Greater stability needed

Today’s world changes faster than most legislatures can update their tax law and the newly elected Conservative government recently outlined the steps they will take that they will take to crackdown on those who abuse the system.

But the importance of an efficient tax regime to individuals and society is so great that it should not be treated as a short-term political football.

It is the bedrock of constitutional funding should be recognised as an integral and pervasive element of every business and individual’s environment.

A good tax system will benefit both a government and its populace; a poor one will disadvantage individuals and business, with impacts far beyond the tax system itself.

Over time, tax systems have been subject to rigorous change and development. So much so, that the rules and related guidance run to thousands of pages.

These changes have not always necessarily been for the benefit of wider society though.

Take the recent changes to the EU rules on the VAT treatment of digital goods for example.

The changes implemented were intended to remove the unfair advantage enjoyed by huge multinational corporations and rebalance trade in favour of microbusiness.

However, Andrus Ansip, the EU Commissioner responsible for the change admitted that the initiative had “wanted to protect, but somehow destroyed those businesses”.

Change needs to be signposted clearly. If we know what’s coming, we can adapt for it sensibly.

When it comes to changing tax systems, slow and steady wins the race, while the fallout from poorly considered changes can go well beyond the revenues which do not materialise.

It has been estimated that the French government has had to pay compensation of more than €1bn to the firms contracted to run road tolls which had to be abandoned after the cameras were destroyed and tax offices set on fire by protesting hauliers.

Taxpayer engagement can be a key element to managing change. The UK implemented a “corporation taxes road map”, which set out clearly the areas to be reformed and how. Detailed and constructive consultation with the business world helped to iron out the wrinkles in revised legislation.

Even where features remained, which business disapproved of, a consequence of the lengthy negotiation procedure was that both sides knew precisely why change had not been possible. Acceptance may have been grudging, but it was there.

For taxpayers, stability is essential for effective planning and efficient ongoing compliance. Individuals can budget household income more accurately, while businesses are encouraged to make investment decisions.

Businesses would typically prefer to operate in a slightly more imperfect system than one where incremental improvements resulted in an environment of constant change.

What is needed is not so much revolution as considered and well-signposted evolution.

That evolution, of course, is guided by the policymakers who hold power from time to time, and the state of tax systems makes one wonder whether they always get it right. “When in a hole, stop digging” is still good advice.

A tax administration which has made (or inherited) a tax system that bears evidence of rushed, intemperate or ill-advised tinkering should have a little think about how best to get out of the hole.

When looking at longer term or more fundamental changes, a more targeted system of taxing the factors of production could help, or a more balanced mechanism for assessing the value of a business’s outputs.

Tax is not the only thing business does for society and reconsidering how we define the additional contribution it needs to make over and above simply existing, might be more effective than the reduction of all value to accounting entries.

We may not be getting the hundred days review that might have been on the cards in the UK, but some time spent reflecting not just on what tax does, but how and perhaps more importantly why (clue: it’s for the good of society generally) is essential if we actually going to create a fit-for-purpose tax system that is the envy of the world.

Jason Piper is tax technical manager at the ACCA