Thought Leadership Lecture 2015 - Jeremy Sherwood

Thought Leadership Lecture 2015

Tax Simplification in a Complex World

Jeremy Sherwood, ATAX Research Fellow [email protected]

https://www.gov.uk/government/organisations/office-of-tax-simplification

mailto:[email protected]



1.Why is tax so complicated?

2.Why bother about tax complexity?

3.Why do so many tax reforms fail?

4.How can we make tax simplification work?

Tax Simplification in a Complex World

Tax Simplification in a Complex World“A general tax shall be imposed upon all the leading branches of income. No scale of income indeed which can be devised will be perfectly free from the objection of inequality, or entirely cut off the possibility of evasion. All that can be attempted is to approach as near as circumstances will permit to a fair and equal contribution.”

In the 1700s, taxes were levied on things as diverse as windows, wigs, hair powder, sugar, gloves and dogs. In 1792-3 the UK Government earned 23% of its total tax revenue from taxes on land and property, 53% from excise taxes on food, drink and tobacco, 18% from excise duties on other items such as coal, iron, soap, cloth and candles and 6% from stamp duties.

William Pitt, 1799

JOHN BULL at his STUDIESattended by his Guardian Angell

Anonymous Caricature, 1799

1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is in proportion to the revenue which they respectively enjoy under the protection of the state.

2. The tax which each individual is bound to pay, ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person

3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

4. Every tax ought to be so contrived, as both to take out and to keep out of the pockets of the people, as little as possible, over and above what it brings into the public treasury of the state.

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776)

“The certainty of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty”

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776)

• What do we mean by tax complexity?• the inherent design of the tax system, the laws and rules that define

the rates and scope of taxes paid by people and businesses at home and abroad.

• the administrative processes: information and tax returns, payments and audits.

• The dictionary defines “complex” as “difficult to understand” or “made up of many connected parts”.

• OTS favours “usability” – we look at the users of the tax system. Can they realistically understand and do all that they have to in order to comply?

• Professor David Ulph distinguishes between “necessary complexity” and “unnecessary complexity”

Aspects of tax complexity

Aspects of tax complexityComplexity in one part of the system will often (but not always) lead to complexity in subsequent parts, as a complex policy invariably requires complex legislation, which may need to be interpreted into a complex administrative process. The administrative process is usually (but not always) the key interaction with the user.

Policy Legislation Implementation

Underlying complexity Impact of complexity

Usability (1): Adult literacy levels are lower than you think

Level 139%

(12.6m)Level 2+

45% (14.1m)

Entry 13% (1.1m)

Entry 311% (3.5m)

Entry 22% (0.6m)

55% of the adult population has a

literacy level below Level 2

Entry 1 = age 5 Key Stage 1NC Level 1

Entry 2 = age 7Key Stage 1NC level 2

Entry 3 = age 10Key Stage 2NC Level 3

Level 1 = age 11 to 14Key Stage 3NC Level 4GCSE grades D to G

Level 2 = age 16Key Stage 4GCSE grades A* to C

Level 3 = age 16+A level

Level 4 Degree and above

Source: HMRC data, 2008

Usability (2): adult numeracy levels are even lower

Level 129% (8.8m)

Level 2+25% (8.1m)

Entry 15% (1.7m)

Entry 325% (8.1m)

Entry 216% (5.1m)

75% of the adult population has a

numeracy level below level 2

Entry 1 = age 5 Key Stage 1NC Level 1

Entry 2 = age 7Key Stage 1NC level 2

Entry 3 = age 10Key Stage 2NC Level 3

Level 1 = age 11 to 14Key Stage 3NC Level 4GCSE grades D to G

Level 2 = age 16Key Stage 4GCSE grades A* to C

Level 3 = age 16+A level

Levels 4 to 8Degree and above

Source: HMRC data, 2008

Necessary complexity– Political/social aims– Economic aims– Fairness– Certainty– Avoidance– Boundaries/definitions– Processes for

assessment, collection and enforcement

– Change

Unnecessary complexity– Poor policy design, eg

artificial boundaries– Too many special cases– Badly worded law– Poor guidance – Complicated and

expensive processes– Self-assessment?– Excessive change

Example of Unnecessary Complexity (1)

“It has been argued that a single rate of capital gains tax represents a simplification. We do not find this argument persuasive, compared with a system in which capital gains are taxed at the same rate as an individual’s taxable income. We believe that the benefits of a single rate are overstated…

What is more important for a simple tax system is that different forms of income and gains are taxed at similar rates. With an 18% capital gains tax rate, a higher rate income tax payer now faces a clear incentive to convert income into a capital gain.”

