David Denton: Why tax complexity is itself a kind of tax
The UK’s tax system could be simple if its sole purpose was to raise revenue. However, it also needs to be fair, efficient, and enforceable, whilst successive Governments have increasingly used the tax system to drive behaviour and influence social policy.
Dealing with the financial shocks of the banking crisis precipitated by the demise of Lehman Brothers in September 2008, COVID and more recently the wars in Ukraine and the Middle East, has led to stealth taxes, frozen allowances, and endless tinkering.
Quite possibly we have the longest, and most complex tax code in the world.
Complexity impacts disproportionately those unable or unwilling to take advice. The lay person is unlikely to know, or understand, let alone utilise, many of the hundreds of reliefs, allowances, and exemptions (‘reliefs’) to their advantage. And at the other extreme, when things go wrong, HMRC take the view that ignorance of the law is no defence.
“[Tax] complexity impacts disproportionately those unable or unwilling to take advice.”
In 2015, the Office for Tax Simplification (OTS) was put on a formal footing by Chancellor George Osborne. An early endeavour was a report on the enormity of the UK tax system, leading to a tax complexity index, identifying the top drivers of complexity, measured by underling complexity and its impact. It summarised almost 1,100 reliefs, within 100 variants of tax. Inheritance tax measured in the top decile for both complexity and the impact of complexity.
Since then, the OTS has been abandoned (Kwasi Kwarteng – the famous ‘growth budget’ in 2022) and the number of reliefs have grown. In 2023 as part of a House of Commons Treasury Committee inquiry, it was reported that 1,180 tax reliefs were in operation, with just 365 having official costings. Sadly, their recommendation for a “comprehensive and systematic review of existing tax reliefs to look for opportunities for simplification” seems to have fallen on deaf ears.
IHT, probably the UK’s most emotive tax, has more than its fair share of illogical, impenetrable, and sometimes overlapping reliefs, leading to my conclusion that tax complexity is itself a kind of tax.
David Denton is Head of Technical Services at Quilter Cheviot
Want to hear more from David Denton on the UK’s most emotive tax? You can hear from David – alongside the superb Margaret Heffernan and inimitable Jamil Qureshi (as well as Fundment Founder & CEO, Ola Abdul) at The Adviser Edge on 30 June at Fundment’s offices in London. Interested? Register your interest at https://form.typeform.com/to/Gh6tl8v2