ACCA - The global body for professional accountants

Significant changes but government struggling to simplify tax system

The Government has made a major impact on the UK’s tax system in its first year in charge announcing close to 200 amendments or additions, excluding relief abolitions, says ACCA (the Association of Chartered Certified Accountants).

Celebrating its first anniversary this Wednesday, in just 12 months the Government has made tangible differences to personal and business finances, while laying the groundwork for a long-lasting tax legacy with the Office of Tax Simplification. However, the number of changes made means the Government is taking two steps back for every one step forward in its battle to get to grips with the UK’s complicated tax system.

“The Government’s impact on the tax system this year has been dramatic; there have been changes across the board,” says Chas Roy-Chowdhury, ACCA’s head of taxation. “Significant changes so far include the rapid increases in personal allowances for basic-rate taxpayers, the VAT rate change, and the creation of the Office of Tax Simplification (OTS). ACCA has long called for an independent tax body to advise government on tax matters so the OTS is a very positive addition to the UK’s system.

“However, despite removing 43 of the reliefs recommended for scrapping by the OTS, the Government has announced a further 200 tax amendments or additions since its formation. The weight of changes creates a compliance headache for accountants, businesses, and individuals alike. Despite the Chancellor’s intention to untangle the UK’s ‘spaghetti bowl’ of tax, the tax system seems to have a mind of its own; it’s volatile and just gets bigger and bigger.”

ACCA believes the Government’s key decisions on tax to have been:

  1. Raising the personal allowance The Government has been bold with its plans to raise the personal allowance to £10,000 before the next election but should consider extending this policy to other tax bands. With employee National Insurance Contributions and VAT going up, raising the allowance may soften some of the pain for the lowest paid. Permanently removing the lowest paid from direct taxation is a progressive move.
  2. VAT increase From progressive to regressive. Raising the VAT rate to 20 per cent brings the UK’s VAT rate broadly in line with the rest of Europe but is the UK’s highest ever standard rate. VAT hits those on fixed incomes hardest and the rise would ideally be reversed when public finances allow.
  3. Corporation tax Corporation tax will be 23 per cent by 2014, historically and comparatively low. Another bold move by the Chancellor, but corporation tax is just one factor in promoting inward investment. What will have a bigger impact than the headline rates are the radical reforms of the taxation of multinational groups that will see some multinational companies pay an effective tax rate of 5.75 per cent.
  4. HMRC budget One of the black marks against the Government. Tax policy and public finances are only effective if the state is able to collect taxes effectively. HMRC was under-funded before this government and is now even more so. Problems at HMRC are well-documented and any further cuts would start to do real damage to the government’s ability to collect tax. HMRC has been given an extra £900m to reduce the tax gap by £7bn but this is separate to a 15 per cent budget cut. HMRC can’t take more cuts.
  5. The Office of Tax Simplification Another positive move and one that will bear fruit over time. The OTS has so far recommended 64 tax reliefs be abolished or simplified, with the Government accepting 43 of these (although only seven reliefs are guaranteed to go). The controversial and unpopular IR35 legislation was recommended for removal in a separate OTS review but has been kept by the Treasury. The OTS’ suggestion that National Insurance Contributions and income tax could be merged has led to a government consultation on the matter, and, if approved, such a simplification could have serious ramifications for taxation in the UK. The current split is helpful politically, disguising the true percentage of tax taken out of voters’ pay packets.

While the Chancellor has described the UK’s tax system as a ‘spaghetti bowl’, tax legislation remains confusing and volatile for businesses and individuals, says Chas Roy-Chowdhury.

“In its two budgets in the past 12 months, the Government has announced roughly 200 tax changes, excluding relief abolitions. This compares with 130 in Gordon Brown’s first two budgets [1997, 1998] and roughly 120 in both the post-election 2002 and 2006 budgets. Interestingly, over half of the changes announced in the Chancellor’s first budget [2010] were originally announced by the previous government.

“The large numbers of tax changes in the past twelve months are as a result of a new government implementing a new agenda; excluding abolishing reliefs, the 2011 budget saw over 100 new changes announced. The number of changes also reflects how complicated and bloated the tax system became between 1997 and 2010. There are now so many tax-levers to pull just to keep the whole system working. The 1997 budget saw only 33 tax changes, with 11 pre-announced changes. For 2010 these figures were 43 and 52.

“The Government is committed to simplifying the tax system, which is commendable, but so many changes in one year don’t help matters. Hopefully more changes now mean fewer later. If government really wants to simplify the system it needs to avoid tinkering at the same time as simplifying.”

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For further information, please contact:

Nick Cosgrove, ACCA Newsroom
+44 (0)20 7059 5989
+44 (0)7963 496144
nick.cosgrove@accaglobal.com

Helen Thompson, ACCA Newsroom
+44 (0)20 7059 5759
+44 (0)7725 498654
helen.thompson@accaglobal.com

Notes to Editors

  1. Figures should be taken as an estimate based on available information.
  2. Figures for tax changes come from 'Budget Policy Decisions' of the 1997, 1998, 2002, 2006, 2010, 2011 budget documents. Decisions include changes to tax credits. The abolitions of reliefs were not included in the figures. Announcements of consultations and reviews were not counted, neither were changes that were/are subject to EU approval. Tax freezes were not counted unless a rise had been planned instead. Figures are a combination of new policy announcements and previously announced policies set to take effect in the next twelve months. The figure for 2011 excludes announcements originally made in 2010 unless the nature of the policy had been changed.
  3. ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management.
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