This is the seventh and final essay in a series by the Rt Hon Kit Malthouse MP on how to fix the British economy. You can read the other instalments in the series here:
- Growth is the child of capital
- Ownership and nationhood: the fight for economic belonging
- We need a competition revolution – here’s how we do it
- Unaccountable institutions have led our economy astray
- Children are at the heart of our economic growth
- Trust is the precondition for economic growth
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Out of the Shadows: A Conservative Tax Revolution
Of all the questions in politics, none is more fundamental than how a government raises its money. The tax system doesn’t just fund the state; it shapes the economy. It influences how we work, how we invest, how we grow businesses and how we live. It sends signals about effort, reward, fairness and risk. It affects every household, every company, every decision. That’s why sometimes tax can’t just be adjusted up or down; it must be rethought entirely.
This is the last essay in a series I’ve written for CapX, each one part of an ambition to help rebuild a Conservative economic message, a message that must be both effective and speak directly to the instincts and aspirations of the British people. But beyond the immediate, we need to show where we are going. Long-term signals matter. What kind of system will our children inherit? That’s the structural question this piece tries to answer.
Fifteen years ago, on the very day the 2010 General Election was called, I proposed a radical simplification of our tax system in the pages of The Times. I made the case for a single, transparent consumption tax to replace the convoluted array of levies we were navigating. At the time, this was seen as provocative and earned me angry phone calls from George Osborne and Eric Pickles, who had just launched their election campaign in which not raising VAT was a central plank.
While the proposal was compelling even then, the world has changed since in ways that make it not only viable but necessary.
Since 2010, the UK tax code has ballooned in complexity. The full set of Tolley’s Tax Handbooks, the gold standard reference for tax professionals, has grown from just over 11,000 pages to more than 25,000 pages today. This isn’t merely an administrative issue; it’s a significant drag on economic productivity. Businesses, especially SMEs, are mired in compliance, diverting resources from innovation and growth. Entrepreneurs spend too much time managing tax instead of managing people, products or ideas. It dulls enterprise and breeds avoidance.
Furthermore, you don’t have to look far to find absurdities. Take VAT: a chocolate digestive is taxed, but a plain one isn’t. And get this: if the chocolate is inside the biscuit, it isn’t taxed either. Potato crisps attract VAT, but tortilla chips don’t. In short, it’s a system where the wrong biscuit can trigger a legal battle.
Or look at the VAT registration threshold, set just high enough to encourage thousands of small businesses to stop growing. Sole traders hover immediately below £90,000 in turnover, refusing new business rather than triggering the admin and cost nightmare of registration. Meanwhile, self-employed people working from home can claim for an office chair to sit on but not a kitchen table to work at, and are left guessing what HMRC might consider ‘reasonable’. Income tax rates climb, then drop, then climb again through a thicket of allowances, tapers and cliff edges. The tax code isn’t just long; it’s incoherent.
But the distortions are especially troubling when you compare family circumstances. In a household in which both parents earn £50,000, each keeps all their personal allowances and the full child benefit. But a single-earner household on £100,000 loses the entire £2,212 in child benefit under the so-called High Income Child Benefit Charge. The result? The dual-income family ends up more than £12,000 better off in take-home terms despite identical gross household income.
And at £110,000, the penalties compound: not only is child benefit fully clawed back, but the personal allowance begins to taper away. At this level, a taxpayer loses £5,000 of their allowance, equivalent to an extra £2,000 tax bill. These effective marginal tax rates soar beyond 60%, occasionally approaching 70%, creating punishing cliffs for ambition and effort.
It’s no wonder that even HMRC sometimes can’t keep up. Just look at IR35, the infamous rules aimed at clamping down on ‘disguised employment’. After several rewrites and a government-backed status-checking tool that struggles to spit out a straight answer, HMRC has managed to create a system so opaque that even its own staff don’t seem to understand it. Contractors, businesses, and public bodies are left playing employment-status roulette. Tribunal defeats have piled up for HMRC, with judges repeatedly finding that it has misunderstood its own rules. In some cases, even government departments such as the Department for Work and Pensions and Defra, applying HMRC’s own guidance, ended up owing hundreds of millions in back taxes.
