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Hardman Lecture takes aim at UK’s biggest tax failings

Author: ICAEW Insights

Published: 08 Dec 2023

Campaigner Dan Neidle rounds on key features of the tax system that are bad for productivity, inefficient – and inhumane.

Fixing the nation’s most pernicious tax problems requires collective will, according to acclaimed campaigner Dan Neidle.

On 22 November, Neidle took the podium at Chartered Accountants’ Hall to deliver this year’s edition of the prestigious Hardman Lecture, hosted by ICAEW’s Tax Faculty. Entitled ‘The Worst Features of the UK Tax System,’ the talk pulled no punches as it delved into three causes for concern – focusing not just on systemic issues, but skewed public beliefs about the punitive regime.

Here are the main issues Neidle explored.

Cliff edges

Thanks to “well-intentioned” tweaks, he said, hundreds of thousands of UK residents on modest incomes are currently paying marginal tax rates of 71% or higher.

For example, since 2013’s introduction of the child benefit taper, the threshold at which it stops has remained static, even as the government has increased child benefit itself – thereby raising the marginal rate.

As a result, a parent of three children who is working 1,500 hours per year for £50,000 would see just £9.60 an hour after tax, if they decided to take on an extra 200 hours’ work. Therefore, people don’t do it.

“You cannot look at people turning away work and rejecting hours and tell me that it doesn’t have an effect on the country as a whole,” Neidle said. “There needs to be a political commitment not to have marginal rates that exceed, say, 55%.”

Another, powerful disincentive for productivity, he pointed out, is the £85,000 VAT threshold – a “precipice” that thousands of UK businesses are scrambling to stay on top of, for fear that their prices will rise by 20% above those of their rivals.

“There’s only one solution, here,” he said, “and that’s to take the threshold down. It should be around £20,000 or £30,000 – like most of the rest of our competitors.”

Complexity

In Neidle’s view, two fixable areas of complexity are “fossil” rules dating back decades that are irrelevant but still in force, and newer laws that have gradually spiralled into complexity.

Citing such measures as transfer pricing, corporate interest restriction, results dependency, reasonable commercial return and unallowable purpose as sources of duplication, Neidle said that many rules of that type are fossils that burn adviser time, client money and HMRC resources.

With that in mind, he urged ministers to update the Finance Act to enable them to set regulations that would eliminate certain tax rules – and, indeed, entire taxes – that have no revenue benefits. “I believe there are hundreds,” he said.

As an example of newer provisions that have attracted complexity, Neidle singled out hybrid mismatch rules: 39 pages of “really hard” legislation, for which HMRC – “bending over backwards to be helpful” – produced a staggering 484 pages of guidance.

Neidle called for lawmaking that provides certainty, precision and ease of application. Furthermore, he stressed: “We must not make this mistake again. The next time there’s a brilliant international initiative requiring UK implementation, we should take a step back and do it in a different way.”

Public misconceptions

Neidle then turned to the importance of challenging widespread assumptions that tax evasion is rife, rich people get away with it and people on low incomes are routinely “clobbered” with penalties.

“Perception matters,” he stressed. “If people believe that others are getting away with something, they’ll try to get away with it themselves.”

While Neidle said there is no evidence to show that evasion is rife and rich people regularly escape penalties, he stressed that lawmakers should tackle the scope for the very wealthy to game inheritance tax – or exploit the non-dom system to buy their way out of tax altogether.

A larger problem, he noted, is the mass-marketing – or mis-selling – of avoidance-inclined tax products to everyday consumers: a practice he would prohibit, unless such offerings were put through rigorous HMRC vetting and fixed with statutory risk labels.

To send out the right message, Neidle said, tax evasion must be subject to prosecution as a first resort, rather than addressed through HMRC’s civil Code of Practice 9 (COP 9) process.

In Neidle’s analysis, the belief that poor people are clobbered with penalties is also untrue. However, in the past four years, HMRC has opened late-filing cases against 420,000 people – often living with disabilities or mental health issues – who earn too little to pay tax.

“It is – I’m sorry – a national disgrace,” he said.

Find a fuller account of the lecture on TAXline.

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