The tax system’s baffling complexity holds Britain back

The writer is president of the Chartered Institute of Taxation

Bombshells, black holes, double whammies . . . Tax is rarely far from the centre of attention during an election campaign. But nearly always it’s an argument about who should pay a bit more or a bit less, or whether this party or that has a gap in its figures that will need filling.

Much less discussed, but just as important, is having a tax system that works effectively.

Last year, callers to HMRC telephone helplines spent nearly 7mn hours waiting on hold — more than twice as long as in 2019.

Overloaded helplines are far from the only pothole in the road for diligent taxpayers. Onerous form-filling, baffling complexity, an inability to access clear guidance and prompt repayments — all these hinder the ability to do business and contribute to growth and increased productivity for the UK.

In a survey of tax advisers that our institute conducted last year, 95 per cent said that these poor service levels have a significant or moderate negative impact on the ability to do business.

Digitalising tax administration has to be part of the solution to inefficient processes. But too often at present it seems to be an exercise merely in outsourcing work from HMRC to taxpayers themselves — or their agents.

Meanwhile, research and development tax credits, recognised by all parties as a key element in supporting innovation, are beset by problems. Large numbers of seemingly valid claims have been rejected after the government reacted to high levels of abuse not with more careful checks but with a blunt process of challenge and rejection with little chance for businesses to engage. This has undermined confidence in the relief: businesses do not trust HMRC to accept or properly consider legitimate claims, leading to reports of businesses exploring moving overseas or scrapping plans to create jobs or invest.

A smooth-running, easy-to-navigate tax system that delivers what it promises, without excessive delay or bureaucracy, is an important part of the national economic infrastructure. And it should be cost-effective.

Every major party manifesto so far has vowed to raise additional revenue by reducing the so-called tax gap — the £39.8bn a year that is the difference between tax due (the theoretical tax liability, in the jargon) and tax collected. While most of the political rhetoric is around avoidance and evasion those factors actually make up well under half of the tax gap.

If the next government is serious about this gap, ministers need to tackle not just the £1.8bn of tax avoidance and the £11.2bn of tax evasion and other illegal activity. But they must also look at the £17.8bn made up of taxpayer mistakes — what HMRC categorise as “error and carelessness”.

It needs to be as easy and straightforward as possible for wannabe-compliant taxpayers to pay what is due: investing in HMRC customer service — instead of cuts — is central to making sure queries are answered. Ministers also need a relentless focus on simplification — a simpler tax system, with clear rules and easy-to-navigate guidance would mean fewer mistakes by both taxpayers and authorities. And they must invest in digitalising the system — but review the process to avoid overburdening users.

The happy news is that, done right, measures such as these should not only reduce the tax gap, they should also make administration easier. This would free up business owners and managers to focus on growing, rather than spending their days overcoming bureaucratic hurdles put in their path by the state.

The tax system is not a “dumb pipe” that funnels money to the government. It is an elaborate system taking up large amounts of business time. We shouldn’t make it any more taxing than it has to be. Improving how it operates could make a significant contribution to economic growth. Politicians of all parties should put these measures at the heart of their plans.