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Tax is one of the fundamental precepts of any polity. It is frequently among the campaign-related issues in elections around the world, UK included. Thus, a system of taxation has to echo certain qualities. Adam Smith is the first person to elucidate such principles. In 2009, the Association of Chattered Certified Accountants (ACCA) came up with a set of precepts that they felt demonstrated the spirit of the principles Adam Smith in the modern day. While the ACCA came up with a list of twelve principles, this paper seeks to analyze the UK system of taxation and determine if it is compliant with the principles of tax simplification and stability, tax competitiveness, and openness, transparency and accountability.
Tax Simplification and Stability
The ACCA principles state that taxation systems should be both simple and stable. In this context, simple means easily to understand, and more importantly, to implement. A complicated tax system makes the compliance costs to be high especially for individual and the small businesses (Jones et al. 2016). The UK taxation system is not simple. For instance, the payment of income tax is convoluted. Firstly, the amount of income tax is determined by one’s age with, different threshold’s for under 65, those between the ages of 65-75, and those over 75 (Jones et al. 2016). One also has to factor in an individual’s profession. Additionally, in capital gains tax, entrepreneurs have different rates that the rest of the population. Furthermore, also has to consider all the other allowances and benefits-in-kind. The complexity of the tax system is seen in the fiasco that resulted in millions of people in the UK paying more taxes than they were supposed to. Several authors have noted the complexity of the UK taxation. Harle (2011) has termed the UK tax system “out of control” due to its complexity. Additionally, in the UK, one has to pay taxes to at least three different levels of government: the national treasury, the devolved units like Scotland and the local government’s i.e. council tax. Mirrlees et al. (2012) proposed a single, set of tax laws that would apply across the board to income from all sources and capital income. All the abovementioned factors show the complexity of the UK tax system.
Stability is the quality of a tax regime being enduring and free from meaningless, unplanned changes. However, it has to be differentiated rigidity. While stability allows for continuous review of the taxation system and ensures that it conforms to the modern day realities, a rigid tax system will be inflexible, which will mean having taxes that are outdated. KPMG (2014, p. 17) has noted that the UK taxation scheme is stable compared with other countries in Europe, although it could still improve. Changes in the UK system have only been to streamline the system, or to introduce better taxation measures. Consequently, it is apparent that UK taxation system is stable.
The purpose of any taxation mechanism is to raise revenue. On the other hand though, when the government places an emphasis on revenue raising, sometimes it might be counterproductive in that it might mean high taxes, which can result in capital flight as the liberalization of markets has led to significantly higher possibility of tax and labor flight. Consequently, how low tax rates, its incentives and its effects on the revenue of companies and individuals goes a long way in deciding if a country’s tax policy is to be considered a competitive. In a country that belongs to a regional association with a free movement of capital and labor, like the UK (European Union membership), this is exacerbated.
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The UK has cut corporate tax rates in order to remain competitive. There are questions if tax cuts stimulate the economy. Cloyne (2011, p.2) has investigated the impact of the reduction of taxes in the UK economy. Cloyne (2011) concluded that a 1% cut in taxes stimulates the GDP by 0.6% on impact and 2.5% over three years. KPMG (2014, p. 17) has noted that a decrease in the UK tax rates is likely to make it more competitive. The UK used to have a tax rate that was one of the highest in the world at 56%. In a bid to stay competitive, the government has continuously reduced the extent of corporate taxation in the country (Miller & Pope 2015). Through reforms that followed the Corporate Tax Roadmap in 2010, the UK has also continuously improved the corporate tax design. For instance, the country has seen the main rate of corporate tax fall from 28% in the year the government launched the roadmap to 20% in 2015 (Miller & Pope 2015). It is significant, because it is the joint lowest among all twenty biggest economies in the world. It had been precedent by taxing companies with lower rates of profits than their counterparts with larger ones by around 1% (Miller & Pope 2015). While this might seem meager, it could have been a life saver for some of the smaller companies.
Furthermore, the UK has changed the way it taxes overseas earnings. It is usually a staid issue in taxation as some of the methods of taxation lead to double taxation of a corporation even of an individual. Ting (2014, p. 41) explains that the primary cannon in international taxation law is that governments should tax income should only once, which calls for states to take measures that would assist their taxpayers to avoid double taxation by not domestically taxing those multinationals’ activities abroad as this is significant in a country’s tax competitiveness (Ting 2014, p. 41). With regards to this, the UK government has changed from taxation of worldwide earnings to territorial taxation that has a focus on taxation of the earning of those activities that the corporations do in the UK (Miller & Pope 2015). Such measures have continually made the UK more tax competitive when compared to other developed countries.
The UK has also come up with new innovative tax produces that are further meant to increase its competitiveness including the “Patent Box” tax, which will enable companies to have a lower rate of taxation from its innovations are patents the taxpayer has registered in the UK or European Union capped at 10% (Miller & Pope 2015). Such an initiative, coupled with other measures meant to support research and development efforts, will go a long way in increasing the tax competitiveness of UK. UK tax is also one of the joint lowest in G20 while being the lowest in the G7. From the preceding, it is apparent that in the UK tax system is one of the most competitive in the developed world.
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Openness, Transparency, and Accountability
In a modern democratic world, citizens have the mandate to know their government’s policies including tax policies of their nation’s government. The ACCA principles explain that openness, transparency and accountability have several major precepts. The UK has a parliamentary system of government. Thus, the public consultation usually occurs through the use of Parliament, who are the elected representatives of the nation. In such a way, major opinions regarding taxation are debated, and the government makes decisions on the basis of the parliamentary debates. Moreover, the public can directly petition their member of parliament, or the government directly, if they think that an issue is of ubiquity in taxation. It ensures that taxation is not out of touch with the modalisms on the ground and the taxation.
The duty of collecting and utilizing revenue belongs to the government (Mirrless et al. 2012). However, in doing so, the government also has an obligation to account for its activities, take the responsibility for the activities, and publish the results in a way that is transparent and forthright. Through initiatives, such as the opening of UK’s corporate registry, will indicate the owners of corporations so as to avoid tax dodging by those in power the UK taxation system is becoming even more transparent. While commenting on the US states, Leachman, Grundman, and Johnson (2011, p. 3) note that the epitome of a transparent system is that taxation reports and spending statistics should be available to the public. The UK government routinely measures and publishes this data. Combined with institutions such as Office for Budget Responsibility, it means that the country has a high level of openness and transparency. Nevertheless, there is a dearth of transparency in some of the tax settlement deals, as is apparent in the case of the Google tax settlement. It is so mostly due to tax confidentiality (Freedman 2016, p.9). In conclusion, while the country still has room for improvement, especially concerning tax settlements, its tax system is by large transparent, open and accountable.
The paper has sought to look to what extent the UK taxation system complies with the principles of tax simplification and stability, tax competitiveness, and openness, transparency and accountability. On the first principle, it is apparent that while the UK tax system is stable, it falls short in the aspect of simplification. On the second principle addressed, it is evident that the UK taxation system is one of the most competitive in the developed world. Last but not least, the UK taxation system is also open, transparent and the government is accountable in financial matters.