I have been greatly disappointed, though less surprised, by recent shrill criticism of the immorality of high earners arranging their affairs to minimise tax liabilities. Cameron too is guilty of supporting this mob morality - and he and his sidekick Osborne make the rules. One fears that the next step will inevitably be more poorly judged legislation to target the specific areas where too little tax is deemed paid and perhaps a further step taken to legitimising retroactive tax legislation. That is the last thing this country needs, what we need is grown up legislation that actually addresses the massive faults and inconsistencies in the current tax system.
More legislation just addressing the symptoms will exacerbate the already ridiculous complexity of the UK tax regime. That will result in yet more expensive advisors spending more time to minimise the adverse effect on their clients. To earn their fees they will naturally try to mimimise the amount of tax payable and one might imagine their clients would encourage this. The more complex the system becomes, the more the wealthy are likely to gain advantage over those who cannot afford expensive advisors. The overall effect will be to make a number of would-be entrepreneurs calculate they are better off as large company salarymen or civil servants with a gold plated pension. It is the nation as a whole will lose out, and, though our would be entrepreneur will live a calmer, more comfortable life, he/she is likely to retire demoralised and frustrated.
Rod Liddle wrote an excellent article in the Sun recently, pointing out what should have been obvious to our leaders; it may be that Gary Barlow and Jimmy Carr pay too little tax but the fault is the government’s not theirs - nobody had suggested they had broken the rules. It is a shame Jimmy feels the need to publicly state he is guilty of a misjudgement; surely we can expect him to abide by the law but not voluntarily give money to the government. Like other successful people he might donate to a charity of his own choosing should he feel the need to give away more, rather than to pay the government who he might consider will not use the money wisely or even efficiently.
Government should surely be expected to deliver a tax code that is fair, and, ideally, understandable by a normal mortal. At the moment we are nowhere remotely close to either. It is hard to see how the government fails to understand how badly this demoralises those who might just produce the entrepreneurial drive we all acknowledge is so necessary. The only plausible reason I can think of is government is mostly made up of people who enjoy privilege inherited from the efforts of earlier generations or, alternatively, those who have come from very modest roots and do not understand the despair experienced by those struggling to pay mortgages and other debts to get ahead when it seems the government is removing money from every orifice. They forget, or at least ignore, the fact that the level and complexity of taxes we now suffer has been proven counterproductive. They also deceitfully mis-represent the tax rates. The marginal rate of tax for a person earning a salary of £50,000 per annum is stated as 40%. No! back to school for you Osborne, for an RRR refresher. The amount paid is employee 42p in the pound (remember the 2% uncapped NI?) and employer 13.8p in the pound. That’s 55.8p on a cost of employment of £1.138; 49% not 40%. For goodness sake, you need to raise the money, just raise income tax to 50%, abolish NI. You will raise more cash, the left will be ecstatic and we will all understand the real cost of the wretched tax and the debate will be based on facts not the appalling distortion of government spin. You won’t do so, perhaps because it is politically expedient not to admit how much is raised or, more worryingly, because those in government cannot resist messing with the lives of others. This bureaucratic process was applied by Gordon Brown with such alacrity it seemed an addiction, the mooted flaw in his character perhaps.
So the government now expects of its citizens to pay more tax than the law requires, apparently because it is unable to deliver a tax code that is rational and fair and on which we can rely. It must be hard to run the current mess and still keep a straight face, possibly explaining why Mr Osborne looks increasingly like he is sucking a lemon. I read HMRC consider themselves understaffed and struggle to complete their workload (Good!) and yet seem only too happy to work in an unholy alliance with the Government to exploit the most unfair aspects of the labyrinthine tax code at the cost of the taxpayer and the country's output and peace of mind generally. The cartoon Taxman character won prizes for selling the friendly image of HMRC. In the real world that company might be exposed to liability for misrepresentation.
