“It’s a national disgrace” was the catchphrase of the late Philip Hardman, former senior tax partner at Grant Thornton, tireless campaigner and, in 1991, founder of ICAEW’s Tax Faculty. Often punctuating his criticism of flaws in the UK tax system, the phrase served as an apt tone-setter for ICAEW’s latest annual lecture held in his name, which took place on 22 November at Chartered Accountants’ Hall.

Entitled ‘The Worst Features of the UK Tax System’, the lecture was delivered by former Clifford Chance Head of Tax Dan Neidle, who has distinguished himself through his own campaigning work in the field – courtesy of his non-profit company Tax Policy Associates. This year, the firm won the Tolley’s award for Outstanding Contribution to Taxation, while Neidle himself was named in The Lawyer’s Hot 100 list of most influential legal minds.

As the title suggests, Neidle has spotted clear and present national disgraces in the tax landscape of 2023 – but he is equally troubled by skewed public perceptions of the system’s punitive side. Here are the main issues that he explored.

Cliff edges

Hundreds of thousands of UK residents on modest incomes, Neidle said, are currently paying marginal tax rates of 71% or higher, thanks to “well-intentioned” tweaks that at first had minor impacts, but contained “time bombs” that have been exploding ever since.

For example, when the taper for child benefit was introduced in 2013, the marginal rate for families with three children was in the 60s – but now, it’s 71%. And because the government doesn’t change the threshold at which the child benefit taper stops, but does increase child benefit itself, every time it does so, the marginal rate goes up. “Nobody in politics seems to notice,” Neidle said. “And nobody seems to care.”

He explained: “Say you have three children, you’re working 1,500 hours a year and you’re earning £50,000. That’s around £33 per hour before tax and £25 after tax. Fine. How would you like to work another 200 hours for the same rate? Sounds good. But how much will you see after tax? The answer is around £9.60 an hour. That’s less than the minimum wage. So, people don’t do it. Why do we have a tax system that stops people from working more hours – that stops small businesses and the self-employed from growing their business?”

For Neidle, cliff edges in the tax system present clear macroeconomic risks: “You cannot look at people turning away work and rejecting hours and tell me that it doesn’t have an effect on the country as a whole.”

In terms of solutions, he said: “The first thing is for politicians to admit that this is the system they’ve created. We shouldn’t be taxing anyone 71% – whether they earn £10,000, £100,000 or £1m. And we certainly shouldn’t have a tax policy that disincentivises work. There needs to be a political commitment not to have marginal rates that exceed, say, 55%.”

Another, powerful disincentive for productivity, Neidle noted, is the £85,000 VAT threshold. “We can see that precipice, and we can chart it,” he said. “And we can count around 30,000 businesses clambering at the edge, desperate not to fall off – because they know that if they do, their prices will go up by 20%, while those of their competitors, still at the top, won’t.”

He stressed: “If you raise the threshold, you’re not eliminating it – you’re moving it. You’re not trapping smaller businesses – you’re trapping slightly bigger ones. That’s not better. That’s worse. There’s only one solution here, and that’s to take the threshold down. It should be around £20,000 or £30,000, like most of the rest of our competitors.”

Complexity

Neidle cited two areas of complexity in the UK tax system that, in his view, are readily fixable. The first is what he dubbed “fossil” measures dating back 20 to 40 years that are outmoded or irrelevant, yet remain in force. The second – “on the other end of the geological spectrum” – are newer laws that have gradually spiralled into complexity.

“A few weeks ago,” he said, “I tried to write down all the rules you have to go through to advise a multinational lending into the UK from the US, just on interest deductibility. I came up with transfer pricing, corporate interest restriction, hybrid mismatch rules, reasonable commercial return, results dependency, equity notes, section 444 ‘arm’s length’, anti-avoidance counteraction, and unallowable purpose. That’s a lot of duplication.”

Many such rules, Neidle said, are fossils that burn adviser time, client money and HMRC resources. As such, HMRC must be more confident that it has all the anti-avoidance tools it needs to let go of redundant rules. Looking ahead, Neidle urged ministers to update the Finance Act to enable them to set regulations that would eliminate certain tax rules – and, indeed, entire taxes – that have no revenue benefits. “I believe there are hundreds,” he said.

As an example of newer provisions that have attracted complexity, Neidle singled out hybrid mismatch rules: 39 pages of “really hard” legislation, for which HMRC – “bending over backwards to be helpful” – produced a staggering 484 pages of guidance.

“We need to look again at principles-based legislation,” Neidle said – meaning lawmaking that provides certainty, precision and ease of application. Furthermore, he stressed: “We must not make this mistake again. The next time there’s a brilliant international initiative requiring UK implementation, we should take a step back and do it in a different way.”

Public misconceptions

In the final part of his lecture, Neidle turned to the importance of challenging widespread assumptions that tax evasion is rife, rich people get away with it and people on low incomes routinely get “clobbered” with penalties.

“Perception matters,” he said. “It goes to the heart of confidence in the tax system, the wider political system and the rule of law. If people believe that others are getting away with something, they’ll try to get away with it themselves – as we saw with the fraud around COVID loans. So, we can’t ignore what we may call ‘folk beliefs’ in the tax system.”

While Neidle said there was no evidence to suggest that evasion is rife and rich people regularly escape penalties, he acknowledged that the very wealthy can buy their way out of inheritance tax – or exploit the non-dom system to buy their way out of tax altogether. But for that very reason, he said: “Those two areas need to be looked at – not just in raw revenue terms, but because of what they do to the perception of fairness.”

A larger problem, he noted, is the mass-marketing – or, more accurately, mis-selling – of avoidance-inclined tax products to everyday consumers on average or low incomes. Neidle said that he would prohibit that practice entirely, unless the provider has disclosed its offering’s features to HMRC under a three-month grace period – and even after approval, the product would have to carry a statutory warning notice, flagging up the risks of HMRC challenge and retrospective legislation.

Neidle also called for tax evasion to be subject to prosecution as a first resort, in the manner of benefit fraud – rather than tackled primarily through HMRC’s civil Code of Practice 9 (COP 9) track, which reserves criminal probes only for the most serious cases. As well as sending an appropriate signal to the public, he said, prosecution from the outset would mark a move away from fraud management towards genuine fraud suppression.

In Neidle’s analysis, the perception that poor people are clobbered with penalties is also untrue. However, he did cite one area of particular concern: that in the past four years, HMRC has opened 420,000 late-filing cases against individuals who earn too little to pay tax, many of which involve penalties in the thousands. “These are people on very low incomes,” he said, “often living with disabilities or mental health issues.

“It is – I’m sorry – a national disgrace.”

Read more analysis from Dan Neidle and Tax Policy Associates.