Friday, 10 September 2010

A taxing problem for the Revenue (and the rest of us)

The current problems of HM Revenue & Customs in relation to the circa six million people who have had their tax bills incorrectly calculated highlights two truths about the UK’s current taxation system. Firstly, that the current PAYE (Pay As You Earn) method of payment is failing to cope and, secondly, our tax system is unbelievably complex.

PAYE dates back sixty years to a far simpler time when people stayed in one job their whole working lives. The only calculation involved taking a percentage of yearly salary which didn’t change very much. Contrast that with current transient working habits with the average stay in a job somewhere around three years, contract working, part-time working and an employment benefits system, which includes company cars, healthcare and bonuses, all of which must be included in the calculation.

Now factor in more recent changes to the taxation system like child tax credits, which involves taking a calculation of a combined household’s income. The result is failure of the kind we are witnessing now.

The advice from the Institute of Taxation earlier this week was that anyone receiving a letter should check their new tax calculation very carefully. That’s all well and good but I remember talking to the tax office about company car taxation many years ago and coming away more than a little confused and with a blinding headache.

The truth of the matter is we now have the worst of both worlds, a failing PAYE system that is struggling to cope which is part of a wider taxation system which is so complex the average man in the street has little hope of being able to spot any mistakes.

Our current Chancellor has already initiated a review of the current taxation system to make it much simpler. It can’t report a moment too soon.


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