Revamp Suggested For UK Tax System

November 11, 2010 Taxation in UK

HM Treasury entrance signThe UK tax system is unnecessarily complex, costly to administer, unfair, raises too many compliance costs, and requires an extensive far-reaching overhaul.

A new report commissioned by the Institute of Fiscal Studies (IFS), released on November 10th, has outlined a thorough list of suggestions for restructuring the UK tax system. In a media statement held at the time of publication, James Mirlee, chief author of the report, explained the need for tax change, saying that the UK tax system “discourages saving and investment, and distorts the form they take. It favors corporate debt over equity finance. The revenue it raises, and the redistribution it does, could be achieved in less costly ways.”

As one of its primary suggestions, the report proposed extensive reconstructions of the UK personal income tax system. It was claimed in the report that the country’s current system of levying a personal income tax and a National Insurance (NI) contribution on workers’ wages is unnecessarily complex and “bizarre”. The report suggests that the NI contribution and the income levy rate should be merged into one comprehensive tax. The new system would ease administrative loads and difficulties, and allow the Government an opportunity to reevaluate its tax rates.

The report criticized the existing corporate income tax structure, saying that it placed excessive encouragement for businesses to seek funding via debt. According to a report, a system of tax reimbursements for businesses relying on equity, would lead to increased levels of corporate investment in the UK.

The national Value Added Tax (VAT) system was also regarded as inefficient. The report stated that allowing zero-ratings on some items, is an cumbersome way of targeting relief to low-income earners. Instead it was proposed that a streamlined and revised welfare system would be more efficient in providing relief to those most affected by the cost of essential purchases.

James Mirlee has conceded that the suggestions contained in the report would be politically difficult to implement. However, he warned that retaining the current tax system would have significant economic costs in the long-term, slowing down potential growth and prosperity. So far the HM Treasury has not revealed its views on the report, only saying that the Government would “consider” the findings.

Shortly after the report’s release, several economic and taxation analysts spoke out against its proposals, claiming that the proposals are too simple and would place a great burden on the most vulnerable workers in the economy. Richard Murphy, a Tax Justice Network adviser, labeled the new report as a “profoundly right-wing document”. He claimed that the suggestions, if implemented, would place excessively heavy tax liabilities on the poor and the elderly.

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