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Last Updated: Tuesday, 30 December 2003, 09:27 GMT
Is the tax system too complex?
MONEY TALK
By Chas Roy-Chowdhury
Head of Taxation, Acca

Chas Roy-Chowdhury

Is the tax benefit system too complicated to be of real benefit to people? And is the system becoming much more complex under Gordon Brown? A leading accountant assesses the tax landscape.

There was a time when death and taxes were life's certainties.

Today this may not be quite so clear cut, at least if you are trying to claim tax credits or just trying to comply with today's UK tax system.

Over many years the system has become increasingly complex.

The tax system is rather like a cake: new layers are continuously added.

But there is very little root-and-branch reform.

In recent years it has become more complex for taxpayers, because more of us now deal with the Inland Revenue through tax credits.

The system has the paw prints of a theoretician all over it

In effect, we now have a full blown benefits system being operated by the Inland Revenue and paid where possible through the tax system or directly to an individual's bank account.

The majority of people who are likely to be the recipients of the payments may never have had any previous contact with the Inland Revenue.

The underlying philosophy of tax credits has to be commended.

The idea is that people should be given a hand up not a hand out. One of the key features being that people should be provided with incentives to move in to work and off full time benefits.

The biggest problem with the system is that it is based upon quite a complex level of means testing - the system has the paw prints of a theoretician all over it.

The government says there are now two types of credit - Working Tax Credit and Child Tax Credit.

But in reality there are nine categories of Working Tax Credit and five for Child Tax Credit, because there are many different elements which are needed to work out how much someone receives.

Calculating credit

Because the tax credits system is so finely tuned, this can add its own complexity and burdens for claimants.

For example, this year's credits are worked out using your income from 2001-02 but in reality it is the current year's income which determines your final credits entitlement this year.

It is this additional quirk which has been causing big problems for recipients of the credits, causing a sudden reduction in their entitlement once the Inland Revenue has the up-to-date figures.

The overall level of tax compliance has become a mountain for most people

If you can work through this maze and get to the right figure for your credits entitlement you should receive a prize.

The government has made bold statements about the highly successful implementation of the new benefits regime, but a recent report by the National Audit Office painted a very different picture.

Form-filling

It is not just tax credits that have made the system for taxpayers more complex.

The overall level of tax compliance has become a mountain for most people.

There now seem to be very few who no longer need to complete at least one tax form.

If you're a higher rate taxpayer you complete a self-assessment tax return and those numbers are being pushed up by tens of thousands by fiscal drag each year, caused by earnings rising faster than tax bands and allowances are increasing.

If you are eligible for tax credits you complete another set of tax forms.

One of the best examples of a complicated new tax calculation are new company car rules.

If you have a company car, then to work out the taxable benefit today you need to know the carbon dioxide (CO2) emission for the exact model, which for recently acquired vehicles will be on the V5 registration document.

Then find the " CO2 band", of which there are twenty-one, which the vehicle falls into and multiply that by the list price.

In the past the benefit was simply available from a scale charge table of three bands depending on engine capacity.

We could consider using just a CO2 based system, as for car fuel benefit, and reduce some of the complexity.

Many politicians find it hard to calculate their own tax liabilities

Stamp Duty is another tax where before 1998 we only had one rate of tax - one percent - now we have three - one, three and four percent.

Not surprisingly, with the increase in the rates and of property prices, the yield from the tax has almost trebled since 1998.

The government is making some effort to help people navigate this increasingly rambling tax system, such as simplifying self assessment forms and providing online tax calculators.

But as previous surveys have shown many politicians find it hard to calculate their own tax liabilities.

Perhaps they should be more mindful that every time they tinker with the tax system that they should have their own litmus test: Could I complete that tax form and work out the tax myself? Then, we may all be better off.




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