Meanwhile, the government’s official tool – CEST – can’t deliver a clear verdict in nearly 20% of cases. HMRC pursued both Gary Lineker and Adrian Chiles under IR35, claiming they were effectively employees despite working through their own businesses. After years of legal wrangling, tribunals ruled in both cases that they were clearly operating independently, and that HMRC had misapplied its own rules. This isn’t tax policy; it’s guesswork with a legal bill.
And when confusion reigns, the courtroom beckons. Tax tribunals have surged. First-tier Tax Tribunal receipts rose by 30% in the first quarter of 2024 compared to the year before, according to RPC’s Contentious Tax Review. Appeals are stacking up. The whole thing is becoming less like a system of public finance and more like a game of tax Jenga: one more rule and the whole thing might topple.
And yet we keep piling it on. Governments tinker, patch and bolt on ever more rules in the hope that some fiscal sleight-of-hand will keep everyone happy. It never does. Instead, it fuels the perception that the system is arbitrary, unfair and gamed by those who can afford the best advice.
Meanwhile, the global economy has moved on. Business is mobile. Capital moves quickly. Supply chains are international, and investment decisions are made at the tap of a screen. Companies no longer anchor themselves to one jurisdiction; they scan the globe for efficiency, clarity and opportunity. If the UK wants to remain competitive, we must offer a tax environment that welcomes, not repels, global capital. A regime that is transparent, stable and easy to navigate isn’t just good policy – it’s essential infrastructure for a modern economy.
But what if we stopped tinkering and started again? What if we phased out income tax and corporation tax altogether, and instead raised our revenue through a single, broad-based consumption tax? Yes, prices would rise to reflect the new VAT rate, but that rate would be clear, honest and universally applied. At the same time, every worker in Britain would receive their full gross income. No deductions. No PAYE. No need for payroll departments or self-assessment software or January panic.
The transition wouldn’t be overnight. It would be phased, gradually increasing the consumption tax while winding down income and corporate taxes over time. Employers would be freed from the millstone of tax compliance, and companies would stop estimating and passing on their tax bills and compliance costs to their customers via pricing models, so pre-tax prices would fall.
That’s right: every time you buy a Mars bar or a pack of digestives, you’re already paying corporation tax, you just don’t see it. Around 2.5% of the price goes straight to the Exchequer, hidden in the cost. Companies don’t pay tax; they pass it on. They guess the bill, bake it into the price and you foot it. It’s stealth taxation on a national scale.
In a new model, everything becomes visible. Transparent pricing. Clear tax. No subterfuge. You want to know what you’re paying the Exchequer? Just look at your receipt.
Then there’s the compliance burden; another silent tax on our economy. Between HMRC’s vast enforcement machinery and the army of private accountants navigating its labyrinth, we spend an estimated £10 billion a year on simply administering tax. That’s money not building businesses, not creating jobs, not raising wages – just fuelling a bureaucratic arms race. In a simplified, digital tax system, much of this cost vanishes. No PAYE to administer, no forms to file, no guessing games about what’s deductible. Thousands of highly skilled people – currently employed chasing receipts or interpreting rules – could be redeployed into more productive sectors. Even the tax inspectors could do something more constructive… like start a business.
Best of all, the technology already exists to make all this work. Every digital transaction can calculate and remit tax in real time. Government revenue would come in not quarterly or annually, but daily: automated, efficient and auditable.
Of course, cash would become the exception, not the rule. And that matters, because as cash disappears, so does the shadow economy. In 2012, 55% of transactions in the UK were made with cash. Today, it’s just 14%. The majority of economic activity is already digital – and that means it’s traceable. No more trades ‘off the books’. No more nannies and plumbers in the tax-free twilight. The net would widen, the burden would be shared and the honest would no longer subsidise the dishonest. As more transactions come into the light, rates can go down and fairness goes up.
