UK_Com_Bruce_1

This article was first published in the February 2016 UK edition of Accounting and Business magazine.

Nowhere in the business and financial world are thoughts, opinions and policies more confused than in the field of tax. The whole tax arena is riddled with misunderstandings. It is no wonder that politicians, public opinion, tax advisers and companies get it all so wrong, so often. Yet at the same time, very quietly, the whole field is changing into something that may make tax life very much simpler and more logical.

For generations it has all been about the unintended consequences of daft political policies. There is the syndrome, as one tax expert puts it, of every chancellor of the exchequer wishing to be seen standing triumphant, gun aloft, with one foot on the head of the mythical beast they want us to believe they have just slain. Or else it has been the insane political insistence on tinkering here and there, resulting, as another tax expert once put it, in something resembling a teetering edifice built of Lego that cannot be altered in any small detail for fear that it might bring all the rest of it down.

Nor do the tax practicalities keep up with the times. ‘Businesses can ignore borders, and tax struggles to keep up with this,’ says John Whiting, tax director at the Office of Tax Simplification. Last year the Organisation for Economic Cooperation and Development (OECD) came up with a plan to help tax authorities deal with this issue (see box). As with many grand schemes that rely as much on idealism as on practical measures, the signs of it succeeding are not good so far. 

‘The US is unlikely to be able to enact any of it,’ says Chas Roy-Chowdhury, head of taxation at ACCA. ‘There is nothing solid and hard-hitting that might get the job done.’ And around the world efforts to thwart the OECD’s plan are already being made. ‘There is a slightly unedifying scramble by countries around the world to impose tax regulations before the OECD gets its unified global tax plan into action,’ says George Bull, senior tax partner at mid-tier firm RSM. 

Learning to skate

We should not be surprised. Politicians right across the political spectrum haven’t a clue about tax. And that means they are prone to grasping the wrong end of the stick. One expert told me recently that very few MPs are confident about talking about tax. For them it is like being on an ice-rink. They haven’t the confidence, the background or the knowledge. Roy-Chowdhury’s solution would be for a spot of compulsory learning for MPs and ministers. ‘They should try to work out a tax form or fill out a VAT return,’ he says. ‘They would learn from that, and they could then see the problems they cause.’

And politicians, like the time-honoured joke about journalists, don’t like facts getting in the way of a good story. Richard Murphy, the accountant firebrand of tax reform, found this out for himself last year. Opposition politicians picked up a figure from his blog and fired it into the headlines. They announced that if the £120bn tax gap he had estimated between what companies owe and what they pay were closed, it would be enough to double health service funding and give everybody in the country a £2,000 cash windfall. What they failed to point out was that he had also said that, for a whole variety of sensible reasons, much of that money would not be recoverable.

This sort of thing spawns misconceptions. For example, around half of all income tax is paid by the top 5% of earners, with around 10% paid by the top 1% – yet the public discourse is about the top end not paying any tax. Tax breaks are another example. Most were originally created to boost revenue: the government reckoned it would get more revenue from employment taxes than it would from corporate taxes. And it does. But a furore broke out because the coffee chain Starbucks, and many others, took the tax break up. There then followed, in Bull’s words, ‘a pillorying of corporate executives’. He adds: ‘They were in the right and paid every pound required. It is the legislators who made the law. If it is not working, then change the laws.’ 

Meanwhile Roy-Chowdhury says: ‘The people on the soapbox have gained credibility that they shouldn’t have.’

Technology to the rescue

Despite people with only a vague grasp of tax facts and policies throwing mud at each other, the reality is looking promising. One of the reasons is technology. Whiting says: ‘At one end of the spectrum we collect an awful lot of money, 90% of it automatically. But it could become more efficient. There is great scope. We can come up with recommendations that wouldn’t have worked 10 years ago but that might now.’ Already the cumbersome P11D system, which requires a form detailing a year’s expenses and benefits, is on the way out. Four and half million forms will be eliminated.

HMRC is talking what was once, and still could be, science fiction. But it is going in the right direction. A cashless society, it says, would do away with the black economy. That’s a long way off, but the current digital strategy is not. There are downsides as well as upsides. ‘It would be cheaper tax collection, but a much more controlling collection,’ says Bull. 

Much in the world of tax is already automatic. ‘The main direction of change is going to be digital,’ says Whiting. He predicts the death of the tax return. ‘There is a good prospect of information coming in automatically and the taxpayer will get an alert saying what they owe. It would be simpler and more efficient.’

There are practicalities in the way. Digital communication can be patchy outside cities. HMRC is not renowned for its sophisticated resources. Politicians will always tinker, and change brings complexity. But in the end, the ease brought by the digital possibilities means that reform is likely to come out on top. 

Robert Bruce is an accountancy commentator and journalist