Simplifying the UK Tax Code Often Gets Bogged Down in Politics

The UK tax code has a life of its own—it gets bigger, like a red giant star, gradually expanding until it consumes all around it.

Not so long ago, there were two volumes of the UK tax code—one yellow, the other orange. You could ignore the orange one because only the people in value-added tax would use it. If you didn’t know the answer—“it’s in the yellow book!” as pointed out by my manager when I asked why we add back depreciation.

Now we have specialists in all areas who know the minutiae of their own area, but not necessarily the big picture. Efforts to tame the beast have failed—the Office of Tax Simplification has come and gone. Despite having some talented people, the OTS was only an advisory body—a fig leaf hiding the blushes of successive UK chancellors who talked a good simplification game but delivered little.

The reality is that tax simplification, and its close cousin tax reform, go hand in hand. Without one, it’s difficult to have the other. Tax reform is difficult, it creates winners and losers and shifts the burden of tax—those who win will like it, and the losers will complain. Nigel Lawson was the last tax-reforming UK chancellor, more than a generation ago.

If you can’t reform tax, it becomes increasingly complex as more policies are introduced. Wanting to restrict interest deductions (personal or corporate) requires new sections and new concepts, making it harder for taxpayers to understand what to do. The corporate interest restriction is around 150 pages long—a riveting read I’m told—but legislators must work out where we are, where we want to get to, and then how to bridge the (150-page) gap, all the while watching out for the inevitable law of unexpected consequences tripping them up.

Simple tax legislation is about making the tax code clear to understand, explain, and administer. For many years, the Hong Kong tax code was held up to be a model of efficiency (350 pages all in). Hong Kong had rapid economic growth while the code was in place, but taxpayers easily knew where they stood, meaning tax could be collected efficiently. Professional tax advisers may have had less to do, but management could get on with the business of running the company, because there was little need to spend time wondering whether legitimate transactions would fall foul of some obscure anti-avoidance provision.

Many individuals now need professional support to complete their own tax returns, with more people requiring assistance as higher interest rates eat through their personal savings allowance—even basic rate taxpayers may now need to report interest. As more of the public encounter the tax code, they will need to manage their own assumptions about what service they expect and what the tax authority, HM Revenue & Customs, can deliver. A simpler tax system would help HMRC focus its resources on ensuring compliance, rather than explaining the basics to increasingly baffled taxpayers.

For the time being, UK tax simplification is dead. Former Chancellor Kwasi Kwarteng called time on the OTS on the basis that all future legislation should be simple. Following his ejection from office, the new government has focused its energy on driving tax revenues up by relying upon inflation and fiscal drag. Yet there’s a glimmer of hope. The government has made political statements that a neater and cleaner tax system is a priority for officials in the UK Treasury and HMRC—they have a mandate to create simplicity in terms of both policy and administrative design.

This government must call an election by Jan. 25, 2025, so the last thing it needs is simplification or reform, as this will remove the certainty associated with future revenue and annoy the losers, and there isn’t enough time for the winners to see the benefits. Given the interest successive governments have shown in perfectly sensible suggestions from the OTS, political statements of support for simplified taxes are the easiest way to approach it. One hope is that a reforming chancellor will be appointed and will overhaul the entire system—something that isn’t going to happen before the next general election.

Professional bodies associated with taxation have offered to help the treasury, even producing a nine-point plan to assist with the process. All the steps are logical, inclusive, and sensible; however, the challenge is that implementing these changes is time consuming.

This government doesn’t have time, it has something more important to do—an election to fight. Don’t expect dramatic (or even undramatic) action soon, given the government’s recent U-turn against removing 5,000 pieces of EU legislation—despite this being an election pledge—as it was too difficult.

In the medium term, tax reform that leads to simplification seems the best hope. If the balance of taxes were to shift (say, the introduction of a wealth tax), this might give cover to clear out a few hundred pages of legislation. The ungenerous might describe this as “rip it all up and start again”—and I would agree with them.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Laurence Field is a partner at Crowe UK.

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