Rachel Reeves has been told by one of the world’s most influential economic bodies that Britain’s tax system is holding the country back and needs urgent surgery if the Chancellor is serious about reigniting growth.
In a pointed intervention, the Organisation for Economic Co-operation and Development (OECD) has urged the Treasury to launch an “in-depth tax review to make the tax system more efficient and growth-friendly”, arguing that decades of tinkering have left Britain with a patchwork of distortions, loopholes and outdated valuations that penalise enterprise and deter investment.
The Paris-based think tank’s latest assessment will make uncomfortable reading in Downing Street. It concludes that the UK economy is being dragged down not only by the familiar headwinds of elevated borrowing costs and sluggish productivity, but by a tax code that businesses have learned to game and that ordinary taxpayers increasingly struggle to understand.
At the heart of the OECD’s recommendations is a call to broaden the VAT base, stripping out a thicket of reliefs and exemptions that economists describe as “largely inefficient and regressive”. It is the sort of reform that could finally consign to history the long-running absurdity of HMRC having to rule on whether a Jaffa Cake is a biscuit or a cake, the kind of grey area that has generated decades of tribunal cases and column inches. The OECD suggests that any additional receipts raised by closing such loopholes could be recycled to shield low-income households through targeted transfers.
Property tax comes in for similarly sharp criticism. The OECD notes that council tax bands still rest on property valuations taken in 1991, a state of affairs no government has dared to touch for fear of triggering a political backlash among homeowners whose rateable values no longer reflect the modern housing market. Successive chancellors have kicked the revaluation can down the road, leaving a levy that economists regard as one of the most distortive in the developed world.
For small and medium-sized businesses, the case for reform has long been obvious. Entrepreneurs, accountants and owner-managers have complained for years about the sheer complexity of the HMRC code, the punitive £100,000 to £125,000 tax trap that penalises aspiration, the interaction of income tax with student loan repayments, and the cliff edges that plague stamp duty. Each has become a case study in how good intentions, bolted on year after year, can produce a system nobody would design from scratch.
Britain once had a body specifically charged with addressing these frustrations. The Office of Tax Simplification, an arms-length outfit set up to cut administrative burdens, survived for 13 years before being abolished by Kwasi Kwarteng during his short-lived tenure as Chancellor. Its recommendations were frequently ignored even while it existed, and its closure was widely seen at the time as a signal that Whitehall had lost interest in serious structural reform.
The OECD’s warning lands at an awkward moment for Reeves. Several think tanks, including the Institute for Government, urged the Chancellor to pursue wholesale tax reform ahead of last year’s Budget, when she was scrambling to fill a fiscal black hole running into billions. She now faces similar pressures later this year, with the war in Iran weighing on global growth, interest rates stubbornly elevated and borrowing costs showing little sign of easing.
The report also strays into more politically charged territory, criticising the government over conflicts of interest in its dealings with business — a swipe that will inevitably be read in Westminster as a reference to the recent controversies surrounding Lord Mandelson and Labour Together, as well as the steady stream of former MPs moving into private sector roles that have raised eyebrows on both sides of the House. The OECD recommends that legally binding commitments on violations be extended to cover politicians’ post-public careers as well as their periods in office.
Among its other prescriptions, the think tank calls for a rethink of employee training subsidies funded through the apprenticeship levy, suggesting resources be redirected towards young people who are struggling to get a foothold in the labour market.
Responding to the report, a Treasury spokesperson said the government was “already reforming the tax system to make it more efficient, modern and fair”, adding that it was “tackling reliefs that are now costing far more than intended and are disproportionately benefitting the wealthy”.
Whether that amounts to the kind of root-and-branch overhaul the OECD is demanding, or simply more of the piecemeal tinkering that has brought the system to its current state, will become clearer when Reeves stands up at the despatch box later this year. For Britain’s SMEs, who bear a disproportionate share of the compliance burden, the hope will be that she finally grasps the nettle.
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OECD urges reeves to overhaul ‘inefficient’ UK tax system