The office of tax surprises

Children’s clothes, unlike regular clothes, are zero-rated for VAT in the UK – unless they’re made out of Tibetan goatskin, that is. Then the full rate of VAT applies.

There isn’t much call for Tibetan goatskin children’s clothes these days, but the rule is there, in black and white, in the UK tax code.

“Back in the days of purchase tax during the Second World War, more clothes were made of various furs and skins, and Tibetan goatskin was very luxurious, and didn’t benefit from the same reduced tax rate as other forms of goatskin,” Paul Morton, the new tax director at the Office of Tax Simplification (OTS), explains with some relish. “There must be very, very few children wearing Tibetan goatskin these days.”

Vintage tax codes

The UK tax code is full of such oddities from bygone eras. The difference in rating between chocolate drinking powders and fruit ones (the former VAT-free, the latter full-rate) dates back to the Second World War: “We wanted servicemen and women to be able to have their cup of cocoa without extra tax, whereas fruit-flavoured drinks were seen as luxury items. That kind of complexity is surely something we can do without.”

The OTS has been trying to iron out some of the UK’s tax creases for the past six years, previously under the direction of John Whiting, whom Morton succeeded at the beginning of the year. While the department is still working on some of its historical big-ticket items – it has just issued a report on VAT, and is still working on the alignment of income tax and national insurance contributions – it’s changing direction slightly when it comes to facilitating its simplification agenda.

Rather than trying to simplify the code itself, the OTS is looking at what Morton calls the “user experience” and how tax obligations are presented to taxpayers. “The VAT registration threshold is £85,000,” says Morton. “As soon as you go over it, you have to register and start collecting 20% VAT. We know that there are many people who take various active steps to remain below the threshold. For example, they might decide to close their shop for a period of time, or they might not let out the extra room in their bed and breakfast.”

Some of those people are deliberately trying to avoid paying more tax, but others are intimidated by the process of doing VAT returns. “We are thinking there about behaviour, the user experience, and how we can make it easier to enter the VAT system,” says Morton.

Turning to technology

Technology might be the key to that, and it is something that the OTS is looking at very closely, reviewing the policies and approaches of more technologically advanced tax systems, such as Norway’s, and consulting with leaders in technology on a regular basis. “We’re not going to try to find answers, but we are going to make sure that the right questions are being addressed,” says Morton.

“I think that feels like the right approach in a world that we can’t predict, because it’s moving so quickly.” The primary questions the OTS is asking with regards to technology are: what technology could make the tax system simpler, and what about the human factor?

In Scandinavian countries, for example, it’s becoming increasingly common for people to receive automated tax returns, which they can review and approve via an app. The trouble is that a proportion of people don’t bother checking them. “They’re so confident in the system that they’re happy to disengage completely. It raises all kinds of questions: are they fulfilling their responsibilities as a taxpayer and a citizen?

Should we encourage people to feel more engaged? Do we feel that’s gone too far in terms of the technological process improvement? I think there are all sorts of questions that we need to debate here.”

So it’s not easy, but the time is right to start looking at how tax can be modernised in the UK to better reflect the way the working world is changing.

Do you think it’s okay for people to pay a little bit more tax if the system were easier to understand?

Taxing times

“We can see huge issues as more and more people become gig workers or, as the Taylor review might call them, ‘independent contractors’,” says Morton. “We see no employers’ national insurance contributions. As a business, they’re below the VAT threshold. So there are big economic issues, there are administrative issues, and many more people need to become taxpayers in their own right, rather than being on payroll

The inevitable need to raise taxes in certain areas to make up the shortfall is almost guaranteed to be unpopular. The government’s earlier attempts to do this by changing national insurance contributions for the self-employed met with a huge backlash and led to a humiliating climb down, but the issue is not going to go away.

“There are two questions that I ask of people. The first is: do you think it’s okay for people to pay a little bit more tax if the system were easier to understand? Most people say yes to that one. The second is: would you be prepared to pay a bit more tax in order to have a simpler tax code? Generally speaking, the answer is no. That’s a big part of the problem.”

Despite the tricky questions associated with it, for Morton the answer is still technology; if people are confident in an automated system that makes things simpler, they’re more likely to accept their obligations, he says. “We don’t need to present everybody with all the complexity. But, having said that, it’s a personal view, and I think we need to be asking how people feel about that.”

This article appeared in our Jan/Feb 2018 issue of AT magazine.

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.

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