A full critique of the system would be a massive and depressing document to produce and probably more so to read. Instead I offer a few tit-bits to illustrate some of the unfair and inefficient elements lurking within our tax code.
- Employees (via a tax on their employers) suffer an additonal levy the self employed do not; the Employer's NI at 13.8%. Why? I suspect no reason other than they are sitting ducks. Employees are easy meat and thus screwed, amongh other things, with the un-restricted Employers' NI - this was not Brown for once - thanks very much K Clark. It should simply be abolished and an equivalent of say 12% added to the tax rate.
- Brown did however show his admiration of Clark's tilting the playing field by introducing some unpleasant legislation known as IR35 setting out a rather bizarre set of conditions that allowed a relationship to be taxed as self employed rather than an employee. Needless to say the self employed community re-organised to satisfy those conditions and HMRC chased some hapless individuals through the courts with limited success except for financially damaging those who had the temerity to defend their actions. The net effect is that very little money was collected but a great deal of time and money spent pursuing a selection of those who filed their taxes on a self-employed basis. More cost, more scary big brother from HMRC, more complexity and a completely unnecessary red tape on the smallest business. I expect the result was an increase in administrative costs generally and a reduction in business activity and taxes collected overall. If government needs to increase the amount of tax raised (why do I say if - they do, and badly!) it should raise the tax rate which is applied to all income earners equally, then they don’t have to try to tax self employed rabbits as PAYE donkeys. This tax neutral adjustment would have the happy byproduct of increasing confidence within the business community and business levels would increase.
- Tax rates are debated in terms of 20%, 40% and 50%/45%, which is rubbish. Needing to squeeze every more from the taxpayer but too devious and dishonest to say so G Brown ("Blubgurn") added an uncapped 2% to Employees' National Insurance. Any honest commentator should speak of 22, 42 and 47/57, or be guilty of promulgating the government's dishonesty.
- The marginal tax rate on incomes between £100,000 and £115,000 is higher than incomes over £150,000, or, for that matter, over £1,000,000. This is the result of slyly removing the tax allowance at the rate of £1 for each £2 of income over £100,000 earned. For those employed under a PAYE system this is a marginal rate of about 67% [42% plus £4 for each £20 earned plus 13.8% Er's NI]. If the tax rates need to be higher, then raise taxes. This sleight of hand is most unfair taxing the middle more than the rich. What next? Logically they will exacerbate the position by removing the 20% band and replacing it with the higher 40% rate.
- As if this nasty little sting was not enough on its own HMRC have in recent times embarked on a process of making it worse by arbitrarily raising the rate of tax taken through PAYE of taxpayers whose income is below the £100,000 threshhold on the basis they believe the taxpayer will earn over £100,000 the next year despite having no evidence of this. The taxpayer can appeal against this but many do not - particularly as the tax codes are often changed just before the end of the tax year, not leaving much time. If too much tax is taken it will be refunded on filing a tax return but the taxpayer is out of money for a considerable period and given the outrageous rate being collected, where actual income is below the threshhold the tax is extremely damaging to the individual.
- Employee options must be issued under tax office structures or they will be treated far more harshly than a third party purchasing the same option. Why? they should be taxed on the same basis.
- Directors pay NI on a harsher scheme than employees. There is no intrinsic advantage to being a director but there are certainly obligations and potentially liabilities an ordinary employee does not face. Why should they be treated more harshly in tax than other staff. The practical effect is small but the principal wrong and should be corrected. As I know to my cost the difference can make life difficult for the director of a small company with limited income.
