Brexit represents a conundrum for tax policy-makers. On the one hand, leaving Europe provides the opportunity to abandon EU restrictions on the UK tax system, allowing it to evolve to meet our own needs. On the other hand, with thousands of regulations to rewrite, complex negotiations to be undertaken and all of this in the context of global economic uncertainty where the UK wishes to continue to play a vital role, there is a serious risk that the opportunity to clean up the UK tax system will be missed because of lack of resources and too much busy-ness in other areas.
I had the opportunity to participate in a fringe event at the Conservative Party conference where we debated this. Here are some of the key points which emerged.
The UK tax system is too complex
Notwithstanding all the good work done by the Office of Tax Simplification, Parliament enacts hundreds of pages of new tax laws every year. Does the UK need so many tax reliefs? Would fewer reliefs, and the policing of those reliefs, produce a shorter tax code and lower tax rates? The UK needs a simpler system which is driven by evidence-based policies and is underpinned by a desire to have an integrated, stable and sensible whole.
People are losing faith in the UK tax system
Perceptions that some companies and individuals can use tax rules to avoid tax unfairly, coupled with the never-ending changes in tax law, mean that people are losing faith in the tax system. By creating a simpler, stable, open and demonstrably fairer tax system, the government has the opportunity to restore trust.
What do we want the UK tax system to do?
Next, we should ask what we want from the UK tax system. That’s not only about how much tax we need to raise, but also about who should pay how much tax, and on what. It’s also about the social goods which we want to achieve through the tax system by using tax reliefs and incentives. What sort of country do we want to be? Fairness and social justice are crucial.
What about business taxes?
In the case of business taxes, we have to address three questions which reflect our status as a major global economic power:
1. First, should we continue to use the tax system to boost our international competitiveness through low corporate tax rates and other measures? Should corporation tax even be abolished
2. Whatever is decided, it is essential that the UK remains involved in BEPS so that we can continue to work on stamping out aggressive tax avoidance while ensuring that the tax system doesn’t create artificial barriers to growth; and
3. The existing, complex business tax regime impacts large and small companies alike. Now is the time to create a simpler tax code for smaller businesses.
Time to integrate income tax and National Insurance?
Integration offers the prospect of a massive simplification in the UK tax system. If we integrate income tax and National Insurance Contributions, we also have the opportunity to consider how we tax things like self-employed income, employment income, pensions, property income, interest, dividends, short-term capital gains and long-term capital gains.
It was suggested that inheritance tax should be abolished, to be replaced with a capital gains tax charge on the growth in asset values at the time of a person’s death.
Changing EU-driven tax rules
- to treat EU-resident individuals and companies in the same way that we treat UK-resident individuals and companies; and
- comply with State Aid rules which have reined in some UK tax laws intended to boost the UK economy which have had wide-ranging effects.
These include transfer-pricing, the enterprise investment scheme, venture capital trusts and “patent box”. The names alone indicate how important these measures are to the UK as it builds a vibrant, knowledge-based innovative economy. The potential lifting of the State Aid and other restrictions provides an opportunity to restore these tax rules to the way the UK wanted them to be in the first place, and to develop more precisely focused regional tax policies within the UK.
The role of VAT
VAT is a European tax and there is every reason to believe that it will continue in a UK form after Brexit. It is also the single tax most likely to influence consumer spending and therefore the economic prospects of the UK. During the debate, the government was urged to consider cutting the VAT rate to stimulate demand – demand which is more likely to be met from domestic production while a weak pound is increasing the cost of imports. In due course, the VAT rate could be restored to its present level.
So we have a magnificent opportunity to create a post-Brexit tax system which meets our future needs as a nation, and is much better at meeting those needs than the current system is now. But time is tight and resources are limited. Can Parliament rise to the challenge?