Earlier this week Treasury Minister David Gauke, launched a full scale
assault on anyone who pays their cleaners and tradesmen cash in hand, saying
this practice was morally wrong.
He might well be right as the Treasury estimates about £35 billion of
tax goes uncollected each year, of which just £5 billion is due to tax
avoidance. The rest is due to people not paying the tax they should –
that’s tax evasion.
And for those who doubt the scale of the 'black economy', one EU report
estimated that it is worth £160 billion in the UK.
The problem with most bandwagons is that if you don’t get off at the
right time, you invariably crash. Just look at the unprecedented
intervention by the Prime Minister, over the tax affairs of Jimmy Carr.
Even under the last Labour Government, I could not have imagined Gordon
Brown or Tony Blair talking about an individual’s tax affairs, when that
person, famous or otherwise, had not broken a single law.
Yes, I know Gauke’s remarks were widely seen as a gaffe, but the fact
the comments were made at all underlines the level of panic when any story
emerges about a person minimising their tax bill.
No doubt there are those who reveled in Mr Carr's discomfort. But while
his behaviour exposed his own hypocrisy by putting his money offshore to cut
his tax bill by around £1.6 million while regularly engaging in banking
bashing, I must say again that he did nothing illegal.
Putting money “offshore” in special tax efficient vehicles like K2, was
declared legal by the HMRC. And this type of mechanism is not just used by
individuals. A similar system to K2 was used by Vodaphone, saving the company
billions.
Then there are the companies like Google or WPP, who reportedly moved their European
Headquarters to Dublin, to take advantage of the lower corporation rates. And
again there is nothing legally wrong with this.
But instead of complaining about this, what are the Government doing
about it?
Well, the last Government under Blair and Brown, talked tough for 13
years about making the tax system fairer, cutting out abuses and closing
loopholes. The result of all this tough talk? A handbook of tax regulations
doubled in length to more than 11,000 pages. No, this is not a typo.
According to the Chartered Institute of Taxation, the regulations had doubled
to 11,520 pages, giving the UK the longest primary tax code, and one of the
most complicated, in the world.
The current inhabitant of No 11 Downing has so far been unable to slash
these rules and regulations, much to annoyance of many Conservatives,
businessmen and even tax officials who see the mountain of paperwork as an
inhibitor to growth and being counterproductive.
The Burden Barometer 2010, produced by the British Chamber of Commerce,
found that the total net cost of the major regulations to business approved
since 1998 was £88.3 billion and some of this is down to the ever-increasing
complexity of the tax regulations.
So, given the cost and the intricacy of the tax system is it any wonder
that corporations and individuals are going to find and exploit every single
loophole?
The solution I would suggest is not more regulation, but a simpler tax
regime that is actually enforced. This argument lies behind those who advocate
a flat tax system, like the TPA in their brilliant report, “The Single Income
Tax – Final report of the 2020 Tax Commission”.
The report argues very cogently the benefits of introducing a flat tax
system that reduces the burden on the hard-pressed taxpayer and cuts out the
loopholes.
And the evidence is very compelling when you look at other countries. A
flat-rate tax has been adopted by nearly 40 countries.
One such example is Russia. Hardly the place that you would associate
radical thinking on tax policy, but they have adopted a flat- rate system.
After it was introduced, the Government saw income tax revenues more than
double in real terms and they have been able to wipe out many of the loopholes
created by the excessive rules, regulations and red tape of the past.
A similar model was pushed forward in Georgia. Again a country that is
famous for other reasons, but here a simplification of their tax system,
boosted income and slashed avoidance and fiddling.
There was a time when the Conservative Party believed in being the low
tax party. It believed that allowing people to spend more of their own money
was the morally right thing to do. Looking at a flat tax system would have been
an option, but we seem to be a very long way from those days especially given
the invidious effect of our coalition partners acting as the buffers for truly
Conservative policies.
Simplifying the system and reducing the amount of tax we pay as
individuals to increase the overall amount raised, is the obvious and evidence
based approach. But I worry that this will not be repeated in the UK, given the
furor that the Chancellor’s announcement of cutting the top rate of tax from 50
pence in the pound to 45 pence caused amongst our partners.
Instead I worry that we will continue to have one of the most
complicated tax systems in the world. And we will continue to carp about
loopholes, legal schemes to avoid paying excessive tax and paying the cleaner a
few quid cash in hand.
