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The writer is the founder of Tax Policy Associates, a think-tank
I worked as a tax lawyer for 25 years, helping clients navigate dozens of tax and legal systems. Italy was always my favourite — because the Italian tax system was hilarious.
I remember an M&A deal in 2013, when an American client asked our Italian tax partner how long it would take to resolve a tax dispute in Italy. He gently explained that the actor Sophia Loren had, just the previous week, closed a dispute over her 1974 tax return. The administrative chaos was just the cherry on top of a cake of incoherent laws and overlapping anti-avoidance rules. Finding straightforward answers, even to simple questions, was impossible.
Greece was even worse. International transactions were rare, because the tax system was viewed as actively hostile to investment.
So it’s sobering to look at the Tax Foundation’s international rankings of corporate tax competitiveness and see the UK ranked 28th out of 38 OECD countries. Italy (24th place) and Greece (17th) can now giggle at the inadequacies of our tax system. The likes of Denmark (14th place) and Sweden (6th) are far ahead.
How can this be? The culprit isn’t tax rates. It’s tax complexity.
There are two main causes.
First is spiralling legislation, at its worst when the UK is implementing global initiatives such as the OECD’s 2017 Beps (Base Erosion and Profit Shifting) project and the 2024 global minimum tax. Most countries adopt new rules in broad strokes; the UK embroiders them into baroque detail. A single one of the 15 Beps proposals ballooned into 80 pages of statute and 480 pages of guidance.
Second is layer upon layer of anti-avoidance rules. The 1990s were the peak of corporate tax avoidance in the UK — the culmination of a decade-long arms race between advisers finding loopholes and HMRC introducing new rules to block them. That race has now been won, decisively, by HMRC. New principles-based rules mean tax avoidance almost always loses in the courts. But the old anti-avoidance rules still remain. A simple intragroup financing from a US parent company to its UK subsidiary requires going through nine overlapping anti-avoidance rules, involving thousands of pages of legislation and guidance.
This all leaves us with a corporation tax return that now has 985 boxes. Tax disputes take longer to resolve than ever, with legal complexity exacerbated by HMRC’s own internal processes. We’re not in Sophia Loren territory yet, but 10-year disputes are not uncommon.
All of this has a cost. Some is immediate: the National Audit Office estimates that tax compliance costs business more than £15bn each year. The more serious cost is longer term. There’s good empirical evidence that tax complexity hinders investment. I saw this in action myself. A Korean client once complained that our rules changed faster than his spreadsheets — and took his investment elsewhere.
George Osborne recognised the problem when he created the Office of Tax Simplification in 2010. But the OTS never received political support, and few of its proposals were enacted. That was a bad mistake. Its abolition in 2022 was a consequence of a political failure.
We need a kind of new OTS — one with a junior minister attached and heavyweight political backing.
Give that minister the challenge of reducing the volume of corporation tax legislation each year, by a combination of rewriting over-complex rules, and repealing unnecessary anti-avoidance. Give HMRC the resources to pursue the handful of businesses who would exploit a leaner code.
Almost every path to growth demands political trade-offs or economic pain. Reforming corporation tax is the rare exception.