Oxford Centre for Business Taxation, evidence to House of Lords Budget Committee

In 2008 the UK replaced a complex system of 30% capital gains tax with a “taper relief” based on how long an asset was held with a single rate of 18% with no inflation allowance. At the time, income tax rates were 20% and 40%.


In 2010, the UK had 1,042 tax reliefs and expenditures.

“The creation of reliefs or exceptions in the tax system can add to complexity. Consistent with the broader regulatory reform agenda, the Government will consider proposals for new reliefs carefully, and will want to satisfy itself that there is a strong and proven case. To help inform these decisions, the Government will develop a framework for the introduction of new reliefs. It also proposes to make greater use of sunset clauses and post implementation evaluation…”

HM Treasury, Policy Making – A New Approach (2010)

The Chancellor asked the Office of Tax Simplification to carry out a review of these reliefs, recommending which to retain, simplify or abolish.

The OTS reviewed 155 reliefs in detail, and recommended that 54 remain unchanged, 37 be improved, 17 simplified, and 47 abolished


“Most tax reliefs exist to make the tax system fairer and simpler, and tax reliefs can be important tools in ensuring that the Government is able to use the tax system to achieve wider policy objectives… But all exemptions must be paid for by other taxpayers, and, in the long term, reducing the number of exemptions in the system will lead to a simpler and more stable tax system with lower headline rates.

In Budget 2011 we announced the withdrawal of 43 tax reliefs. This will remove over 100 pages of tax legislation, and is a significant reduction in complexity.”

Financial Secretary to the Treasury, David Gauke MP, May 2011


By 2015, the UK had 1,156 tax reliefs and expenditures, a net increase of 114.

“HM Treasury and HMRC do not keep track of tax reliefs intended to change behaviour, or adequately report to Parliament or the public on whether tax reliefs are expensive or work as expected. We found some examples where HMRC and HM Treasury proactively monitored and evaluated tax reliefs, but in general the Departments do not test whether their aims for the reliefs are being achieved.”

Amyas Morse, head of the National Audit Office, 21 November 2014

Why is tax so complicated?

Lobbyists want tax concessions and special treatment

Media use tax to sell papers, and interested in controversy not detail The tax system has

evolved over 200 years, often original policy intention is lost

Tax complexity is caused by people whose real priority is not simplification

Tax policy makers can have a complexity mindset, producing legislation based on government’s needs and culture, not the users’

Politicians are under pressure to make announcements and satisfy supporters. How many votes are there in tax simplification?

Tax advice industry can drive complexity and makes money out of it

Why bother about tax complexity?

It doesn’t really matter

• The tax system seems to work – it brings in the money

• IT can hide underlying complexity• Tax has always been complex, it’s

not going to go away• There are bigger regulatory

burdens – employment law, health and safety, pensions

• Complexity can help disguise tax rises or unfair taxes, or lead to people paying too much tax

• Complexity keeps the tax world in a job – revenue officials, tax advisers, lawyers and academics

It matters

• There is a substantial economic cost to tax complexity, but it is hard to estimate

• Greater complexity creates more errors and higher Government administration costs

• Uncontrolled growth in complexity can lead to a point where no-one understands the law and everyone just ignores it

• Research suggests people are more likely to comply if they understand their obligations and feel good about the tax system

Economic costs of tax complexity (1)

The cost of compliance for micro, small and medium-sized employers (1-250 staff) has risen to £20 billion in total, with a total of £13.5bn for internal salaried costs and £6.5bn in external support costs. This is equivalent to £14,900 per small business (£4,850 in advice/support and £10,050 in internal costs) or £1,900 per employee. However the cost for each business owner feels much higher as the opportunity costs of internal compliance are £38.6bn or almost three times the actual salaried costs.

UK Forum of Private Businesses, 2015 survey of 4000 small businesses

Economic costs of tax complexity (2)

Value of tax gap Share of tax gapCriminal attacks £5.1bn 15%

Evasion £4.4bn 13%

Hidden economy £6.2bn 18%

Avoidance £2.7bn 8%Legal interpretation £4.9bn 14%Non-payment £4.1bn 12%

Failure to take care £3.9bn 12%Error £2.6bn 8%

£34bn 100%Source: HMRC Measuring Tax Gaps, 2015 edition

Greater complexity creates more errors and higher Government administration costs

Why bother about tax complexity?

