Rachel Reeves has been told by one of the world’s most influential business bodies that Britain’s tax system is holding the country back and needs urgent surgery if the Chancellor is serious about reviving growth.
In a targeted intervention, the Organization for Economic Co-operation and Development (OECD) has called on the Treasury to launch an “in-depth tax review to make the tax system more efficient and growth-friendly”, arguing that decades of tinkering in the UK have resulted in a patchwork of distortions, loopholes and outdated valuations that penalize businesses and deter investment.
The latest assessment from the Paris-based think tank will make for uncomfortable reading in Downing Street. It concludes that the UK economy is burdened not only by the familiar headwinds of increased borrowing costs and sluggish productivity, but also by a tax code that businesses have learned to navigate and which ordinary taxpayers are increasingly finding difficult to understand.
At the heart of the OECD recommendations is the call to broaden the VAT base and eliminate a thicket of relief and exemptions that economists describe as “largely inefficient and regressive”. It’s the kind of reform that could finally banish to history the long-standing absurdity of HMRC having to decide whether a Jaffa cake is a biscuit or a cake, the kind of gray area that has given rise to court cases and columns for decades. The OECD suggests that any additional revenue generated by closing such loopholes could be used to protect low-income households through targeted transfers.
Property tax is similarly harshly criticized. The OECD notes that local tax rates are still based on 1991 property valuations. No government has dared to touch this situation for fear of triggering a political backlash among homeowners whose tax values no longer reflect the modern real estate market. Successive chancellors have postponed the revaluation cannon, leaving behind a levy that economists consider one of the most distortive in the developed world.
The need for reform has long been obvious for small and medium-sized companies. Business owners, accountants and owner-managers have been complaining for years about the sheer complexity of the HMRC code, the £100,000 to £125,000 criminal tax trap that penalizes ambitious interests, the interaction between income tax and student loan repayments and the cliffhangers weighing on stamp duty. Each has become a case study in how good intentions, implemented year after year, can produce a system that no one would design from scratch.
There was once a body in Britain specifically designed to deal with these frustrations. The Office of Tax Simplification, an independent body designed to reduce administrative burdens, survived for 13 years before it was abolished by Kwasi Kwarteng during his short tenure as Chancellor. Its recommendations were often ignored even during its existence, and its closure was widely seen at the time as a signal that Whitehall had lost interest in serious structural reform.
The OECD warning comes at an uncomfortable time for Reeves. Several think tanks, including the Institute for Government, called on the chancellor to undertake major tax reform ahead of last year’s Budget as she struggled to close a billion-dollar fiscal black hole. It now faces similar pressures later this year: the war in Iran is weighing on global growth, interest rates are stubbornly elevated and borrowing costs show little sign of easing.
The report also moves into more politically charged territory, criticizing the government for conflicts of interest in its handling of the economy – a swipe that will inevitably be seen in Westminster as a reference to the recent controversies surrounding Lord Mandelson and Labor Together, as well as the steady rotation of former MPs into private sector roles that have caused a stir on both sides of the House. The OECD recommends extending legally binding non-compliance obligations to politicians’ careers after they leave the public eye and throughout their term of office.
Among other things, the think tank is calling for a rethink of training grants for employees financed by the training levy and suggesting that resources be redirected to young people who are struggling to gain a foothold in the labor market.
In response to the report, a Treasury spokesman said the government was “already reforming the tax system to make it more efficient, modern and fair,” adding that it was “addressing relief that now costs much more than intended and disproportionately benefits the rich.”
Whether this is the fundamental overhaul required by the OECD or simply a gradual tinkering that brought the system to its current state will become clearer when Reeves is at the shipping desk later this year. For UK SMEs, who bear a disproportionate share of the compliance burden, there is hope that it will finally take responsibility.
