DO WE HAVE A FAIR TAX SYSTEM?

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DO WE HAVE A FAIR TAX SYSTEM?

From time to time I have highlighted tax cases which I feel that HMRC should never have taken to the Appeals Tribunal.

Why do I do this?  There are two reasons.  The first is that HMRC is not, or should not be, an entity remote from us.  It is an organ of government.  Our government.  Its main role is to collect the taxes that our democratically elected parliament has imposed on us as the means to generate the income to finance the services that parliament perceives (rightly or wrongly) we want the government to provide to us.  The fact that it has volunteered to do other things – such as pay out some social security benefits and to collect student loans – are not its purpose; they are things that the Board of HMRC perceives that they can make money from to supplement the money that the government gives them to run the tax system.  I have no particular problem with them undertaking such commercial ventures, albeit that personally I would have preferred them not to do so as it distracts them from efficiently running the tax system.  Apologies if you disagree, if you think their administration of the tax system is a model of efficiency; I don’t!

But I digress.  As guardians of the tax system, HMRC are working for you and me.  They are providing what the government believe that we, as taxpayers, want.

What do you actually want from HMRC?  I want them to collect the tax that parliament has imposed.  But I want them to do so fairly.  I also do not want them to waste taxpayer’s money on pursuing either hopeless cases or cases where it is not reasonable for them to collect the last penny of tax or penalties because I perceive it unfair for them to do so.  That is obviously a bit controversial.  My concept of fairness may differ from yours.  It certainly differs from that of the government and I suspect differs from that of HMRC ,which to my mind surrendered its independence years ago, preferring instead to become a mouthpiece of the Blair government.

The second reason is that politicians are constantly holding out fairness as a lynchpin of our tax system.  But their conception of fairness seems to differ significantly from mine.

Do we have a fair tax system?  No, not in my view.  Perhaps that is a bit harsh.  We have a system that operates fairly in the majority of cases, but unfairly where the facts are a bit out of the ordinary.  I accept (albeit that the government does not appear to do so) that there is a conflict between simplicity and fairness.  A simple tax by definition is likely to operate unfairly where the facts fall outside the norm, as trying to cater for unusual situations requires more complex legislation.  Similarly, a fair tax cannot be simple because it needs to cater for unusual situations.  Up until the 1980s, the government tended to tilt the balance in favour of fairness.  Since then they have tilted it (consciously) in favour of simplicity.

Which do you want?  You cannot have both.  Personally, I would prefer a system that is complex but fair than one which is simply but unfair.  But then I’m a tax specialist.  What of the average taxpayer?  Parliament expects him to complete a tax return if asked to do so by HMRC.  Parliament have never grasped the nettle of whether he can be expected to find money to pay someone to help him.  (The Tax Tribunals have; there are a number of cases where they have penalised a person for not being able to (or choosing not to) afford to engage a tax specialist where he has entered into an out of the ordinary transaction).  Assuming these Tribunals are wrong and that parliament still expects a taxpayer to be able to complete his own tax return without assistance, that aspiration is a realistic one only if the legislation is simple and easy to understand.  So perhaps there is another balance to be struck; that between complexity and compliance costs.

As mentioned earlier, the government’s definition of fairness is different to what I (and I suspect you) perceive the word to mean.  It is clear that when they talk about fairness, they do not mean that the system ought to operate fairly in unusual circumstances.  They mean that persons in reasonably comparable situations ought to pay roughly the same amount of tax.  No, that is wrong.  If I am self-employed doing the same job as an employee for the same reward, they do not believe the two of us should pay the same tax – sorry they do, but instead of enacting that, they seem to enjoy having two taxing regimes with different outcomes and then enacting lots of complex legislation to determine which self-employed people they (or rather HMRC) believe deserve to be self-employed and which they believe should be taxed as if they were employees.  That is one reason why there is so much highly complex legislation.

But I digress.  The government’s view of fairness is that a person should adopt a two-stage approach.

1.      Apply the law to his situation.

2.      Consider whether parliament intended the law to apply in his situation or they simply couldn’t be bothered to try to cover that situation.

Fairness in government terms means that if at step 2 you believe that parliament intended to impose tax even though it chose not to in fact do so, you should construe the legislation as if it taxed you.  In other words, if in a particular situation you end up paying less tax than a neighbour in a similar situation, it is unfair to expect to be taxed according to the law.  Instead, you should volunteer to pay the tax that parliament inadvertently did not impose on you.

If you agree with the government definition, you should probably stop reading this blog.  I think it is wholly unrealistic and ignore it.

When I started this blog is intended to highlight two cases where I thought HMRC had acted unreasonably.  However you have probably read as much as you want in one go, so I will defer that to another blog.

ROBERT MAAS