“The UK has one of the longest and most complex tax systems in the world. Two of the three longest Finance Acts ever were enacted in the last Parliament. The complexity of our current code undermines confidence, acts as a burden on business, suppresses entrepreneurs and inhibits economic growth.”Michael Izza, Institute of Chartered Accountants of England and Wales, 2015

Uncontrolled growth in complexity can lead to a point where no-one understands the law and everyone just ignores it

“The UK’s tax code runs to 22,298 single spaced, small font, heavily footnoted pages. That’s two-thirds the page-count of the 32 volume Encyclopaedia Britannica, which affected to summarise the sum total of human knowledge.”Jolyon Maugham QC, July 2015

Why bother about tax complexity?Research suggests people may be more likely to comply if they understand their obligations and feel good about the tax system

“Increase the transparency of tax policy making and modernise tax administration procedures: these measures would reduce opportunities for corruption and improve the “taxpayer experience”. Citizens’ perceptions of public officials, especially tax officials, can influence attitudes towards taxation.

Simplifying tax regimes, and greater use of information technology are ways to improve tax morale and compliance. Particular attention should be paid to experiences at the local level as it is often here that coercion and corruption are most prevalent.”

What Drives Tax Morale, OECD, 2013

Why do so many tax reforms fail?

Osborne admits he had “got it wrong” on some Budget measures with political capital expended on “battles that don’t matter.”Chapter on 2012 Budget, Cameron at No 10, The Inside Story by Anthony Seldon and Peter Snowdon 2015

“I am well aware that the tax reformer’s path is a stony one. Any change in the system is bound, at least in the short term, to bring benefits to some and disadvantages to others. And the disapproval of the latter group tends to be rather more audible than the murmurings of satisfaction from the former”Nigel Lawson MP, 1984 Budget speech

Why do so many tax reforms fail?1990s - Tax Law Rewrite Project: tight control by Government, unambitious, no scope to change policy, too slow and cumbersome, not enough contact with real customers, most consultation was with lawyers and accountants.

2000s – Corporation Tax Reform project: Too many important losers, transition costs too high, strong lobbying from large business

2010s – 20/20 Vision (Taxpayers’ Alliance): No Government buy-in, politically unrealistic, over-optimistic assumptions, too long and speculative

2011 - Mirrlees report: Bad timing (in a recession), not enough Government buy-in, too systematic (Government can’t “cherry pick”)

2011 – Tax/national insurance merger: lack of appetite from business/tax profession/HMRC, concern over “losers”, especially pensioners, bad timing due to other changes to pensions and income tax.

How do we make tax simplification work?

1. Understand who holds the keys to tax simplification and persuade them it is worthwhile for them.

2. Engage with Government and stay engaged. Otherwise nothing will happen.

3. Quickly establish and maintain your credibility with Government, senior officials, the tax profession and the media.

4. Choice of personnel is absolutely essential.5. Move quickly – reforms need to fit into the political cycle. 6. Keep momentum – early and regular success maintains the profile of

simplification and credibility of the office.7. Don’t be too ambitious – aim for bite-sized chunks that can be

implemented relatively quickly.8. Anticipate and engage with likely “losers” – understand their issues

and try to mitigate them if possible.9. Challenge the status quo in a forensic and professional way, informed

by balanced evidence and practical taxpayer experience

Case study: The UK Office of Tax Simplification

• A completely independent office of Tax Simplification was recommended by ex-Chancellor Geoffrey Howe in a 1998 speech

• This was picked up by the Conservative-backed Forsyth Review in 2008

• 2010 Manifesto commitment by Conservatives to establish the OTS

• 2010 Con/LibDem Coalition Agreement established the OTS as an arm’s length body of HM Treasury for the lifetime of the Parliament

• 2015 Conservative manifesto promised to expand the role and capacity of the OTS and make it permanent.

• 2016 Finance Act expected to contain a clause setting up the permanent Office of Tax Simplification


CONSULTATIVE COMMITTEE

Board member chairs

Members from tax, business, interest

groups and Treasury/HMRC

Rt Hon Michael Jack CHAIRMAN

James Bowler - HMTEdward Troup - HMRC

Treasury/HMRCAnalytical support and

information

Also back office support and business

support5 civil servants from HMRC/HMT – policy

experts/project managers

SECRETARIAT

Jeremy Sherwood HMRC/HMT Head of Office

John Whiting TAX DIRECTOR

2-5 others: private sector/academics

5-10 private sector secondees (lawyers,

accountants, academics, tax specialists, HR professionals)


John Whiting is the Tax Director of the Office of Tax Simplification, a part-time role he has held since the OTS was established. Until 2013 he was the Tax Policy Director of the Chartered Institute of Taxation; previously, he was a tax partner at Pwc. He is also a non-executive director of HMRC and a Board member of Revenue Scotland.

