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New Clause 11
Administrative Efficiency of the Tax System
'The annual Financial Statement and Budget Report shall include an analysis of the effect of the Budget measures on the administrative efficiency of the tax system, including the following matters:
(a) the change in the number of taxes, tax rates, tax allowances and reliefs;
(b) the estimated change in annual tax compliance costs for the private, public and voluntary sectors; and
(c) progress on the simplification of tax administration for all taxpayers.'.--[Mr. Edward Davey.]
Brought up, and read the First time.
Mr. Edward Davey:
I beg to move, That the clause be read a Second time.
It may strike hon. Members as odd that, at this late hour, we are debating a new clause on tax administration, but, as we pass the Finance Bill, we should spend some time debating the matter. In 1986-87, the Tax Law Review Committee estimated that the tax administration industry, in both the public and private sectors, accounted for 1.5 per cent. of national income. At current prices, that means that the administration industry is worth more than £12 billion--as much as the agriculture, fisheries and forestry industries. The way in which we regulate that significant industry and the policies that we give it to administer affect many people and involve a lot of money. It is incumbent on us to look at the serious issues involved.
To their credit, the Government have introduced new measures in clauses 123 and 124 dealing with electronic documentation to assist the administration of the tax system. That is welcome, but we need to approach the issue with humility. Having considered all the factors that make the tax system so complicated, tax expert Robin Godman wrote in Taxation Practitioner in July last year:
That has been a recurrent theme over the years. Many committees have been set up. The Institute for Fiscal Studies was set up more than 30 years ago. The Meade committee report in 1978 influenced the Conservative Government. Recently, we have seen some major new studies on the tax system. The Bath report, published last year--its full title is "The Tax Compliance Costs for Employers of PAYE and the National Insurance System"--has become a seminal work on how we should look at the issues. The Government sponsored the study via the Inland Revenue and the Department of Social Security. It had some hard-hitting conclusions on compliance costs that should make us sit back and think.
The Select Committee on the Treasury has looked at the Inland Revenue and spent some time analysing the report from Bath university. Its findings were published at the end of May this year. This is a live subject and it deserves our attention.
What are the root causes of complexity? The foremost are the taxation policies of any Government. The Government have introduced a significant shift in the direction of taxation policy. We have seen some good signs, particularly in the Taylor report's comments on working towards the integration of the national insurance system with the income tax system. The Government have taken on board some of those important proposals, but they need to go further. The Government's proposals to merge the Inland Revenue with the Contributions Agency are progressive, and will help to reduce administration costs. There are other measures in the Bill that will also reduce complexity, including the abolition of mortgage interest tax relief and the married couples allowance. Those measures are going in the right direction for simplicity.
For ordinary taxpayers, there are three rates on earned income--10, 23 and 40 per cent. For dividend tax, we have 10 and 32.5 per cent. For capital and savings, we have 20 and 40 per cent. For trust income, we have 20, 23 and 34 per cent. For those receiving children's tax credit in the years to come, there will be a tapered tax rate and, at some stage, people will be paying a tax rate of 46.7 per cent. That is before we get to the many rates that have been introduced with the CGT taper relief. The number of rates has gone up, and that is why we propose that the Government say, when they introduce their Budget report, how many allowances, rates and reliefs there are as a result of the Budget.
Complexity comes not only from policy changes, but from the administrative detail, regulations and rules that come from the tax authorities, be it the Inland Revenue or Customs and Excise. Those are the root of the compliance costs for business. A business man--even someone employing only one or two people--must read all the information and regulations to ensure that he complies. Also, he must understand them--and that can take some doing. This is not just a one-off exercise. Employers must keep up to date because the tax law is forever changing.
For small businesses, huge compliance costs are involved. They must come to terms with the coding for the UK's cumulative tax system. They must operate two forms of direct taxation--income tax and national insurance. Anyone who has had to deal with the complexities of class 2 national insurance for the self-employed will know how taxes that raise only small amounts of revenue can involve huge complexity, and can cause great concern for small businesses.
The Bath report showed the extent of compliance costs and how they unfairly affect small businesses. The report showed that compliance costs per employee for the smallest employers--those employing one to four people--were £288 per annum. For the largest employers--firms employing 5,000 employees or more--the compliance costs were just £5 per annum. The relativities are even worse, and small businesses are even more badly affected. The gains that large employers get from the cash flow benefits of collecting the money from their employees before passing it on to the Inland Revenue are far larger than those for smaller employers.
