City view The real lesson from Rayner’s tax bill
Our tax system is just too complicated – it’s time to simplify
Over the last few weeks, Labour’s deputy leader Angela Rayner has been under intense scrutiny over the tax due on the sale of a property in Manchester. It turns out that Rayner bought a semi-detached council home in 2007, with a discount under the right-to-buy scheme, and then sold it eight years later for a profit reported at around £48,000. The argument is about whether she should have paid capital-gains tax (CGT) on the money she made, which depends on whether she was actually living in that house with her husband, or had registered somewhere else as her main property.
The actual amount is fairly trivial. Rayner would have owed less than £4,000 in CGT, even if the property had been liable for the tax. The police have looked into it, and in due course HMRC may as well. We’ll have to see what happens. Compared with some of the Tory sleaze scandals, there is hardly a huge amount of money at stake. Even so, Rayner will probably very soon be the deputy prime minister in a new Labour government, and one of the most powerful people in the country. And she has been such a fierce critic of her Conservative rivals, demanding instant resignations for even the slightest hint that a rule has been broken, that she can hardly complain if she is held to the same exacting standards herself.
Head-spinning complexity
Rayner’s personal behaviour aside, we should, however, learn the real lesson of the affair. Our tax system is far too complicated. Take CGT. Your main home is exempt from capital gains, but it has to be registered as the main place where you live, if you to own more than one property. On a second property, depending on whether you spend any time there, you were taxed on any gains you made at 28%, until the chancellor brought that down to 24% in the last Budget. If the property is held in a limited company, then it will be taxed under a separate set of rules, with corporation tax charged if you sell it at a profit. On any other capital gains you make, you’ll be charged the current rate of 20%, unless it is from a firm you have set up yourself, in which case there is a lower rate of 10%. Except that only applies to the first £1m. Clear? Probably not. It’s enough to make any normal head spin.
It doesn’t stop there. The same is true of dividend, pension, freelance and company taxes. If you have any money in a pension, as most of us do, there is a complex set of rules to follow, and the same is true of savings, or gig work on the side of your main job, and if you have your own company the laws are even more complex. It gets worse all the time. We are, for example, about to see the introduction of the “British Isa”, with different allowances depending on whether you buy UK or foreign equities. And we now have different rates of corporation tax for small and large companies. The list goes on and on.
Bring back the spirit of Lawson
It is more than 30 years since we last had a chancellor who made any effort to simplify the tax system. Nigel Lawson, back in the 1980s, made it a rule to abolish at least one tax in every Budget, and steadily tried to make the system both neutral and as easy to understand as possible. Ever since then, every Budget has seen extra rates, allowances, new levies, and additional reliefs. Sure, many of them may be wellintentioned, designed to encourage us to invest more, save more, or put more money into green investments, or whatever the fashionable political cause happens to be that month. Add them all up, however, and we are left with a tax system of bewildering complexity. From 5,000 pages in 1995, the UK’s tax code expanded to 10,000 pages in 2010, and to more than 20,000 pages now.
It’s hard enough for accountants and tax lawyers to keep track of it all. Ordinary people don’t have a hope. Rayner may well not have broken any rules intentionally. She may have just found that the rules were confusing and difficult to follow. When she is in government later this year, as she will almost certainly be, perhaps she could learn the lesson from that. She could start making the case for tax simplification.