Steve Baker MP wants a simpler flat tax system. WHY?

The Daily Politics BBC News reports on the spaghetti like complexity of our tax laws. No news there. What did surprise me though was the brief interview included in the piece with Conservative MP Steve Baker who advocates the benefits of a flat tax system and then reveals he doesn't understand the implications.

He was referring to a change to the income tax system. It would involve everyone paying income tax at the same rate with no reliefs or deductions other than a single personal allowance. So whether you earned £1,000 above the allowance, £10,000 above it, £100,000 above it or £1m above it you would pay the same rate of tax on your income.

This idea is not new. Back in 2005 the Conservative party commissioned an investigation into the possibility of introducing a flat tax system in the UK. Such a proposal was not in either of the Coalition parties' election manifestos. But the idea of a flat tax does 'sound' like it should lead to a simplification of the tax system. Which of course is part of the attraction.

What Steve Baker MP said in the interview though makes no sense:

"A flat tax....would be likely, based on the evidence, to raise a greater amount of revenue."

Clearly this will depend on the precise rate of tax. And if does raise more money then who will be paying that extra tax? Not the top rate taxpayers who would no longer be paying tax at 40% and 50%. On that basis alone it's a disgraceful suggestion.

In 2007 Richard Teather published a model in 'A Flat Tax For the UK - A Practical Reality'. He assumed a 22% flat rate of tax and a £12,000 personal allowance to balance the equation. It leaves no losers, ensures that those on just-below average incomes benefit most, and sees that the poorest third of all earners gain proportionately more than the richest third. Sadly it is also £50 billion short of cost neutrality. More recent estimates anticipate that we would need a 25% flat rate of income tax payable by everyone on all of their taxable income.

Like many people I'm keen to support ideas that would genuinely lead to a simplification of our tax system. Such developments would reduce the incentive and opportunities to engage in what are now known as 'abusive' tax avoidance schemes. A flat tax is appealing in theory. But only in theory. A bit like having a chocolate bath.

Key arguments here include:

• Graduates would pay the highest effective rate of tax when their student loan repayments are added to their flat tax;
• The tax burden would fall more on the 'squeezed' middle than at present due to the drop in the the 50% and 40% higher rates of tax down to the flat tax level; and
• The so-called success of flat rate tax systems elsewhere are unproven.

Other arguments are, I think, more about stressing the practical difficulties of implementing such a system. They are not insurmountable. None are. But frankly I don't see it happening in the foreseeable future.

Many people may have paid the wrong tax - why is that?

This is another post by reference to last night's Panorama - "Tax: Are you one of the six million?"

This rather confused TV programme suggested that as many as 1 in 3 people could have paid the wrong tax. Given the wide definitions used for 'wrong' this will come as no surprise to accountants and tax advisers.

Various contributors to the report suggested what needs to be done:

1. "There has to be a better way of paying tax"
2. "Too many staff cuts, too fast"
3. "Sack those at the top of HMRC"

Without going into great detail let's be clear:

1. The tax system is complex due, in part, to needless complications introduced by Gordon Brown who ignored advice from tax experts.
2. Many of those complications result in people paying too little or too much (ie: the 'wrong') tax.
3. The PAYE system worked fine when people typically only had one job or one pension.
4. A necessary annual reconciliation of PAYE records hasn't been possible for years. Having recognised this, HMRC commissioned a new computer system that would allow them to consolidate the tax records of all PAYE taxpayers - previously spread across a number of old systems.
5. The Coalition Government seems to genuinely want to find ways to simplify the tax system. This Chancellor will not be looking for ways to grandstand twice a year as did Mr Brown when he introduced and then defended poorly thought through tax changes. Many of these led to the complexities we have today.
6. The people at the top of HMRC may not be perfect but until recently their hands were tied by the previous Government and the staff cuts that were imposed on them in recent years. Dave Hartnett, for example, has never struck me as complacent or as being satisfied with the poor standards exhibited by some of his staff. On the contrary.
7. HMRC's staff cuts are not self imposed. They are a direct result of imposed severe staffing reductions imposed by the last Labour Government. To the extent that future staffing cuts occur the Coalition Government will be to blame.
8. The PAYE system will only rarely get anyone's tax right through in year tax deductions from salaries or pensions. This will generally only happen where someone has only one source of earned income each year, no benefits in kind and no investment or other income.

