The IoD's View

Taxes need to be simpler. administrative burdens are real burdens on business, which take time away from improving products, winning orders and developing staff. The administration of taxes must be fair, transparent and based solely on laws passed by Parliament.

Key Points

• The complexity of the tax system is a very serious concern. The bulk of tax legislation is now greater than that in almost any other country in the world. Small businesses, which are in no position to afford sophisticated advice, can ignore some parts of the tax code but in other areas, they suffer just as much as large businesses.
  
  
• The IoD surveyed a sample of 500 members in spring 2007. 73% of respondents agreed that “complexity in the UK tax system can make it difficult to take major business decisions”. 70% agreed that “the administrative burdens imposed on a business by the UK tax system could be enough to deter a potential entrepreneur from starting a business” (The tax system – at a tipping point? IoD, 2007).
  
  
• The Government has proposed a range of simplification initiatives. It has also set itself two targets, one to reduce the administrative burden on businesses of forms and returns by at least 10% over the five years to 2010/11, and the other to reduce the administrative burden on compliant businesses of audits and inspections by at least 15% over the same period. We welcome all of these initiatives, but we could do with more, and faster.
  
  
• Officials have substantial powers to investigate taxpayers. Increases in these powers were included in the Finance act 2008. The case that the Government has made for such extensions of powers is not sufficient.
  
  
• Since 1689, power to levy taxes has lain solely in the hands of Parliament. The Crown has no right to our money unless Parliament says it has. While there have been no direct breaches of this provision, there is a constant danger of administrative creep. Loosely worded legislation gets made precise by guidance drafted by officials and not approved by Parliament, or is propped up by assurances given by ministers. Such developments are wholly unacceptable.

Q & a

Q. Do we know how much tax administration costs British business?

a. The Government’s targets for reductions are based on a study carried out by KPMG. That study found that the annual administrative burden of the UK tax system in 2005 was £5.1bn (administrative Burdens – HMRC Measurement Project, KPMG, 2006). However, this figure covers the cost of gathering information and completing forms. It omits the cost of keeping an eye on the business and on the law in order to spot where there might be a tax compliance issue, and the cost of distraction from running the business because a tax issue may be a particularly worrying one. These types of cost are hard to quantify, but we can take it that the full cost is substantially more than £5.1bn.

Q. What is the Government doing about simplification, and is it enough?

a. There are two general targets, one to reduce the administrative burden on businesses of forms and returns by at least 10% over the five years to 2010/11, and the other to reduce the administrative burden on compliant businesses of audits and inspections by at least 15% over the same period.

There are also a number of specific initiatives. In October 2007, the Government announced three streams of simplification work, covering vat, anti-avoidance legislation and the corporation tax rules on related companies. The Finance act 2008 gives legal effect to several simplifications. We can expect further progress in future years.

We warmly welcome these initiatives, although we would caution against measures that might appear to be easy solutions but that would have serious disadvantages, such as certain types of general or purposive anti-avoidance rule. Furthermore, when the current administrative burden of the tax system is so high, we can hardly say that the current initiatives are enough.

Q. Won't computerisation dramatically reduce administrative burdens?

a. Computerisation certainly takes away a lot of computational drudgery, and it can significantly reduce error rates. But it is not a panacea. Items need to be categorised correctly before they can be recorded. For example, does an item of capital expenditure qualify for the allowances given for expenditure on plant and machinery? We should also remember that recent figures for administrative burdens relate to a business community that is already largely computerised.

It would also be unwise to assume that a computerised HMRC will avoid making mistakes. The National audit Office report HM Revenue & Customs: accuracy in processing Income Tax, July 2007, revealed a significant level of errors. Even after allowing for corrections, many of which are made at the instigation of taxpayers or their advisers, 500,000 taxpayers a year are undercharged by about £125m in total, and 540,000 are overcharged by about £157m in total (paragraph 1.17).

Q. Why is the Government extending the powers of officials?

a. The Government believes that new powers could make it easier for officials to help those taxpayers who want to comply, and easier for officials to detect those taxpayers who want to evade tax.

The new power that gives rise to most concern is a right for officials to visit businesses and inspect their systems in-year for the purposes of corporation tax and income tax on profits. Even though some limits on this power were introduced in response to pressure from the IoD and others, the arguments put forward for this new form of intrusion are hopelessly inadequate. It is important not to allow the convenience of officials to become the criterion for the selection of new powers. There are also specific reasons why HMRC should not have an in-year power to inspect systems. accounting systems are often geared to management accounting requirements, not to financial reporting requirements. Numerous year-end accounting adjustments are needed, so in-year reviews would mean little. and audited accounts are the basis for taxable profits, so tax inspectors would be duplicating the role of auditors.

Q. Is administrative discretion really placing the rule of law on tax at risk?

a. Not on a large scale. The instances that concern us are confined to small areas of the tax system which raise modest amounts of tax, but they are still very significant to the taxpayers concerned. and in any case, the principle that tax may only be levied in accordance with laws passed by Parliament should not be breached, even on a small scale.

a leading example is the legislation on managed service companies, introduced in 2007. The scope of the legislation was very unclear to many professionals, and some amendments were made in Parliament, but the Government still had to clarify it with a ministerial statement. and when the guidance came out, it clearly went beyond the scope of the legislation by introducing an arbitrary definition of professional advice (Managed Service Companies Guidance on Chapter 9, Part 2 and Section 688a, Part 11 Income Tax (Earnings and Pensions) act 2003, July 2007, HMRC, page 8). It also stated that “The guidance is intended … to make HMRC’s position clear regarding its intent to ensure that the legislation meets Government’s intent” (ibid, page 4). This last statement displays a clear misunderstanding of HMRC’s role. When it is implementing law that Parliament has passed, it must ensure that Parliament’s intent is met, not the Government’s.