How to untie the tax knot

Yet another HMRC scandal this week, as a new HMRC computer discovered millions who have paid too much or too little in tax. A letter from the tax man will land on their doorstep in the next few months. Some will enjoy the dubious pleasure of getting money back that should never have been taken in the first place. Others face the painful task of finding the money to catch-up on tax they didn’t pay before.

  As Pete said in his post on Wednesday, this isn't the first time. When the House of Commons Public Accounts Committee looked at similar problems last year, they said that the Department had 'failed' in its duty to process people’s taxes 'accurately and on time'. The bureaucrats need to be held accountable for these repeated failures, but are they really the ones responsible for a tax system that isn’t fit for purpose?   The world’s fastest speaker, Steve Woodmore, can read aloud more rapidly than most of us can think. But it would take him five straight days at full speed to get through the over eleven thousand pages of the British tax code (see the video that we shot in April, above). Even some of the guides for individual taxes, like Income Tax and Capital Gains Tax, are by themselves longer than War and Peace. Is it any surprise that it is all too taxing for the tax man?   As Governments of all parties have vainly attempted to finance the huge amounts they spend, they have made our taxes more and more complex. Tax breaks are introduced to look after some people and businesses that are hit particularly hard. Special rules are put in place to try and stop others dodging taxes as high rates make spending a fortune on high priced lawyers and accountants to reduce your liability worthwhile. That’s why it will be hard to make the tax system much simpler before spending is under control.   But that isn’t true for all of the complications in the tax system. Some are just the result of historical anomalies we can and should clear up now. We have three taxes on people’s incomes: Income Tax; Employees’ National Insurance; and Employers’ National Insurance.   All of three of them drive a wedge between what employers pay and employees get in fundamentally the same way. But there are all sorts of differences between the taxes that makes administering them more expensive for companies and HMRC. KPMG found that just three of the “information obligations”, which the separate National Insurance system imposed on business, created a compliance cost of £146 million. That’s a lot of money that could be spent doing something more useful.   As we suggest in our new report today, it would be much simpler for all concerned if the taxes were merged — and it would be more honest. Stop telling people they pay a basic rate of 20 per cent, when they actually pay around 40 per cent.  Stop hiding Employers’ National Insurance contributions off our payslips. End the illusion that National Insurance is all saved away to pay for your retirement, and not into the big Treasury pot. The Government have introduced much greater transparency over how our money is spent, but we need to know what we are paying as well.   Pensioners could still pay less; they already have a different personal allowance within the Income Tax system. So could the self-employed, though in that case it might be fairer to level the tax down so everyone is treated the same.   Most financial statements are remembered for one thing, whether it is Gordon Brown increasing taxes on those who had been paying the 10 per cent rate, George Osborne cutting spending at the Emergency Budget, or the cut in Fuel Duty earlier this year. The Chancellor needs the story after the Autumn Statement to be his agenda for growth, and tax reform is a vital part of that. Finally killing off National Insurance, taking the plunge after dipping his toe in the water earlier in the year, would be a fitting centrepiece.

Matthew Sinclair is director of the Taxpayers' Alliance.