The Bath study showed that the gains that large employers get from that float income outweigh the costs of administering the pay roll. Large employers do very
well from the current tax system, and small employers do not. That is a serious issue when one looks to the long term. The UK's cumulative tax system was designed for a static labour market, when people stayed in their jobs for many years, when there were low staff turnovers and when we had many more larger employers. However, we do not have that sort of labour market now, and that will be the case increasingly in the future. We will have a much more dynamic labour market, with people changing jobs several times during their career. We will have a greater number of smaller companies. That crucial finding of the Bath report was not picked up in the previous studies of tax administration.
The study showed that many of the compliance costs come when one takes on a new employee and a new coding has to be found. In theory, the P45 system should reduce those costs, but the study showed that it does not tend to work. That cannot be good for job creation.
The Treasury Select Committee report said that the Bath study pointed the way forward. It said:
The report focused on the compliance costs for small businesses. If a similar study were done on the costs for the personal taxpayer and the voluntary sector, it would also show significant compliance costs, increasing over the past few years with the introduction of self-assessment and the working families tax credit. If such studies were available to the House--perhaps the Government should sponsor them--many more hon. Members would be concerned about the matter and urge the Government to review it for the next Finance Bill.
The complexity is not only in administrative detail but in the overall philosophy and culture of the Inland Revenue, which does not seem to emphasise the need for simplicity, which should be an objective of tax policy. With a simple tax system taxpayers--citizens--can more easily understand what is being raised in their name, and how. That will increase accountability and compliance, because, if people understand the system, they will be more willing to pay.
The Government said that they were in favour of simplifying the tax system. That was almost a manifesto pledge. The Chancellor has certainly said that he is pro-simplification. If he is to achieve that goal, he should consider the approach embodied in the new clause.
The new clause would build on initiatives set in train by previous Chancellors. Lord Howe was a great promoter of the tax law rewrite project, which was designed to try to simplify the wording of tax legislation. It is a signally good project, with support from hon. Members of all parties. Labour Members do not seem very interested, but they should be concerned about the regulatory burden that the tax system imposes on small businesses.
The project does not shorten the legislation but it makes it easier to understand, so that one does not have to read it several times to find out what on earth the legislators were on about and what tax laws we were trying to create. It is very important for simplification.
The people involved in the project have often argued for a technical finance Bill, to ensure that we get it right in the first place rather than pushing through imperfect
tax legislation and having to amend it the next year. That is certainly one way forward that I would urge the Government to consider.
I also urge the Government to examine the recommendations of the Select Committee on the Treasury in its report on the Inland Revenue. The Committee considered three options. The first was a royal commission on tax simplification: I think that that goes a little far, but it is a possibility the Government might want to consider. The second was a White Paper to be published by the Government at the start of each Parliament, in which they set out their direction for tax policy, so as to give tax practitioners and taxpayers an idea of where it was heading and encourage a little more coherence in the Government's tax thinking. That might be another way forward. However, the most impressive aspect of the Select Committee's analysis of the evidence that it heard was its emphasis of the need for longer-term planning of tax policy. That points toward the idea of a technical Finance Bill, so that there is greater consultation on tax measures to ensure that we get them right.
New clause 11 makes a more modest proposal: it simply asks that the Government provide information, so that we can see how their agenda for tax simplification is progressing. The new clause is based on paragraph 91 of the report of the Select Committee on the Treasury, recommendation (u), which states:
"In fact, the Budget and the Finance Bill cycle are very significant factors in the causes of complexity".
What we are doing today--what some of us have been doing for many months--adds to that complexity. We need to look at the process and try to find ways to reform matters and make them simpler--perhaps even to reduce the size of the industry. After all, it does not really help our balance of payments.
"We recommend that the Inland Revenue be given a target to reduce compliance costs."
That is absolutely right. The new clause would bring that about because it would force the Government to provide the information according to which targets could be set and progress measured.
"We recommend that in its response the Government gives its considered view on the options for simplifying the tax system we have discussed in this Report and sets out its own proposals for a systematic programme of simplification with a view to reducing compliance costs."
If the Government accept our new clause tonight, they will have gone a long way toward implementing that recommendation.
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