Tax priorities for the new government
THE CHARTERED INSTITUTE OF TAXATION AND INSTITUTE OF FISCAL STUDIES TAX DEBATE ‚ FIVE YEARS TO CHANGE TAX FOR THE BETTER: WHAT SHOULD THE NEW GOVERNMENT‚ S PRIORITIES BE?‚
On Wednesday 3 June 2015 CIOT members and invited guests heard from a panel of experts from the fields of tax, economics, business and politics who gave their views on what the new Government‚ s priorities should be for the UK‚ s tax system over the next five years.
The debate was the fourth in a series of events organised by the CIOT and IFS aimed at promoting debate among policy-makers, opinion-formers and the wider tax and economics communities on the future of the UK and international tax system. The debate took place in the spectacular setting of the Great Room at the RSA in London and was hosted by the CIOT‚ s President, Chris Jones.
Paul Johnson, Director of the IFS, began by looking at what has happened in the past five years. He explained that there have been big changes to the structure of the tax system, not least the fact that because of the rise in the tax free personal allowance only 56% of adults now pay income tax which has meant that an increasing proportion of tax is being paid by the highest earners. This contraction in the number of people who are paying the most tax is a worrying development as the tax system has become dangerously reliant on a smaller number of taxpayers.
In his opinion, the big issues that need to be addressed are the role of NICs and the structure of the income tax system, including the indexation of thresholds, as well as a proper review of the Council Tax system, which he described as out of date and regressive. He lamented the fondness of all political parties for ‚ pulling rabbits out of the hat on Budget Day‚ which he said is no substitute for a proper tax strategy and policymaking plan.
Gavin Kelly, Chief Executive of the Resolution Foundation, an independent think tank that aims to improve living standards for low- to middle-income families, believes that there is a great gap between the rhetoric from all the main political parties and what their proposals will actually achieve in practice. In his opinion, it is disgraceful that low income earners have not been taken out of NICs as well as income tax. The pledge to increase the tax free personal allowance so that a person earning the minimum wage and working 30 hours a week pays no income tax is at best meaningless if these people are already paying no income tax, and at worst risky if the minimum wage rises significantly over the life of this Parliament. The focus should be on increasing the NIC threshold. On Universal Credit (UC), he pointed out that not one single politician has mentioned publically that any gain from a tax cut for a low earner will be matched by a reduction in UC. How does this help struggling families?
Gavin also raised the disparity between how the NIC system treats old and young workers. He questioned why people over retirement age who are still in work should not pay NICs. Finally, on council tax reform he favours a proportionate property tax but admits that this is unlikely to happen, so he would settle for a re-valuation approach.
Patrick Stevens, Tax Policy Director at the CIOT, pointed out that politicians tend to suffer from what he calls the ‚ Cornish pasty syndrome‚ . They will say ‚ we can‚ t do that‚ whenever suggestions are made to reform the tax system. This is unhelpful. In his opinion, we need an open and informed debate about the logic of the current tax system.
To illustrate this, Patrick took us through the different tax rates (and for this purpose he treated NIC as just another tax) that apply depending upon whether a person is an employed earner, self-employed or operating through a personal service company. He questioned whether the differences in rates are intentional or not. Similarly, he showed us the lower rates that apply to unearned income, including rental income, and the tax reliefs provided to investors in rental property. He asked whether it is really the Government‚ s intention to encourage investment in rental property or not.
Emma Chamberlain, a barrister at Pump Court Tax Chambers who specialises in advising non-domiciliaries (‚ non-doms‚ ) spoke about reforming the way the UK tax system treats non-doms. She thinks the current regime is not good value for money, and that many non-doms would pay more UK tax for greater simplicity. The remittance basis charge (RBC) is very complicated and often not understood, particular in how it interacts with IHT and trusts. She proposed three options for reforming the way non-doms are taxed. Firstly, abolish intention as a basis for taxation, and move to a residence basis. This would involve a reform of IHT and possibly transitional provisions. Secondly, modify what we have now by increasing the RBC significantly which she believes would raise a lot of money as most non-doms would pay the higher charge. And thirdly, keep the current domicile regime but deem UK domicile after a period of time.
Stephen Herring, Head of Taxation at the Institute of Directors, thinks the time for politicians to make bold decisions on tax has arrived. His priorities included giving equal importance to achieving manifesto commitments to delivering the £12,500 personal allowance and increasing the higher rate threshold to £50,000. There should be an intermediate 30% income tax rate, and the marginal rates of tax of c.60% created by the high income child benefit charge and withdrawal of the personal allowance for incomes over £100,000 should be abolished. He would also scrap the 45% tax rate as he believes that it acts as a disincentive. He agreed with others that reform of the NIC system is long overdue. He also suggested that CGT and IHT could be merged into a single capital tax. He would raise the Annual Investment Allowance considerably and fix it for the term of the Parliament. Overall, he thinks the focus should be on simplifying the current tax system but it should always be considered in the context of the competitiveness of the UK system compared to other countries.
Questions were then invited from the audience. Mohammed Amin challenged the panel for being not radical enough. What did they think about reducing tax to 0% once income reached £10m per annum? Paul Johnson said that although this accords with optimal tax theory, it would lead to a big reduction in tax revenues particularly as the system has become so reliant on a small number of very high earning taxpayers.
Glyn Fullelove‚ s concern was the divide between young and old and what reforms could be introduced to bring more equity into the nation‚ s wealth. Gavin Kelly agreed that tax was a part of the problem and that we can no longer keep turning a blind eye to how we tax property wealth. He thinks more public engagement on this issue is required.
Adam Jackson asked what the panel thought about radical simplification. Patrick Stevens thought that that could only be achieved when tax was taken out of the hands of politicians and that is never going to happen. Emma Chamberlain agreed that we have an over-complicated system, particularly in how we tax property, but pointed out that when simplifications are proposed, such as the abolition of a relief, there are many objections from the tax profession itself. Paul Johnson noted that the problem is that we tax similar things differently which then creates a tension in the system. The differentials between CGT and income tax are a prime example in how they affect behaviour. Radical simplification would be a massive change to a system which, in his opinion, is designed to be complicated!
Margaret Curran CIOT Technical Officer ‚ Management of Taxes Friday 5 June 2015