussions in the savings industry but which was perhaps foreshadowed in the Budget announcement of abolition of tax on the first £1000 of interest payments. The section on ISAs in the consultation document is particularly radical, consisting of three words: “ISAs are out”. There will be some interesting recalculations to be done with the dramatic adjustment to the inheritance tax thresholds as inheritance tax, too, becomes subject to a one-off unitary tax charge on the estate of the deceased, bringing virtually all estates into its remit. And of course capital gains tax planning is likely to prove challenging with the abolition of all possible reliefs, whether farming, entrepreneurs or even the minor chattels exemptions and merger of its thresholds with the single unitary threshold.
VAT will remain largely unchanged with its threshold remaining static and the current rules and rates remaining untouched. However the total exemption for small and micro businesses from the revisions to place of supply rules is a surprising concession and it seems that there will be a further document after the election, on a similarly multi-lateral basis, proposing further radical simplifications including the abolition of all reduced and zero rates and the removal of all alternative calculation methods.
It is perhaps the changes to National Insurance (NI) which are the most radical. In future NI will be charged at a single rate on all earnings, gains and transactions. There will be no upper or lower thresholds, and the rate will change annually. It will be calculated by taking the previous year’s total expenditure on pensions, disability and unemployment benefits (but not in work payments like housing benefit or working tax credits) plus the total cost of the NHS and of personal care provision, and then dividing this by the previous year’s unitary income. Although National Insurance receipts will always lag behind National Insurance Payments (as pensions and benefits will in future be known) there will be a clear link between them. If at any point the rise in GDP is such that unitary NI receipts are greater than the previous year’s NI expenditure the excess will not be used to reduce the following year’s rate but to start a sovereign wealth fund, with the intention of, ultimately, building up a capital sum sufficient to make abolition of NI payments altogether feasible, although the timescale is, it has to be said, ambitious.
Preliminary costings in the accompanying TIIN for this radical package seem rather optimistic, in that they suggest an administrative burden saving of more than a billion pounds and an exchequer impact of zero. Furthermore the economic impact appears to assume that the entire tax avoidance industry will close its doors at once and its employees and partners be immediately re-tasked to economically useful activity, thus creating a 5.8% spike in GDP.
Root and branch tax simplification has been the subject of much hopeful persiflage in the past but there have been few concrete proposals. Although these proposals are radical and the numbers are, to say the least, sketchy, it is to be hoped that the tax industry will respond to the consultation in the spirit in which it is put forward. In future, who knows, we may thumb through our slim pamphlets of tax legislation and look back on today as the end of an era.