Dominic Raab is MP for Esher and Walton, and a former Justice Minister.
Official data shows Her Majesty’s Customs and Revenue (HMRC) taking a punitive approach to middle class taxpayers, while Parliament’s Public Accounts Committee deems it a soft touch on the super-rich. If we want a competitive economy and fair taxation, we need to simplify the tax code – not give the taxman arbitrary powers which invite abuse.
Tax revenue from the richest has fallen by 20 per cent since 2009, yet tax paid by the rest of us rose nine per cent. Fines on individuals for innocent mistakes have trebled in four years, while seven in ten small businesses say HMRC is harsh on the ‘little guy’.
The root problem is a convoluted tax code. Tolley’s tax guide is eighteen times longer than War and Peace. That’s uncompetitive, a turn off to investors and business, and encourages avoidance. Armies of lawyers and accountants make a brisk trade advising corporations and the wealthiest on how to maximise loopholes, and minimise paying their taxes. The problem has been compounded by HMRC’s acquisition of wide powers, to crack down on avoidance, which end up being used to bully small businesses and individuals who can’t afford crafty lawyers.
So this week, in a report for the Taxpayers’ Alliance, I am making the case for reform – to deliver simpler and lower taxes, curb tax avoidance, and protect small businesses and the middle classes from an increasingly bullying taxman.
First, on the basis that prevention is better than cure, the Office of Tax Simplification should be given a mandate to vet any new legislation that adds complexity – not just review it after it’s in force.
Second, the Government should replace the outdated model of corporation tax with a tax on distributed profits. Taxing profits where they are earned, with generous exemptions that can be shifted across borders, has become artificial for many multinationals. Gaming the system is a natural response. Taxing distributed profits – including dividends and interest paid on loans – is more transparent and more competitive.
Third, as a first step to consolidating Income Tax and employee’s National Insurance (NI), the threshold for workers paying NI should be raised in line with the personal allowance. This would simplify payroll taxes, and save an average earner £353 each year.
Fourth, the turnover threshold for the new quarterly accounting should be raised to the same level as VAT registration, sparing the average small business a third of its profit being squandered on administration costs.
Finally, HMRC should compensate innocent taxpayers it wrongly penalises out of revenue raised by the proper use of its powers. This would incentivise accountability, when the taxman abuses his powers, and give ordinary taxpayers a greater sense of fairness.