Why the tax system is not only too complex for HMRC itself to administer effectively - it's also socially divisive.
Another 31st of January has passed and accountants around the country are breathing a sigh of relief that the tax return filing season is over. There is probably an even greater sense of relief than usual because the 2016/17 season was a particularly tough one.
At the start of the tax year HMRC announced that there were errors in their tax calculation algorithm for 2016/17. A fix for most was only received part of the way through the tax year and some are still awaited. As a result, some returns could not be filed electronically. This is worrying, especially with Making Tax Digital on the horizon.
It is easy to see why HMRC had difficulties with their calculation and that is because of the sheer complexity of the tax system. We now have tax rates of 0%, 7.5%, 10%, 20%, 28%, 32.5%, 38.1% and 45%. We have national insurance that kicks in and out at different rates. We have different marginal rates on the reduction of personal allowances and the High Income Child Benefit Charge. We have the personal allowance, the personal savings allowance, the dividend allowance and the marriage transferable allowance. There are three different rates for the personal savings allowance alone. The marriage transferable allowance is only available in certain special cases. And this is before we get to the abomination that is the drafting of the Inheritance tax Residence Nil Rate Band.
The interaction between these various rates and allowances is so complex that HMRC's initial specification for their tax calculation did not take into account all of the potential ramifications.
Simplification of these rates and allowances is urgently needed to make the tax calculation easier. If HMRC cannot get the calculation right in all cases, how can the taxpayer be expected to do so?
And this throws up the bigger problem. Tax is that space where the citizen and the state interact. If we can’t understand our tax calculation, how do we take our place in society? We abrogate that responsibility; ‘it’s too difficult’ – quickly becomes, ‘well, only the rich and the big companies can afford advice’. The next step is that ‘they’ get away with it, and if ‘they’ can do so by employing fancy lawyers, then perhaps we can take this cash job. After all, that’s only fair.
This is a failure of Government, not HMRC. Successive Governments have used tax to further their objectives; they have then used a sticking plaster of changes to tax to try and staunch the consequences of their decisions. The dividend tax rates are a direct result of the reduction in corporation tax, and the failure to reform National Insurance. This isn’t about dodgy tax schemes, and people being able to magic away their liabilities. This is about allowing people to take responsibility for their own tax.
To find out more, please contact your usual Kreston Reeves adviser, or Laurence Parry, Tax Partner, here or on +44 (0)330 124 1399.