Elaborate tax system urgently needs to be simplified

Britain's tax system has become one of the most complex in the OECD. It is inefficient, expensive to administer, it burdens companies and individuals unduly, it acts as a disincentive to saving and it has grown more dysfunctional with every year. It needs urgent and radical reform.

So the news that the government is setting up an Office for Tax Simplification is both welcome and timely.

That welcome, however, comes with caveats. It should be independent of the Treasury and Her Majesty's Revenue and Customs. It must listen to expert advice, but avoid becoming yet another talking shop. Nor should it rest on minor tweaks and presentational gimmicks, fluffed up into the appearance of change by inventive press releases. It must work to a timetable and act speedily. And it should not add to the total numbers of civil servants whose swollen ranks have made a baleful addition to the tax burden on individuals and households.

The brief for the new Office for Tax Simplification announced today is encouraging in these respects. It is intended to provide expert advice to the Chancellor on options for improving and simplifying the UK's tax system to cut administrative burdens on both businesses and individual taxpayers. It will do this by pinpointing problem areas and those with potential for simplification. The views of interested parties, the analysis of ideas for potential reform and proposals for simplification will all be published.

No less encouraging are the credentials of those chosen for the posts of chairman and tax director, Michael Jack and John Whiting respectively. Mr Jack was financial secretary to the Treasury between 1995 and 1997 with special responsibility for UK tax policy. Mr Whiting is Tax Policy Director of the Chartered Institute of Taxation and has had a long career with PricewaterhouseCoopers where he was a tax partner.

If the UK is to see a revival in business enterprise and entrepreneurialism, then simplification of the tax system is a vital first step. It is all very well for FTSE100 companies to be able to afford top accountants and lawyers to fight their tax battles. These resources are beyond the means of the small entrepreneur and local business.

Urgency is also required in the field of personal saving. One of the reasons long-term saving has declined is the constant chopping and changing of tax regimes, lack of clarity in the tax status of savings products and the limits placed on tax sheltered savings schemes such as Individual Savings Accounts. There are complex restrictions on relatively straightforward cash or fixed interest savings in particular, which appeal to many who do not wish to take on stock market risk.

At the same time, pension tax relief for the very wealthy now looks anomalous when encouragement should more equitably be given to lower income families starting out on the savings ladder.

With the caveats set out here, the new drive to tax simplification is an encouraging step forward.