Many tax practitioners and accountants could be excused for thinking that “they can simplify the tax law all they like, it will still be complex at the end of the process, and I will still have more than enough work”.
Tax simplification has been, and still is, on the agenda of governments in many countries, including Australia. The UK for example has a formal independent Office of Tax Simplification.
At the recent UNSW Business School Thought Leadership Lecture 2015, entitled “Tax simplification in a complex world“, Jeremy Sherwood, Head of the UK Office of Tax Simplification (OTS), discussed tax simplification in the UK and pondered how it could be made to work. The similarities in complexity between the Australian and UK tax systems make his comments worthy of note here in Australia.
Mr Sherwood said tax complexity involves both the inherent design of the tax system and the administrative processes surrounding that (eg tax returns, payments, audits, etc). He said OTS favours a “usability” concept – it looks at the users of the tax system, and in the context of tax simplification, looks at whether users can realistically understand and do all they have to do in order to comply.
Why bother about tax complexity? A quote in the UK from Jolyon Maugham QC in July 2015 will no doubt resonate in Australia:
“The UK’s tax code runs to 22,298 single spaced, small font, heavily footnoted pages. That’s two-thirds the page-count of the 32 volume Encyclopaedia Britannica, which affected to summarise the sum total of human knowledge.”
Mr Sherwood said arguments in favour of addressing tax complexity include:
- There is a substantial economic cost to tax complexity, although it is difficult to estimate.
- Greater complexity creates more errors and higher Government administration costs.
- Uncontrolled growth in complexity can lead to a point where no-one understands the law and everyone just ignores it.
- Research suggests people are more likely to comply if they understand their obligations and feel good about the tax system. The OECD, for example, believes that simplifying tax regimes, and greater use of information technology, are ways to improve tax morale and compliance.
Complexity is an inherent feature of the complex world we live in – but there are degrees of complexity. In the UK, Professor David Ulph, Professor of Economics in the School of Economics & Finance at the University of St Andrews (prior to that, he spent 5 years as Chief Economist at HM Revenue & Customs), distinguishes between what he calls “necessary complexity” and “unnecessary complexity”. Mr Sherwood defined necessary complexity as the minimum complexity needed to deliver the broad policy aims. These can include: Political/social aims; Economic aims; Fairness; Certainty; Avoidance measures; etc. On the other hand, unnecessary complexity can include: Poor policy design, eg artificial boundaries; Too many special cases; Badly worded law; Poor guidance; Complicated and expensive processes, etc. Examples of unnecessary complexity in the UK included CGT taper relief, many badly targeted tax reliefs, and unclear VAT boundaries.
Mr Sherwood suggested that any tax simplification body could aim to make tax simplification work in the following way:
- Understand who holds the keys to simplification and persuade them it is worthwhile for them.
- Engage with Government and stay engaged. Otherwise nothing will happen.
- Quickly establish and maintain your credibility with Government, senior officials, the tax profession and the media.
- Choice of personnel is absolutely essential. Chairman of the OTC is the Rt Hon Michael Jack. He was Financial Secretary to the UK Treasury from 1995 to 1997. During his time as Financial Secretary, he was responsible for establishing the UK’s Tax Law Rewrite project. John Whiting is the Tax Director of the OTS. Until 2013, he was the Tax Policy Director of the Chartered Institute of Taxation; previously, he was a tax partner at PwC. He is also a non-executive director of HMRC and a Board member of Revenue Scotland.
- Move quickly – reforms need to fit into the political cycle.
- Keep momentum – early and regular success maintains the profile of simplification and credibility of the office.
- Don’t be too ambitious – aim for bite-sized chunks that can be implemented relatively quickly.
- Anticipate and engage with likely “losers” – understand their issues and try to mitigate them if possible.
- Challenge the status quo in a forensic and professional way, informed by balanced evidence and practical taxpayer experience.
Tax complexity is inherent in all tax systems to varying degrees – some are just (much) more complex than others (such the US, UK and Australia). One might surmise Mr Sherwood’s message as – don’t give up the tax simplification fight; its aims are worthy although there are rarely if ever any “quick fixes”. Tax will never be simple, but it can be made simpler. There is a way forward as suggested by Mr Sherwood in the above 9 points.
This article was originally published in Thomson Reuters Weekly Tax Bulletin (Issue 51, 4 December 2015).