High rates and complexity at heart of tax reputation issues

At a conference on corporate tax avoidance and reputations, Public Accounts Committee chair Margaret Hodge MP backed the TaxPayers’ Alliance position that tax complexity is the root cause of much of the opportunity for tax avoidance in the UK. She told the Oxford Centre for Business Taxation’s conference that:

Simplification is at the heart of tackling tax avoidance and I blame my party just as much as the current government.

It’s great that the TaxPayers’ Alliance message is now established as the most credible critique of the problems relating to tax avoidance and the legitimacy of the system. Complexity leads to misunderstanding, which leads to mistrust. And that encourages people to avoid their own tax because they think others might be getting away with something. So it’s encouraging that this, and the point that complexity so often provides the means for tax avoidance, are being acknowledged.

Exchequer Secretary to the Treasury David Gauke MP also gave a resounding defence of the lower 10 per cent rate of Corporation Tax available for activity connected with the ‘patent box’, claiming the lower rate encourages investment, jobs and growth in Britain. He said the rate had encouraged GlaxoSmithKline to invest £500 million in a new factory, creating thousands of jobs.

Mr Gauke also said that raising the rate “would cost the UK jobs and investment”. He’s right. And that’s why the Government should be cutting Corporation Tax faster than it is. Recent economic data seems to suggest that the recovery is underway but only at an extremely turgid pace. So cutting the rate to 10 per cent would both boost incentives and make the patent box redundant, simplifying the system.

Corporation Tax isn’t a free lunch. As Janine Juggins of Rio Tinto put it, it’s “not a victimless crime”. The money comes from corporate profits. That doesn’t mean incorporation certificates or gleaming corporate office buildings suffer. It means reducing dividends, which in turn means lower pension payments as most shares owned in the UK are held by pension companies. And it means higher prices in the shops. But more than anything, it means lower wages for workers. So it was great that Ms Juggins, Bill Dodwell of Deloitte and John Gapper of the Financial Times all made this point. It can’t be stressed often enough.

The final word was given to Michael Devereux, Director of the Centre for Business Taxation, who stressed that tinkering at the edges will not provide the system we need:

Simplicity has to involve fundamental reform of the tax system.

It’s clear what we do need: a much simpler system with fewer reliefs and exemptions but, crucially, lower rates. And the 2020 Tax Commission proposed just that in The Single Income Tax.

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