An opportunity for tax simplification

July 03, 2015 2:01 PM

With the budget less than a week away, speculation is rife as to what will and won’t be included by the Chancellor. One issue that may now re-emerge from the proverbial long grass is that of bringing income tax and NI rates in line with each other. A simpler tax system is something we have been calling for and we implore the chancellor to undertake this move.

Simplifying the tax system has three key benefits:

First and foremost it cuts the cost of compliance -- by making the system easier to use and understand for companies, it takes them less time to produce their tax returns (and a benefit that will principally go towards small businesses unable to afford full-time accountants or software afforded to larger companies). This also helps HMRC. With less time required to confirm returns, costs will be reduced and allows them to refocus their attention towards the tax evaders the government is supposedly chasing. It'll also, of course, help individuals as a result. 

Further, a simpler system reduces the number of distortionary changes in tax rates. As tax rates rise with higher income, some workers are trapped working a fixed number of hours per week, to avoid crossing in to a higher tax band. This is a significant issue for some of our poorest citizens, who can miss out on greater hours and salaries as they try to stay under a threshold. By cutting the number of tax rate jumps, this would increase the incentive to work, which would be a boon for our economy, our businesses and our taxpayers.

Finally, by clarifying the amount of tax that is paid by the average worker, there will be greater understanding of just how much tax we all pay. The sheer complexity of the tax system hides the true cost to taxpayers and simplification will increase transparency.

With political capital in abundance and a full political cycle in front of him, now is the most opportune time for Mr Osborne to enact his reported reforms and allow him to accrue the returns, rather than a future government.

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