Britain needs tax simplification

Anne Strickland is a researcher at the Taxpayers’ Alliance

If you sat down with a blank piece of paper and were asked to design a tax system from scratch, the one thing you wouldn’t do is build the system Britain has today.

Someone rational would design something simpler and more transparent: one set of rules, applied the same way to everyone, without endless carve-outs and exemptions. Almost nothing in the system we actually have looks like that. Most of it is the opposite: thousands of ad hoc exemptions engineered for specific campaign groups, surviving because no one has ever had the political appetite to revisit them.

When I started at the TaxPayers’ Alliance, I remember being told about the Blind Person’s Allowance, an extra £3,250 of tax-free personal allowance, and being genuinely baffled as to why one disability had been singled out for relief. The honest answer is that it shouldn’t have been, and even the people who created it more or less admitted that at the time.

The relief traces back to the Blind March of 1920, when 250 blind workers marched from Newport, Manchester, and Leeds to London and won the world’s first disability-specific legislation: the Blind Persons Act 1920, which gave blind people the old age pension twenty years early and put their welfare on local councils’ books.

But the tax allowance itself didn’t arrive until 1962, after Parliament rejected the idea five separate times. Blindness wasn’t chosen by the Treasury because it was the gravest disability. It was chosen because the blind were already on a register, created under separate welfare legislation in 1948, which made the relief easy to administer. That is ultimately why it exists.

The Opposition spokesman who responded to the Government’s announcement of the allowance noted that it took a full page of legislation just to grant one small group a simple concession - proof, in his words, of how far the system had drifted from anything resembling simplicity. He warned that the Treasury would “make more complications and not simplify the tax system.” That was in 1962. The relief is still here, virtually unchanged, sitting alongside a small constellation of other things that didn’t exist when it was created and have never replaced it. It’s a clear reminder of how our tax system just accumulates more and more complications as time goes on.

The result is that the UK’s tax code now runs to over ten million words. It would take the better part of fifty days and nights just to read it out loud, never mind understand it. Almost all of that length has been added since 1935 and over half of it since 1990.

The Blind Person’s Allowance is a good example of why this matters, not because it’s uniquely bad, but because it’s uniquely clear. There is no link between being blind and needing a higher personal tax allowance. We already have a system of disability benefits for people who need support, Personal Independence Payments among them. The allowance survives purely on the strength of its own age, kept alive because no one has ever had the political will to address it.

That’s true of exemptions generally, and they place a real burden on taxpayers. It costs over £20 billion a year to administer the tax system, with most of that falling on businesses rather than the government. Navigating the system is becoming harder, not easier, for most taxpayers. Complexity adds cost, makes genuine mistakes more likely, and opens up exactly the kind of grey areas where avoidance and evasion come into play.

There’s a deeper cost still. A market economy depends on people being able to read the signals in front of them: what something actually costs, and if it’s worth doing something instead of something else. But every ad-hoc exemption, threshold and carve-out is a distortion of those signals.

A tax code riddled with thousands of them is a tax code no one can actually understand. An employee won’t understand what they actually cost their employer. An investor doesn’t know what their return is really worth once it’s taxed as income before it’s even invested and then taxed again on the way out as dividends or capital gains. At a certain point, people will stop trying to optimise within the system and start trying to get out of it altogether, by either giving up ambitions or leaving the country for greener pastures.

As I write this, Andy Burnham looks set to become the next Prime Minister, with Wes Streeting among those competing to be his Chancellor. The former Health Secretary has thrown his weight behind a plan to raise capital gains tax to align the rates with income tax, calling it a fix for an unfair loophole.

To the casual observer, harmonising them might sound like a neat piece of simplification. It isn’t. It’s a tax rise dressed up as simplification. Taxing capital like labour ignores the fact that investment requires taking a risk with money that has already been taxed. Treating them like guaranteed income creates new distortions and punishes risk-takers at a time when the UK economy is desperate for growth.

Even on its own terms, it wouldn’t stay simple for long. Streeting has already caveated his plan by stating the new higher rate shouldn’t apply to “genuine entrepreneurs.” No one has explained what that means, or how HMRC is supposed to tell a genuine entrepreneur from anyone else holding an asset. Somebody will have to draw that line eventually, in legislation, with conditions, tests and exceptions of its own.

This is exactly how our tax code grows. The political class simply cannot help itself. Every time they attempt to “fix” the system, they do it by adding a new page to the tax code or a fresh carve-out for whichever group shouted loudest, but never by taking an old one away.

True simplification doesn’t ask which taxes to align upward, or which new ones to invent. It asks which ones to abolish. Nigel Lawson’s 1988 Budget remains the gold standard of what that looks like in practice. He cut the top rate of income tax from 60 per cent to 40 per cent and paid for it, not by some clever new levy but by scrapping a string of reliefs on mortgages, company perks and forestry. Lawson called abolishing a tax “the ultimate simplification” and managed it in consecutive six budgets.

A genuine free-market alternative would go even further. Abolish national insurance, corporation tax, capital gains tax, inheritance tax and the stamp duties, and replace them with one rate on labour income and one on capital income, neither above 30 per cent.

Those taxes alone currently carry nearly half of every exemption and relief in the system. Abolish them, and you don’t just simplify the tax code. You make most of the case for carve-outs like the Blind Person’s Allowance disappear with it. There’s nothing left to carve around and no room left for political favouritism for special interest groups.

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What we’re reading

1. This way to the IEA. Our Director General has been speaking to the Express about why he went into politics: fury at the fall of Margaret Thatcher, the pernicious sense of European meddling in British affairs, but most importantly a sense of what makes this country special – from drinkable tap water to enforced property rights and proper behaviour at traffic lights – that one could only have gained from growing up elsewhere. Then again, Peru does have a superior football kit.

2. Bad council. Over at CapX, Ben Hopkinson has argued that Andy Burnham’s proposal for the largest council housebuilding programme since the war is flawed. Ever London social home costs taxpayers £1, 340 a year; solving the crisis by building social homes would cost over £1.5 trillion. The sums do not add up, councils do not have the capacity, and prioritising it over other building approachs could reduce overall supply. Build, Burnham, build – but not like this.

3. Water bad idea. Perhaps our budding next Prime Minister just can’t catch a break – or perhaps his ideas really are just hopeless. Either way, Maxwell Marlow has taken to task Burnham’s suggestion of returning the water industry to public ownership over at the Spectator, arguing nationalisation would require diverting scare public funds from upgrading ageing infrastructure to assuming massive debts with no guarantees of improved efficiency or environmental outcomes.

4. Scot to trot. For his Wrong Side of History Substack, Ed West has suggested that Scotland has become a testing ground for poor ideas, first coddled in a university or activist organisation before breaking out and spreading across society, like a certain virus allegedly escaping a certain Chinese lab. From immigration to identity, via criminal justice and equality policy, these ideas emerge without sufficient scrutiny and are then taken to vigorous and ludicrous extremes.

5. Back to Burnham. But back to our favourite Stones Roses fan. Neil O’Brien argues over at his Substack that Burnham’s nascent political platform is big on ambitious rhetoric but light on new policies. Most of his are simply rehashes of pre-existing Labour aspirations or are too modest to address Britain’s deep-seated challenges. This is repackaged Labour orthodoxy; by opting for him, Keir Starmer’s MPs are swapping ‘one middle-aged guy in a dark shirt’ for another.