Tax reform is not an obvious vote winner, but it’s getting to the point where the flaws in the UK’s tax system are becoming difficult to ignore.

Faced with mounting fiscal pressure, an ageing population and an economy reshaped by new technology and new ways of working, successive governments have reached for the same answer: another new tax, another carve-out, another temporary fix.

The difficult decisions keep being deferred. The result is a system that grows more complicated and less coherent with each fix, and harder to reform with every year that passes.

This is why tax policymakers are one of the five institutional pillars that ICAEW is focusing on in its 'How to build a better tax system' campaign. How tax policy is formed is the potential foundation for significant change in UK tax and could have a knock-on positive effect on other pillars, such as administration and the judiciary.

“There is actually quite a lot of consensus about what tax reform should look like, or what tax reforms we should implement,” says Ed Saltmarsh, Indirect Tax Technical Manager at ICAEW.

Many people think that income tax and national insurance should be integrated, for example, and ICAEW, alongside others, has called for VAT to have fewer exemptions, but with overall lower rates. The difficulty, explains Saltmarsh, is that these provide long-term gains, but a short-term loss.   

“A politician is going to struggle to implement any serious tax reform because they need to be elected again, and it’s hard for them to make difficult decisions,” he says.

Tax reform isn’t easy

Tax reform will take a long time to implement; if a political party started the process of reform at the start of its term in office, it’s unlikely that they would complete that process before those five years were up. The benefits of that reform may not manifest until the next government. As a result, there is little political incentive to reform the system.

“That's why we need something independent that can provide a constant steer as to where the tax system should be heading,” says Saltmarsh. “If the government wants to do something that doesn't comply with their advice, that's fine. They have been elected, they can still make changes that haven't been recommended. But they would have to publicly state that they are doing it against advice.”

ICAEW’s suggested solution is to split tax policymaking into three separate functions:

1. A time-limited commission for tax: looking at what the tax system should look like and what the end goal should be.
2. A permanent office for tax: this would help to design taxes, review them, and suggest how tax reforms should be implemented.
3. The political decision makers: the government would still have full control over which tax reforms are implemented.

Under this model, the elected government still has control, but is acting on stronger, evidence-based advice. “The idea is that it would put pressure on governments to make those difficult decisions, because there would be independent advice saying that it's the right thing to do,” Saltmarsh says.

A simpler tax system also gives the government more control, Saltmarsh argues, because they can act with more certainty if they need to raise a certain amount of revenue. “It's easier to do that with a simpler tax system with fewer broad-based taxes that are easier to predict,” he says.

“When you have complicated taxes, it's never quite certain what the behavioural impact will be and how it will affect revenue forecasts. So, although we are introducing independent, unelected bodies to provide advice on what the tax system should look like, it actually allows the government to act more.”

Action is needed now

The tax system as it stands may not be able to raise tax in an efficient way, being unreflective of social and economic reality. That’s the big danger, says Saltmarsh.

“We could raise the same amount of tax that we do now in a much more efficient way, that supports jobs, that supports people to get into work, to stay in work, and that doesn't damage growth,” he adds.

“Essentially, we keep seeing new taxes being implemented rather than difficult decisions being made, such as to reform income tax or VAT, even though most people who work in tax, academics and economists agree that's probably the more sensible way to collect tax.”