Chancellor’s Changes

“Somehow the tax system must be brought into the age of Uber. This is now Angela Knight’s job”

Open Season
George Osborne: Hardly a born-again reformer (Horasis Global Meeting CC BY-SA 2.0)

To make tax more complicated is simple. Any Chancellor can do it, with the best intentions, which is why the tax code gets fatter and fatter, and the overburdened taxman keeps you waiting on the telephone. Making it simpler is hard, and harder than it looks. This is now Angela Knight’s job.

George Osborne’s Finance Bill, now going through Parliament, will establish the Office of Tax Simplification on a statutory basis, and she is his choice as simplifier-in-chief. Is he a born-again reformer? Not exactly. He has added his share of complications — to stamp duty, to inheritance tax — but when he set out to simplify tax credits, that web of complexity bequeathed by Gordon Brown, he ran up against the iron law of tax reform: losers shout louder than winners. They did, and they saw him off.

A reforming Chancellor likes to have cash in hand to oil the wheels of change, and this one has not been so blessed. So, when he first set a small team of reformers to work in the Treasury, they made little impact. They hit on the tax-free status of luncheon vouchers — a species which you may have thought had died out years ago. Serious reform would need more power to its elbow. Now he intends to provide it. An office established by statute can have independent authority. It will carry weight accordingly, as an example within the Treasury shows. The Office of Budget Responsibility has a robust chairman in Robert Chote, who has stood up to Chancellors before this one: just as well when, as recently happened, the rest of the Treasury is required to turn propagandist. Angela Knight needs to be no less independent, and no doubt she will be.

She is one of a strong-minded family of Sheffield steelfounders. She knows her way round the Treasury — she was a minister there in John Major’s time — and the City, where, running on to a hospital pass, she headed the British Bankers’ Association in their years of trial. As a reformer, she starts from the realisation that tax has not changed with the times, and will have to.

Pay As You Earn was invented a lifetime ago. For the first time, it swept most working people into the tax net. Some say that its inventor went on to be chairman of our biggest company, Imperial Chemical Industries, which had a vast payroll, and back offices to match. They could pick up the strain of administering the new tax, and National Insurance, too, the tax that dare not speak its name. In those days it was normal to work for such big employers and to stay there indefinitely. Today the mighty ICI has vanished in a puff of chlorinated smoke, and the scene has changed. For better or worse, the service industries dominate, we all move about more freely, and more of us — well over four million — work for ourselves. Nine-tenths of British companies employ fewer than ten people. All, though, are trapped in a system that posits an ICI-sized back office. Somebody has to do the tax collector’s work, and account for two tiers of National Insurance payments — the employer’s and the employee’s. On top of all this, a well-meaning government has imposed workplace pensions. Auto-enrolment, this scheme is called: a misnomer. For the hapless employer, it is like having to cope with a new and additional version of PAYE.

No wonder that some of the most successful new companies manage without a vast payroll. A textbook example is Uber. With a few taps of your phone it will send you a taxi. Uber provides the system, the platform, that makes all this possible — but it does not own the taxi or employ the driver. He may well be a one-man business. Uber is not required to deduct tax from his earnings or account for his National Insurance or make its own contribution on his behalf — or sort out his workplace pension. Somehow the tax system must be brought into the age of Uber. Faced with posers like these, Chancellors are easily tempted to look away. Seeking displacement activities, they rush around, stopping up loopholes and devising incentives which turn into loopholes.

In the ranks of reforming Chancellors, Gladstone was the most eminent, and Nigel Lawson, in the 1980s, the most recent. Lawson made a point of abolishing a tax in every one of his budgets. He cut corporation tax by a third and scrapped the allowances which had been used to offset it. Income tax, which had peaked ten years earlier at 98 pence in the pound, came down to a top rate of 40 per cent and stayed put. He also increased the revenue and ended up by balancing the budget. Reform had made tax more efficient.It could do so again.

Three principles were supposed to sum up the Lawson approach to taxation: make it low, make it simple, make it compulsory. Suitably framed and mounted, they could hang on the wall of Angela Knight’s new office.