Admittedly, no government can please all sections of the electorate through its taxation policies. Despite remaining in power for more than a decade, the recent New Labour regime has not done enough to simplify tax system. A good indication of this came in 2004 when all main political parties assembled in Bournemouth and exchanged proposals on important personal finance issues such as pensions, the housing market and taxes. To identify which areas of the tax system needed simplification, it is instructive to look into the proposals made by different political parties during the conference. With respect to taxes on pensions and savings, the measures by New Labour government have only added complexity. For example,
“All the means-tested benefits available at retirement mean that it pays most people not to save for fear of losing handouts. And Labour relentlessly attacks pensions and tax-friendly Isas. In 2006, pensions will be radically overhauled under the guise of simplification. Instead of payments being linked to earnings, a cap will be applied on pension savings. Any surplus in an individual fund above [pounds sterling]1.5 million will be taxed at up to 55 per cent. Thousands of savers are likely to be caught, though Labour argues it is aimed at high earners.” (Financial Mail, 2004)
The drawbacks inherent in the prevailing pension system were just one area of discussion in the Bournemouth conference. The conference acknowledged similar complexities in inheritance taxes, stamp duty on house purchase, capital gains tax and income tax. Further, “certain tax allowances, such as the married couple’s allowance, have been converted into non-refundable tax credits, and changes to mortgage interest tax relief mean that its effect is similar to a refundable tax credit. At the same time, the basic tax system retains an allowance and rate/band structure. The combined effect of these elements means that the way in which the tax system is described does not readily correspond to the structure of marginal rates faced by taxpayers”. (Fougere & Ruggeri, 1998)
In this scenario, what is required is a radical new way of presenting taxes. According to researcher Julian McCrae, both the New Labour government of recent years and the Tory government that preceded it have given in to the habit of dressing up flawed taxation policies in a politically attractive way. Faring well in public opinion polls has always been important to both the parties and as a result they have resorted to euphemistic terminology and apparently appealing taxing policies. But ‘playing to the gallery’ in this manner has made “certain potentially desirable policies difficult to implement without changing other elements of the tax system. In addition, it allows certain plausible-sounding, but in reality spurious, justifications to be made for policy changes”. Julian McCrae suggests that such problems confronting the tax system can be reduced by using a different terminology. In other words, it involves “describing the tax system in terms of the actual marginal rate schedule faced by taxpayers instead of the current use of allowances and credits”. (J McCrae, 1997) Further, the current formal structure employed in framing tax policies also needs to be changed. The present formal structure is “at best unhelpful and at worst misleading to those with limited understanding of its operation. It introduces differences between the formal and effective limits and widths of bands, and also means that the effective band limits are dependent on the amount of the allowances”. (J McCrae, 1997) A simpler way of expressing the tax system would be to state it clearly in terms of the effective marginal rate structure faced by taxpayers. Such a change would be simpler and easy to understand for both accountants and lay people.
A special area of tax law that needs immediate simplification is that pertaining to small businesses. The IR35 legislation is particularly relevant in this context. It is comforting to know that “the Government has already indicated that reviewing IR35 legislation is a priority and that it will seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility” (H ardiman, 2000). As part of its first report to the Chancellor, the Office of Tax Simplification has promised to “identify and provide evidence of the complexity and uncertainty created by IR35; consider alternative legislative approaches that would be simpler and create certainty while ensuring that, where intermediaries are used to disguise employment, any income that is effectively employment income is taxed fairly; and consider the scope for tax avoidance and the extent to which alternatives to IR35 would affect it.” (www.hm-treasury.gov.uk/small_business_tax_review_terms.htm) This is certainly a progressive step and should help alleviate the number of cases of incorrect tax filings that small business owners tend to do.