- In recent years there has been a growing trend for HMRC to rely on raising fines for minor infringements, and some can be quite expensive. If this is really necessary to collect taxes and information on a timely basis then fair enough. However I fear it has become just another line of revenue and this is immoral. I recently heard a story of a case where a small company was charged a five figure fine for failing to submit an end of year payroll summary on time, although they reasonably believed they had done so. In this example the HMRC were threatening the firm with legal action in the belief they would drop their appeal (as most presumably do). On the firm’s accountant telling HMRC they would defend the case pro bono HMRC dropped their case. This is an outrageous policy as it targets those who cannot afford to defend themselves, the much maligned SME sector. Indeed it sometimes feels like they are targeted because they cannot afford to fight. One small scrap of good news is that trade associations are increasingly providing legal support so an unfortunate target can defend themselves. In time this should mean litigation is only commenced when the apparent sin is worthy of such action.
- There is a huge effort spent collecting additional tax on expenses deemed to be benefit in kind. The book of rules is huge and far from easy to understand let alone administer accurately. The Tax return for expenses, the “P11d” admin is a real headache for small companies. In 1971, a P11d had to be sent to HMRC where a salary was in excess of £8,500 p.a.. Today the threshold is the same in pounds - or 10% of what it was in 1971 in real terms. Against this Euro MPs’ round sum allowances are not taxed, nor accountable, to show no net benefit is received by the individual (one might suspect that in most cases it is). Will Mr Osborne please have the honesty to stand up and state clearly for the benefit of the electorate that
- the government (and its predecessors) deems it fair that the commoner suffers a heavy bureaucratic obligation and must pay tax on any deemed (not necessarily cash) benefit, while
- the rules applying to Euro MPs relating to expense allowances are simple and not subject to tax,
- The new income tax relief cap, as currently proposed, could cause an individual to pay more tax than his overall net profit, or even pay tax where he makes an overall loss. This provision could bankrupt entrepreneurs, or at the least (if they have any sense) dissuade them from investing in new ventures.
I would be interested to learn of other bizarre and unfair aspects of our code readers may be aware of...
In conclusion the above examples are a part of an attitude of disrespect to the wealth generating sector shown by almost all state functions. It has worsened as the state grew as a proportion of national life - now approaching 50%. Gordon Brown accelerated the process horribly, seeming to enjoy biting the hand that fed his empire. Far from being the best chancellor in modern times he deserves to go down in history as the worst - the man who mortgaged the next generation's future to serve his ever more invasive and inefficient state. Why he did this is for another blog but I think it would boil down to vanity, self obsession. Perhaps that is the result of the moral flaw commented on early in New Labour's reign. Particularly disappointing is Mr Osborne's similar tendency and consequent reluctance to remove some of the worst flaws, some of the more obvious of which are listed above, never mind reduce the overall tax rate (which would quite possibly raise the amount of of money actually raised). Such simplification would spark enterprise and support growth in a way his current regime cannot and in a way that easing the (modest) state spending cuts will not. Look at the history books, Mr Osborne, its not the government that creates wealth and jobs (although it can appear to for a short time by spending money raised from tax and borrowing) but it's subjects. The best the government can hope to do is create and maintain the right environment to let this happen.
I support Jimmy Carr, Gary Barlow and enjoy the irony of Ken Livingston doing the same. In Barlow’s case the investments may well yield a worthwhile business in time - unlikely now if the proposed tax changes are successful in preventing such investments. The whole system is inefficient and increasingly morally corrupt; I have come to despise it. I am massively disappointed in Mr Osbourne's lack of interest in sorting it out, and I doubt the next Labour government will - history suggest they feel it is their job to run the lives of others. If the current and future governments of all political colours do not sort out the tax system they can only look forward to reduced productivity, increased corruption and fraud (never mind an increase in the creative use of the law - exactly what government purports to stop) and an ever worse fiscal situation. However, for those mad optimists who believe a better system is possible I recommend reading the recent publication of the 2020 tax commission. Its a brilliant analysis of the problems in the current system and a comprehensive and well argued proposal for a wholesale change to it. Just don't expect your cuddly tax cartoon inspector to like it. It is freely available on www.2020tax.org and also offers an 8 page summary showing most of the key conclusions and proposals. It deserves the support of those who really wish to see the UK back on its feet.
Answer: the UK Government