Today’s taxation is far too complex, is full of anomalies and is spinning out of democratic control. Individual taxpayers are left bemused, often unable to ascertain what they are bound to pay; businesses are burdened with added inefficiencies and complexities. Tax proposals are often designed for the convenience of the authorities and not the citizen. The result is a tax system that is inaccessible to far too many and lacking in proper Parliamentary scrutiny.
Last year, the Institute of Chartered Accountants launched our ‘Ten tenets for a better tax system’. We aimed to generate debate about reform. Our proposals attracted widespread support.
Today we take these proposals a stage further, involving a wider cross-section of opinion. And, to illustrate our point, we have judged one of the Government’s most recent proposals – the taxation of personal service companies (IR 35) – against the 10 tenets.
IR 35 is a key part of this year’s Finance Bill. Our conclusion? The authorities could certainly do better.
Tenet 1: legislation should be enacted by statute, with proper Parliamentary scrutiny
The proposals are written into primary legislation, though it may be possible to amend some PAYE regulations in ways that will affect them. Sadly, though, it has become clear that the Chancellor’s intention is broader than he first stated. The real reasons behind a proposal should be explained by ministers from the outset.
7 out of 10
Tenet 2: in almost all circumstances, the application of rules should be certain.
These proposals are widely drawn, then reduced by exceptions. This leads to anomalies. And there is uncertainly about the dividing line between who is an employee and who is self-employed. These proposals will create real uncertainty if taxpayers are unsure of their status.
3 out of 10
Tenet 3: tax rules should aim to be simple, understandable and clear in their objectives
The objective behind these proposals is still uncertain, so it is difficult to judge whether the complexity of the rules is necessary. Positively, the rules use the style developed by the Tax Law Rewrite Project, but strangely they do not follow this consistently. And there is a contradiction with other legislation that is designed to encourage employee share-holding.
2 out of 10
Tenet 4: tax should be easy to collect and to calculate
Collection is straightforward and will be through the PAYE system. Calculation is complicated by the uncertainties as to which contracts are caught. And there will be problems calculating liabilities in time for when payment to the Revenue is due. The Revenue suggests taxpayers do the calculation twice – once as an estimate and again for the final figures.
5 out of 10
Tenet 5: tax should be properly targeted
Many people will be caught by these rules when there were probably not intended to be. And there is an exemption for partnerships where no partner has more than 60% of the profits. This seems to leave open a clear route to avoiding the new provisions.
5 out of 10
Tenet 6: changes to the underlying rules of tax should be kept to a minimum
The proposals represent a major sea-change in the UK tax system. They will impact on many people in long-standing commercial arrangements, where the ground rules will now be altered. Like many other tax changes, this one appears to have been introduced to counter the unintended impact of previous policy changes; no doubt a further change will be needed at some point soon. Taxpayers are entitled to greater constancy.
1 out of 10
Tenet 7: all proposals should be subject to proper consultation
The proposal was briefly mentioned in the March 1999 budget. Subsequently, there was no formal discussion paper or consultation document. The Government’s Regulatory Impact Assessment (RIA) was not available until June 1999. When wider discussions did take place, they were confined to problems of implementation, excluding the principles behind the reform. When draft legislation was posted on the Revenue’s website, it was marked “for information only”.
2 out of 10
Tenet 8: tax rules should be subject to regular review
It is too early to judge this, but IR 35 could have been an opportunity to build in an automatic timetable for a review.
5 out of ten
Tenet 9: Tax should be fair and reasonable, with a right of appeal to an independent tribunal
The new rules are both unfair and unreasonable. Unfair because they take a select group of people and treat them in a new way without making it clear how to determine who is and who is not implicated – or why. And unreasonable because, in an age of self-assessment, they require large amounts of subjective judgement which can be open to dispute.
0 out of 10
Tenet 10: tax should be framed to encourage investment, capital and trade in and with the UK
These rules do not encourage healthy tax competition. They will distort business decisions and may make some businesses uncompetitive. Some will now be attracted to more welcoming tax regimes in continental Europe. Ironically, given the Government’s enthusiasms, the information technology and e-communications industries could be particularly harmed.
0 out of 10
Judged against these 10 tenets, we have awarded the new personal service company rules a score of 30 out of 100. This is a poor result. But imagine how some of our older tax legislation could fare.
There is now a clear need to review all tax legislation against modern principles. We can’t think of a better way to start the new century.
Tax faculty website and article IR 35 fails to add up