Rt Hon Michael Jack served as the Member of Parliament for Fylde between 1987 and 2010 following a career in business. He served in a number of ministerial posts, including as Financial Secretary to the Treasury from 1995 to 1997. During his time as Financial Secretary he was responsible for establishing the Tax Law Rewrite project.

4. Choice of personnel is absolutely essential.

OTS Projects

Finished:(1) Tax Reliefs – completed March 2011(2) Small business taxation – 2012(3) Pensioners – completed March 2013(4) Share schemes (two stages) – completed March

2013(5) Employee benefits and expenses – completed July

2014(6) Tax penalties - completed October 2014

(7) UK Competitiveness – completed December 2014(8) Partnerships – completed January 2015(9) Employment status – completed March 2015

Ongoing:(10) Tax complexity (exploring the causes of complexity

and measures of complexity)(11) Income tax/national insurance alignment

(12) Small company taxation

5. Move quickly – reforms need to fit into the political cycle.

6. Keep momentum – early and regular success maintains the profile of simplification and credibility of the office.

7. Don’t be too ambitious – aim for bite-sized chunks that can be implemented relatively quickly.

OTS Recommendations to date - 402 (60 ‘big picture’, 342 other) - around 50% accepted wholly or partly, 29% under consideration - (41% of the big picture proposals were partly or wholly accepted)- Proposals included policy, legislative and administrative changes

- Merge tax and national insurance- Introduce a cash accounting basis for small businesses- Improve guidance for people with overseas pensions- Improve clearance procedures for VAT- Carry out a full review of travel and subsistence expenses- Update the rules for tax free living accommodation to make them fairer

8. Anticipate and engage with likely “losers” – understand their issues and try to mitigate them if possible.

Blind person’s allowance

The blind person’s allowance is an additional allowance for individuals who are certified blind or severely sight impaired. The relief is not used by the majority of blind people as they do not earn sufficient income and there may be better ways to assist those with a visual handicap.

However, we recommend not abolishing this relief until an alternative and equivalent funding route is put in place.

OTS review of tax reliefs, final report, 2011

How we work - projects take 6-24 months and are agreed with Ministers- we try to talk to as many people as possible, eg in the

partnerships project we had 50+ meetings and met 1,000 people - we also draw on HMRC internal and public data and analysis- we pull it all together in evidence-based practical

recommendations, working closely with HMRC/HMT to test them - Sometimes disagreement and tension occur, but usually

relations are good. HMRC is most concerned about avoidance, administrative cost and resources.

9. Challenge the status quo in a forensic and professional way, informed by balanced evidence and practical taxpayer experience

‘What the government can do to further improve competitiveness of

the UK tax administration....with particular regard to World Bank

‘Paying Taxes’ report...particular focus on SME sector ’

World Bank paying taxes

Three indicators: Total tax/time to comply/number of payments

Work programme:• Recruited the former Head of Tax at Tesco plc and a SME tax specialist

• Initial thoughts & call for evidence published with Budget in March 2014:

• Extensive series of meetings (c60: April-July), met most of FTSE 100 plcs

• Researching particular issues, other countries etc.

• Report published October 2014, Government response in December

Example project: Improve UK tax competitiveness

Top 10 recommendationsCorporation tax/income tax1. Align tax and accounting profits...(eliminate tax nothings, capital allowances - are they worth it? corporate capital gains: necessary?) (Consider)2. Trading/investment distinction – abolish (Consider)3. Debt cap, transfer pricing – streamline (Consider)VAT4.Greater certainty needed: boundary issues, rulings (Accept)Payroll taxes5.Income tax/National insurance harmonisation (Consider)6.Real Time Information process – review including ‘on or before’ (Accept)7.Extend short term business visitor rules (Consider)HMRC administration8.Extend Customer Relationship Manager model (Reject); explore how to give greater certainty to smaller businesses (Consider)9.Continue to improve call centre times etc; e mail service needed (Accept)10.Single tax account service for small businesses (Accept)…50 recommendations in all…49 being taken forward

How do we make tax simplification work?




4. Choice of personnel is absolutely essential.5. Move quickly – reforms need to fit into the political cycle. 6. Keep momentum – early and regular success maintains the profile of

simplification and credibility of the office.7. Don’t be too ambitious – aim for bite-sized chunks that can be

implemented relatively quickly.8. Anticipate and engage with likely “losers” – understand their issues

and try to mitigate them if possible.9. Challenge the status quo in a forensic and professional way, informed

by balanced evidence and practical taxpayer experience

And finally…‘The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing’

36

Jean Baptiste Colbert

Thought Leadership Lecture 2015 - Jeremy Sherwood

Documents

Transcript of Thought Leadership Lecture 2015 - Jeremy Sherwood