The growing complexity of the UK tax system is jeopardising its international competitiveness, according to company directors.

Two out of three companies believe that the tax system has become more complicated over the last five years, according to a survey of members of the Institute of Directors.

Almost 60 per cent of the respondents thought that the tax system was having a negative impact on the UK’s international competitiveness.

Half of all respondents also said they were spending increasing amounts of money on tax planning and compliance. Nearly 20 per cent of them said that they would consider transferring their operations outside the UK, solely because of the tax system’s complexity.

Richard Baron, head of taxation at the IoD said that complicated tax rules were “choking the life out of small businesses”.

“Complexity in the tax system absorbs resources, clouds commercial decisions and can make the UK a less attractive investment location,” he said.

The administrative burden of tax compliance imposes a cost of £5.1bn (€7.4bn, $9.1bn) on companies – largely as a result of the costs of gathering information and employing intermediaries – according to Treasury-sponsored research by KPMG, professional services group.

The IoD said that although the mere complexity of the tax system was unlikely to drive many UK businesses abroad, it would deter foreign companies from locating a new operation in
the UK.

The reason tax has become increasingly complex lies with the underlying complexities of business, the government’s desire to use tax as a policy instrument and the involvement of large numbers of people in creating tax legislation, it said.

Mr Baron said: “There is no doubt our competitive advantage is being eroded by our byzantine tax system. There is always plenty of space in finance bills for new legislation but never much room for sorting out problems with existing rules.”

“The best thing would be for governments to be less interested in new things that they could do. Very often, a new policy initiative is simply more trouble than it is worth.”

But the IoD acknowledged that solving the problem of tax complexity was not easy and would involve difficult trade-offs. It said the government should not be afraid of tackling existing special charges and reliefs, although it was important that tax simplification did not turn into a programme to increase taxes.

The idea of moving to a “flat rate” tax – with a single rate of tax on all income and gains – won backing from 9 per cent of the survey respondents.

The IoD said that even though a flat-tax system was not an immediate prospect for the UK, it would be worth examining the opportunities for simplifying the tax system that it would offer. It called for a simplification of personal tax computations, sweeping away the complex rules for allocating different tax bands to savings income, non-savings income, dividends and capital gains.

The IoD survey found the most problematic aspects of employment tax were
benefits in kind, employees’ business expenses, national insurance, statutory sick
pay and statutory maternity pay and procedures for employees joining and leaving. “Peculiar wrinkles” in policy relating to income
tax and national insurance on employment income should be abolished, it said.

Anti-avoidance legislation should be limited to cases where its application is really justified, the IoD said. “Anti-avoidance legislation tends to be complicated and to be a source of uncertainty. The more taxpayers who are confident that they can simply ignore it, the better. Its ambit should therefore be narrowly circumscribed.”

The “astonishingly complicated” system of relief for foreign tax when profits are also subject to UK tax should be radically simplified. On capital gains tax, it proposed a single, low rate of capital gains tax.

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