An overly complicated tax system is holding the UK back
Tax simplification should be integral to the government’s growth agenda, writes Adam Frais
Byzantine, Kafkaesque, labyrinthine – descriptions that will be all too familiar to anyone trying to navigate the UK’s infuriating tax system.
Complying with the UK’s 23,000-page tax code doesn’t just raise the nation’s collective blood pressure. It’s a serious threat to our economic health.
It absorbs business time, imposes high compliance costs, weakens certainty and creates cliff edges that distort investment, hiring and expansion decisions.
And the costs are eyewatering – for the government and for long-suffering taxpayers.
The cost of overly complicated taxes
HMRC estimates that the annual cost to businesses of complying with the tax rules is over £15bn a year. Meanwhile the cost to the public purse of administering the system has increased by 15 per cent in real terms between 2019-20 and 2023-24 according to the NAO.
Sole traders and landlords being drawn into the Making Tax Digital net are also beginning to realise the extent of the costs and time involved in quarterly reporting.
Tax compliance and collection needs to be treated as an integral part of the government’s growth agenda, rather than a bolt-on.
In short, a simpler tax system will lead to stronger growth – encouraging investment, boosting productivity and employment and supporting entrepreneurship.
So where to start?
Steps to simplify
First, corporation tax. We believe it is time to replace the historic system of marginal rates and allowances with a simple, single rate of 21 per cent (i.e. below the EU average of 21.6 per cent). This would support investment by reducing uncertainty, lowering compliance burdens and giving small businesses greater confidence over the tax implications of growth.
This would initially come with a cost, but over time this would be offset by the benefits gained from incentivising investment and the resulting increase in tax revenues generated through better supporting long-term employment.
Next, VAT. The current VAT registration threshold creates a clear cliff edge for small and growing businesses. This acts as a growth brake with businesses purposely slowing growth as they get closer to the threshold. Replace the sharp threshold with a tapered model and make VAT payments automatic at the point of customer payment, making it simpler for businesses and reducing errors and underpayment risk.
Third, reform incentives to support start-up and scale-up growth. The tax system is often regarded by entrepreneurs as a constraint rather than an enabler. The Enterprise Investment Scheme (EIS) could be made more effective by raising the annual cash subscription limit to a more realistic sum.
The EIS scheme could also be extended to scale-ups. The current system can create a drop-off between startup and scale-up stages where companies risk losing investment as thresholds are exceeded. A scale-up focused regime could help companies remain in the UK and continue to access growth capital at the point when they need it most to expand.
We explore these and other ideas in BDO’s new Mid-Market Manifesto. Taken together, these measures are designed to ease the pressure on businesses so they can focus on what they do best: invest, innovate and grow.
Ahead of the Budget, our message to the Chancellor is clear – growth in every postcode should start with simplification of the tax code.
Adam Frais is head of tax at BDO