There’s also a crime dividend. Countries like India and the EU nations have taken steps to eliminate high denomination notes deliberately to undermine organised crime and tax evasion. Fewer untraceable notes in circulation means fewer safe havens for laundered money, fewer incentives for cash-based fraud and less scope for the black market to thrive.
This kind of fundamental reform isn’t just about economics. It’s about integrity. It’s about rebuilding public trust in a system that has become riddled with complexity, loopholes and contradictions. It’s about making government honest and taxation transparent. And it’s about creating a 21st-century economy that rewards work, promotes fairness and enables growth.
This idea isn’t without precedent. Around the world, countries have experimented with tax simplification – particularly through flat taxes. Estonia, often cited as a digital pioneer, introduced a flat income tax in 1994, helping fuel sustained growth and positioning itself as a hub for innovation. Latvia and Lithuania followed suit, attracting foreign investment and boosting compliance.
Russia’s adoption of a 13% flat tax in 2001 led to a dramatic increase in revenue, precisely because people could understand the rules and see the logic. Georgia undertook sweeping tax reforms in the 2000s, slashing the number of taxes and moving from a system riddled with corruption to one lauded for its clarity and simplicity. Its ‘Ease of Doing Business’ ranking soared, and GDP with it.
Even where flat taxes weren’t adopted wholesale, simplification brought gains. New Zealand undertook bold tax reforms in the late 1980s, removing most exemptions and special treatments. The result was a system praised for its transparency and neutrality – and a country consistently ranked among the world’s best for doing business.
By contrast, look at the recent international effort to enforce a global minimum corporation tax. Determined to stop multinationals from shopping around for low-tax jurisdictions, the OECD led a push for a 15% minimum rate, an initiative the UK foolishly signed up to. But the cracks quickly showed. Countries realised it was unenforceable, and many began offering new forms of relief or workarounds. The agreement is unravelling.
This is what happens when governments try to impose a uniform tax rate on a mobile, globalised economy using an outdated model. It’s the tax equivalent of trying to trap steam in a sieve. Rather than chasing profits around the world with ever more complex rules, we should be setting a trap that invites them in: stable, simple, predictable – and in full view.
And here’s the thing: companies don’t just care about the rate; they care about the rules. Businesses will tolerate a higher tax rate if they can see it coming, price it in and trust that it won’t be changed on a whim. What they can’t tolerate is chaos. Complexity, unpredictability and constant fiddling send investment elsewhere. Stability and simplicity aren’t soft virtues: they’re competitive advantages. If we want Britain to be a magnet for capital, then clarity – not cleverness – must be our offer.
Critics of consumption taxes say they’re regressive, but that can be designed out. Essentials like food, children’s clothes, books and medicines can remain zero-rated. High-end consumption bears the burden. If you spend more, you pay more. If you save and invest, you’re rewarded. It’s not only progressive – it’s honest.
And honesty is the key. The current system lets politicians hide. Allowances here, thresholds there, a tweak to national insurance, a freeze on bands – it’s fiscal camouflage. A single consumption tax, clearly stated, applied to spending not earning, would force government to be open about what it’s taking and why.
This also changes incentives. People respond to signals. A system that rewards saving, penalises waste and removes disincentives to work is exactly what we need in order to rebuild a productive, resilient economy. It sends a message: Britain backs effort, enterprise and thrift.
Technologically, we’re ready. Online platforms, card machines, digital wallets – currently calculate VAT in real time. The infrastructure for clean, automatic tax collection is already in every smartphone and checkout system in the country.
The Conservative Party has always prided itself on being the party of economic competence and long-range thinking. As we enter a new era of digital commerce and global mobility, we must equip our economy with a tax system that matches its pace and complexity. Simplifying the tax system isn’t just good economics; it’s a statement of national confidence.
The seeds of this idea were planted fifteen years ago. Now it’s time to harvest them, and for the Conservative Party to lead a global search for a better way to tax in the 21st century.
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