Mike Brooks - Tax: keep it simple

Tax simplification is an issue the government must seriously consider to stimulate economic activity, claims Mike Brooks.

I have a client who, although he looks completely normal is, in fact, an alien. He has, as you might expect, adopted many of the usual behaviours of the humans among whom he now lives but, every now and then, he slips up and betrays his extraterrestrial origins. One such instance occurred quite recently when I noticed him browsing through a leaflet on the various forms of taxes in the UK. I began to explain that this was a difficult subject to understand when to my amazement, he said that, on the contrary, he thought that it was all very clear.

'It is quite obvious,' he said. 'First of all you decide how much tax you want to contribute and then you arrange your affairs and structure your transactions to achieve this. I applaud the generosity of your fellow citizens who choose to pay more than the others - they must go to considerable lengths to do so.'

Excessive familiarity

This set me thinking about a subject that, due to excessive familiarity, I had rather taken for granted. Yet, when looked at through fresh eyes, it does appear anomalous that the amount that each of us contributes to the national coffers has as much to do with the nature of our income than with its size.

Of course, income tax was never designed in the sense that a guiding principle can be discerned behind its current structure. It has gathered like the barnacles on a hull of a ship and with just as little coherence or sense of purpose. Much of what we currently have is a mixture of incentives and anti-avoidance measures that have been added, piece by piece, over the years by a process of fiscal ad-hocery.

What is rather more surprising, however, is the lack of interest, not to say the lack of outrage at how this hotch potch now affects almost every transaction undertaken by the citizenry. This might suggest that everyone is content that the fiscal contribution borne by the possessor of an income of, say £50,000 a year, will vary depending on whether that income arises from interest received, from dividends, from an occupational pension or from salary. In each of these cases the total effective tax bill is different.

The complexity of the system as well as its inherent contradictions surely lead to misallocation of resources - and by this I do not just mean the vast sums that businesses of all kinds and sizes pay to the intelligent, highly-skilled professionals who lead them through this labyrinth. Without wishing to get into the merits of any particular case, a particular aspect that causes concern is that a taxpayer, having apparently followed all the rules for many years, can suddenly discover that there is another rule, barely known and never before applied to such cases, waiting to strike.

Time for action

So why are the streets not filled with protestors hurling abuse at the occupant of number 11 Downing Street, demanding that he put an end to this arbitrariness? And why was tax simplification not a major issue in the recent UK general election?

A number of the new members of the recently enlarged European Union are experimenting with single rate tax regimes which are intended, by simplifying the tax regime, to stimulate economic activity and these developments will no doubt be watched with interest elsewhere.

In the UK, of course, we do not have the luxury of being able to start from scratch but tax simplification is an issue whose time will surely come soon. I can hardly wait - but in the meantime, I will continue to arrange my affairs in accordance with the best available tax planning advice.

Mike Brooks is a freelance business writer and consultant.

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