An Opportunity To Reform The Uk Tax System?

To adapt an American aphorism, the UK deserves a tax system which looks as though it was designed to be that way. Recent statements by the Chancellor of the Exchequer, Philip Hammond, suggest a willingness to overturn some of the piecemeal changes put forward by his predecessor and to take a broader view of the UK fiscal system.

While it’s easy enough to understand that the idea of abandoning George Osborne’s proposed 17 per cent UK corporation tax rate might be important in demonstrating that the UK is not indulging in harmful tax competition while simultaneously negotiating the terms of its departure from Europe, there is much else to commend a simpler system.

Of course, many suggestions for simplification have been made over the years by the Office for Tax Simplification and others. Some have found their way onto the Statute Book while others remain no more than ideas for future consideration or to be quietly ignored.

It seems to me that the Chancellor of the Exchequer might usefully turn his mind to the following possibilities.

Firstly, he could look at the balance between the taxation of income and short-term gains on the one hand, and the taxation of longer-term gains on the other. With income tax rates and capital gains tax rates for individuals having been so different for so long, it’s easy to forget that the tax system consciously discriminates in favour of long-term returns. However, topics such as the taxation of UK property returns Ð both rent and capital growth Ð have produced a discussion in which the distinction between income returns and capital gains is blurred. Now would be an excellent time for the Chancellor to start a structured debate on how the tax system ought to deal with income and with long- and short-term gains.

And what about the interaction between income tax and national insurance contributions on earned income? While the different rates and allowances mask the exceptionally high effective rate levied on earned income, now may be the time to contemplate different tax rates for different types of income and gains. The integration of income tax and national insurance contributions would be a necessary part of this.

Recent debates about fairness in the UK tax system have tended to centre on tax rates. However, looking at UK tax rates, the current regime is definitely a blunt instrument. It’s hard to address the nuances required of a progressive tax system when the structure of income tax rates bands is so unrefined. Leaving aside dividend taxation, tax rates are a very unsubtle 20, 40 and 45 per cent. While easy-number headline rates may be politically desirable a system with 10 rate bands running from, for example, 20 per cent to 45 per cent might achieve far greater social good without the cliff-edge effects of the current system.

The unsatisfactory nature of the current income tax rate-band structure is made clear in a recent report on UK Poverty, Causes, Costs and Solutions from the Joseph Rowntree Foundation, which demonstrates that a two-person/one-earner household, with two children, can be on the verge of paying 40 per cent income tax and still be defined as being in poverty. If anybody in the Treasury doubts that the starting point for the 40 per cent higher rate of income tax is out of touch with real life, this proves the case.

Then of course there’s Brexit. I have already noted that UK corporation tax rates are unlikely to decline to the 17 per cent level proposed by George Osborne. But freedom from European regulation means that the UK tax system will no longer be constrained by State Aid rules. So, in the all-important area of stimulating small and medium-sized enterprises in the UK, the Chancellor now has the opportunity to consider relaxing some of the recent restrictions applied to tax-favoured investments such as venture capital trusts and the enterprise investment scheme.