What struck me most though was the way that contributors to the programme, including Labour MP John Mann from the Treasury Select Committee, were so quick to blame HMRC for a failing tax system and for the staff cuts. Mr Mann in particular should know better.

I totally accept that HMRC screw up sometimes. But the basic PAYE system is not their fault. Nor are the staff cuts. The new computer system should avoid a recurrence of the PAYE debacle we saw this year - that was caused in part by the move onto the new system.

That the tax system needs to be simplified is in no doubt and I welcome the Government's reviews that are a small step in the right direction. As to how did we get here? I place the blame on Gordon Brown and, by definition, the Labour Party - and have done for many years. Indeed "An increasing degree of frustration with developments in tax legislation" was one of the key factors that led to me giving up tax advice myself after a 25 year career as a tax adviser.

Panorama on Tax - Make your mind up guys!

Last night's Panorama on tax was a mishmash that attempted to cover too many disparate topics. And in so doing missed it's key focus.

The title: "Tax: Are you one of the six million" was a clumsy and insulting allusion given that this is not a number referenced previously in the media or HMRC re the PAYE debacle that was topical a couple of months back. As I explained at the time: The PAYE tax system is now working as it should...

Panorama started by referencing the PAYE issues and suggested:
- Bad HMRC - they are incompetent and are sacking too many staff too quickly [NB: on instructions issued by Gordon Brown]
- Bad HMRC - all those PAYE errors and the vast number of people who have not paid exactly the right amount of tax through the PAYE system
- Bad HMRC - refusing to apologise initially for the broken PAYE system and all the notices of under and overpayments
- Bad HMRC for issuing demands for underpaid tax and worrying innocent taxpayers
- Bad HMRC - for not answering the phone quickly when 18,000 people a day were calling them
- Bad HMRC - as "there has to be a better way of paying tax"

But what's this?
- Good HMRC - for sorting out and resolving all the cases raised during the programme and agreeing no tax outstanding in each case; and for apologising to each of the taxpayers concerned.

So - what was the conclusion? Should all the underpaid tax be collected despite the upset and worry caused when HMRC pursue unexpected tax debts? Or should it be written off? Most of the programme implied the former but Jeremy Vine's final comments implied a contrary view. He noted HMRC were insisting that there will not be widespread write-offs. He then quoted an insider who told the BBC that:

"With so many underpayment cases in the system, it is inevitable that many of them simply will not be processed"

Given the main thrust of the programme you'd think that would be a good outcome. But no. Whatever HMRC do it's wrong in Panorama's view. Jeremy Vine's closing comments were clearly critical as regards HMRC writing off such underpayments:

"With the country facing massive budget cuts, that's millions of pounds of lost revenue that could be put to good use"

I'll post separate comments re other elements of the programme.

What did you think of it? (Available on BBC iplayer until 15 November)

It's "Pay As You Like" - if you're wealthy, says Panorama

This is the view of a so-called HMRC 'whistleblower' who investigates taxpayers with a net worth of over £20m. It was broadcast as part of last night's Panorama programme that started as a piece about the millions of PAYE demands in the press recently. It moved off target every now and then.

The 'whistleblower' claimed:

"We used to have dedicated teams that would tackle the top 40,000 taxpayers but as a result of rationalisation and a drive for efficiency they've now shed that down to 5,000 - so now we're only looking at the top 5,000."

"I would say we've lost the war... It's become Pay As You Like"

The programme then showed a message from HMRC which said there has been:

"no reduction in resources focused on the tax affairs of wealthy people"

and that HMRC will have £900m more for targeting [tax] evasion and fraud.

Who do you believe?

(Panorama's "Tax: Are you one of the 6 million?" is available on BBC iplayer until 15 November)