The 'Tax Simplifier' series aims to make the case for a much simpler tax code with practical recommendations for policy change. Blogs are published twice a week, on Monday and Thursday. Read David's previous blog on tax knowledge at HM Treasury. You can follow David on Twitter @TaxSimplifier.
Two apparently similar situations can be taxed very differently if they happen to fall on different sides of a boundary defined in tax law.
Tax is bedevilled by these boundaries and the “all or nothing” outcomes they often create.
If the law were focussed much more directly on taxing the economic consequences of what taxpayers did, many of these artificial distinctions could be dropped.
A guiding principle for tax reform should be that if:
(a) different tax consequences ensue depending on whether the facts of a case fall on one side of a tax boundary or another,
(b) the boundary is difficult to define,
(c) the boundary is even difficult to defend in principle, then
(d) we should dispense with that boundary!
So for example we should give up differentiating trading and investment income for companies. We should throw out rules for distinguishing plant and machinery from other assets. Businesses should cease to worry about capital and income distinctions.
As we descend into the more detailed and murky depths of tax law, we should discard detailed rules and distinctions where we can. The burden of proof should be on justifying a rule, rather than justifying its removal.
Of course some broad and detailed boundaries would need to remain.
At a basic level income and gains could be taxed in just three separate categories:
(a) business tax - based on accounts profits (with simplified accounts allowed for small businesses). The activities of any company would be deemed a business for ths purpose.
(b) employment income
(c) income and gains of individuals from non-business activities - accounts should not be required for these activities, which should normally taxed on a cash realisation rather than an accruals basis.
Is serious discussion of such basic issues taboo within Government? We are stuck with our existing spaghetti bowl of tax law if it is.