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 boundaries. You can follow David on Twitter @TaxSimplifier.
A fundamental issue to be confronted on achieving substantial tax reform is deciding what transitional rules would be required. We have to assume that large sections of the public would be resistant to change, or prefer to stay ignorant of what it involved. So any transitional rules would need to be as simple as possible.
Proposals for transition would need to be presented as part of the package which included the substantive measures. Even if people liked the proposed new regime, they should be able to say whether the effort of getting there is worth the candle.
So detailed transitional rules would need to be worked out, and the following principles are suggested:
(a) no amount should be double taxed or left untaxed, unless provision is made to the contrary;
(b) but in putting (a) into effect fine tuning to the last penny may not be necessary - in particular the taxman should be prepared to cede some tax, provided the aggregate amount involved is not too high. This would be a price well worth paying for a simpler system and to retain the taxpayer’s goodwill;
(c) the transitional period should be as short as practicable.
Principle (b) may override principle (a).
Let us consider, for example, my proposal for capital allowances to be abolished in favour of tax relief for commercial depreciation.
It would not be necessary to “join up” the tax written down values of assets under the old regime with the value for calculating future depreciation under the new regime. We would simply move from one system to the other. An exception would be for assets on which the 100% annual investment allowance had been claimed -these should join the new regime with a zero tax base cost.
Of course businesses which have benefitted from the old capital allowances regime will still complain. They should be reminded that they can release any deferred provision for tax in their accounts, for a one-off boost to their accounting profits.
Besides, the calculated difference between the tax benefits of the old regime and the new regime would not be so great. This is because writing down capital allowances have been reduced, and because tax rates have fallen (for companies at least). Further, low discount rates are appropriate to use in calculating the difference because of the current low interest environment.
But we would have conformed tax to the real world. All depreciating business assets would qualify for relief. Immediate relief would also be available for capital expenditure which is all expensed in the accounts when incurred.
It is not claimed that transitional measures would be as easy as a walk in the park. But it is hoped the effort would be worth it for the benefits of tax reform which will be summarised in my next two Blogs, the last in this regular series.