OECD Urges Rachel Reeves to Overhaul ‘Bulky’ UK Tax System to Unlock Growth
Rachel Reeves has been told by one of the world’s leading economists that Britain’s tax system is holding the country back and requires urgent action if the Chancellor is serious about growth.
In a direct intervention, the Organization for Economic Co-operation and Development (OECD) urged the Treasury to introduce a “deep tax review to make the tax system more efficient and scalable”, arguing that decades of processing have left Britain with a patchwork of distortions, loopholes and outdated measures that are hindering investment.
The latest research from a Paris-based think tank will make Downing Street uncomfortable to read. It concludes that the UK economy is being dragged down not only by the usual headwinds of high borrowing costs and sluggish productivity, but by a tax code that businesses have learned to play and ordinary taxpayers are increasingly struggling to understand.
At the heart of the OECD’s recommendations is a call to widen the VAT base, removing a number of subsidies and exemptions that economists describe as “inefficient and regressive”. It’s the kind of change that could finally consign to history the long-standing folly of HMRC having to decide whether a Jaffa cake is a biscuit or a cake, the kind of gray area that has produced decades of lawsuits and column inches. The OECD suggests that any additional receipts raised by closing such loopholes could be redeployed to protect low-income households through targeted transfers.
The estate tax comes with equally sharp criticism. The OECD notes that council tax rates are still based on property values taken in 1991, a situation that no government has dared to touch for fear of provoking political tensions among landlords whose rates no longer reflect the modern housing market. Successive chancellors have kicked down this road, leaving behind a tax that economists consider one of the most disruptive things in the developed world.
For small and medium-sized businesses, the case for reform has long been clear. Businessmen, accountants and proprietors have complained for years about the complexity of HMRC’s code, the £100,000 to £125,000 tax penalty that punishes ambition, the interplay of income tax and student loan repayments, and the cliff edges that plague stamp duty. Each has been a case study in how good intentions, tied up year after year, can produce a program that no one could design from scratch.
Britain once had a body charged with dealing with this frustration. The Office of Tax Simplification, an arms length outfit designed to cut administrative burdens, existed for 13 years before it was abolished by Kwasi Kwarteng during his brief tenure as Chancellor. Its recommendations were often ignored even when they existed, and its closure was widely seen at the time as a sign that Whitehall had lost interest in major structural reform.
The OECD warning comes at an awkward time for Reeves. A group of think tanks, including the Institute for Government, urged the Chancellor to make sales tax changes ahead of last year’s Budget, when he was trying to fill a multi-billion dollar hole. Now he faces similar pressures later this year, with the Iran war weighing on global growth, interest rates surging and borrowing costs showing little sign of easing.
The report also veers into politically charged territory, criticizing the government for a conflict of interest in its dealings with business – a swipe that will surely be read in Westminster as a reference to the recent controversies involving Lord Mandelson and Labor Together, and the ongoing succession of MPs moving into independent roles that have raised eyebrows on both sides of the House. The OECD recommends that the legally binding obligations in relation to violations be extended to cover the post-public activities of politicians and their periods in office.
Among other recommendations, the think-tank calls for a review of workforce training funding funded by the tuition tax, suggesting resources should be redirected to young people struggling to find a place in the labor market.
In response to the report, a spokesperson for the Ministry of Finance said that the government is “already reforming the tax system to make it more efficient, modern and fair”, adding that “we are dealing with resources that are now more expensive than intended and which equally benefit the wealthy”.
Whether that’s the kind of radical overhaul the OECD is looking for, or just more of the small overhaul that brought the system to its current state, will become clearer when Reeves steps up from the delivery box later this year. For British SMEs, which bear a disproportionate share of the burden of compliance, the hope will be that he has finally caught the monkey.
