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KEY POINTS
- Change has been a constant feature of tax over the past thirty years.
- Some changes are permanent — lower rates of income tax and HMRC office reorganisations.
- Arctic Systems has been the dominant feature in recent years.
- Small business taxation needs to be reviewed from scratch.
- Taxation of families is an important issue for the future.
Eighty is a venerable age to get to as a magazine. It's particularly noteworthy for one which serves a profession so new when the magazine started that it scarcely had a separate existence from the legal and accountancy professions out of which it was growing. Taxation predates the founding of the Institute of Taxation by three years, and the first editor and owner of the magazine, Ronald Staples, was also one of the founding members of the Institute.
Taxation has had very few editors in its 80 years. As I never tire of pointing out, Doctor Who is now on its tenth actor playing the doctor since 1963, whereas I am only the sixth ever full-time editor of Taxation. I have been fortunate enough to persuade my three immediate predecessors to write for this special birthday issue about what happened to tax during the time of their editorship, starting nearly 30 years ago. I intend to do the same, but I wanted to look at some of the points raised by their articles first.
Change is constant
I came into the profession at almost the same time as Ken Tingley took over the editorship of the magazine. My impression, just looking back over my own memories, is that things are changing faster than they ever have, and talking to other people they often say the same. But the three other articles in this issue make it clear that change has actually been the only constant in tax.
The vagaries of the non-corporate distribution rate are matched by those of stock relief, for example. Our memories, it seems, play tricks on us, and it was always like this — perhaps not such a high volume of legislation to enact it, but just as fast a pace of change. The most depressing consequence of this is that there seems little hope that the rate of change will slow down, since it has been so high for at least the past thirty years.
Another more or less constant feature is technological change. When I started work at 22, electronic calculators had just become commonplace, rendering the tables of tax on different amounts of income (which used to be the mainstay of the published tax tables) unnecessary. By the time I set up my own consultancy nine years later, my first asset purchase was a computer. Technological change will, I am sure, be a major feature of life in the profession over the next decade as well. Again, it is tempting to say that the changes in the future will be even greater than those so far, but when I consider how far we have come in such a short time, I am not so sure.
Vive la difference
On the other hand, there are some very significant differences. The most significant is the reduction in the rates of income tax, and also of corporation tax. As is mentioned in the other articles, at the start of my tax career the top rate of tax was 83% for the top slice of the highest earners' income, a rate of deduction we now reserve for single parents on tax credits who are also repaying student loans … With the addition of 15% investment income surcharge, the top rate could be as high as 98%. I cannot imagine that we are ever going to get back to rates like that — the change that happened in the 1980s appears to be as permanent as anything is in politics (and also not to be confined to this country, rates dropped around the world).
The other major change has been the organisation of the tax authorities. I am not thinking so much of the combined Revenue and Customs, but more of the change from a system of local offices to one of business streams. When I entered the Inland Revenue as a direct entrant graduate Inspector I was promised district charge in five years. I didn't stay long enough to make good on the claim, but I wonder whether I would feel that it had been honoured if I was still in HMRC, with its very different office structure today.
The Arctic shadow
If I turn to the short (by comparison with the others) time that I have spent as editor, the issue which has overshadowed it has been the Arctic Systems case. When I started as editor we were just about to get the Special Commissioners' decision, and the subject has scarcely left our pages since. One of the side effects of this is a desperate search each time we have a new article for a different image to illustrate it: there are only so many pictures of polar bears and icicles that you can use without it getting repetitive…
The case is over, but the issue of 'income splitting' (a term which HMRC have been rather too successful at establishing as the description of what happened in the case) will continue to dominate future debate.
It is also just a part of two larger subjects; indeed it can be seen as the common term that links them. The first is the taxation of small businesses and the second the taxation of families.
Small business taxation
The greatest missed opportunity that I have seen so far during my time as editor is the Treasury's promise to review small business taxation. Started when Government discovered that the completely unpredicted (!) response of taxpayers to a zero corporation tax rate on the first £10,000 of profits was to incorporate every small business, it had the potential to range widely and establish a blueprint for a comprehensive change.
Instead it seems to have withered and died. It badly needs to be re-established, because the problem is not going away, it is simply getting more urgent.
There seem to be two basic approaches to the issue. One is to adopt some sort of Scandinavian model of small business taxation, which considers the returns from a business as a combination of investment income and earned income, and taxes them accordingly. I examined that in last week's article 'Talkin' 'bout a revolution' (see Related Links above).
As I said there, I begin to understand the principles behind it rather better now, and I can see how it would work without excessive complication for the micro-business that is the main focus of concern. Just because the principles which underlie the system are based on complex economics, it does not have to be difficult to operate in practice.
However, the other approach is to go in precisely the opposite direction. I have mentioned in a previous article 'What's in a name?' (see Related Links above) the French system which allows businesses below a certain size to simply declare their turnover rather than calculate their business profits, and to pay a fixed percentage of it dependent on their broad business classification into (roughly speaking) trades or professions. Undoubtedly this would produce anomalies, and it rides roughshod over the economists' concerns about the differing returns required from investment and labour.
However, it has the great merit of simplicity, although readers specialising in that end of the market might wonder whether it would simplify things so much that they are no longer needed.
Somewhere in the middle of the two lies the other topic that dominated our pages during 2005 and on into 2006 — UITF 40. Without reopening the specific arguments, the broader issue that it highlighted was the problem of applying accounting principles needed in larger companies to much smaller ones where arguably they are not relevant and where they certainly create a burden of compliance that is excessive compared to any benefit that might accrue. In an increasingly regulated profession, that is likely to be an ongoing problem, and it reflects again the contrast between complexity and fairness.
You can create a simple tax system, but only if you are prepared to accept that it will not deal with everyone fairly — some people will pay less tax than they should and some will pay more. But the more that the legislators try to make the system 'fair', the greater the complexity that will be generated.
Taxation of families
The issue which looks as if it may become significant in the next few years is the taxation of the family, which of course begs the question of what the 'family' is.
As I write, the Conservatives are meeting in Blackpool for their conference. If I understood Mr Cameron correctly in his radio interview this weekend, there are likely to be two tax-based family-friendly policies emphasised this week. One, already announced, is that there will be a higher level of tax credit for couples than for single parents; at the moment you either get the couple element or the lone person's element, which are both the same, which means that a couple gets exactly the same credits as a single parent with the same circumstances.
The other policy, not yet announced as I write, appears to be about income tax, and might well be a proposal for at least partially transferable allowances.
What interested me was the admission during the radio interview that two different definitions of 'family', or at least of 'couple', are being used here. For tax credits, a couple is a married couple, civil partners, or two people living together as if married or as civil partners. For the tax proposals, it appears that the definition is going to be simply married couples or civil partners. That, it seems to me, will be a debate that may become more and more important in coming years — to what extent should the tax system try to reflect the changes in family relationships? No doubt it is a subject to which we will return in future.
