Complex tax system is an obstacle to economic dynamism

In a new report on Tax Simplification, the Treasury Committee concludes that the UK's tax system is overcomplicated and is an obstacle to economic dynamism and that the Chancellor must now take personal responsibility for simplification that he has pledged.

The Committee pointed out that complication creates compliance burdens, confusion and disincentives to work or grow a business. Pointing out that the Chancellor, has expressed the view that the tax system is overcomplicated, the decision to Abolish the Office of Tax Simplification (OTS) the independent body responsible for advising on tax simplification, signalled that tax simplification is not a priority for the government.

The report highlights that there are over 1,180 separate tax reliefs in existence, as well as numerous ‘cliff edges’ littering the tax system, such as the threshold for tax-free childcare and the VAT threshold for small businesses.

• Questioned on Research & Development (R&D) tax relief, HMRC officials said, "It is a burden on us."
  • There are 80,000 claims in the R&D small and medium-sized scheme. 60,000 claims were for under £50,000.
• On VAT, the committee heard evidence that the design of the VAT system, the various zero rates and exemptions created compliance burdens for Companies subject to VAT.
  • The ‘cliff edge’ of the £85,000 turnover threshold, above which companies are subject to VAT, resulted in a 'pile-up' of companies just under the threshold. Small and potentially dynamic firms face disincentives to grow.
• The committee highlighted other cliff edges.
  • In a December 2022 Report on the cost of living payments announced in the 2022 Autumn Statement, it warned that ‘cliff edges’ in the tax and benefits system were distortionary. At worst, a ‘cliff edge’ could result in someone becoming worse off by earning more money.
  • It pointed to evidence on the High-Income Child Benefit from Tom Clougherty, Head of Tax at the think tank the Centre for Policy Studies. He explained that "A family with full-time childcare for two children in London would be better off earning less than £100,000 than they would be earning nearly £150,000."

The remainder of the report concentrated on the effectiveness and abolition of the OTS with the Committee stating,

"The Chancellor appears to agree with us that the trend of an ever more complicated tax system must be reversed. Disbanding the independent body responsible for advising him on, and championing, tax simplification risks signalling that it is not a priority for the Government. However, the most important factor in securing a simpler tax system in practice would be the Chancellor taking, and acting on, the personal responsibility for simplification that he has pledged."

It went on to demand accountability from government.

"Should the Government proceed with abolishing the OTS, we recommend they report to the Treasury Committee annually on steps taken to simplify the tax system, covering both new and existing taxes. Such reports should set out performance against tax simplification metrics, compare the complexity of the UK tax system with other countries and set out what the Treasury has done to understand taxpayer needs for tax simplification."

Useful guides on this topic

VAT Toolkit
This is our summary version of HMRC's output and input VAT toolkits, our version includes more detail, topics and planning points.

High-Income Child Benefit Tax Charge
What is the High-Income Child Benefit Charge? Who pays it? Can you appeal against an assessment? Are there any useful cases from the tax tribunals? 

Research & Development Tax Reliefs: At a glance
What is Research and Development (R&D) relief? How to claim R&D relief? How does small company R&D relief work? Can individuals claim R&D relief?

External link

Tax Simplification, Sixteenth Report of Session 2022–23