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Mirrlees Review recommends "radical" tax reform

Stamp duty on property transactions is "inefficient and damaging" and should be abolished, while VAT should be levied on financial services business and income tax merged with national insurance, an independent report on taxation in the UK has claimed.

The proposal is part of a package of reforms which could increase national income by as much as 1.4%, according to figures by economic research institution the Institute of Fiscal Studies (IFS).

Its Mirrlees Review on reforming the tax system has set out a range of proposals designed to improve the current "overly complex and frequently unfair" system.

The report concluded that stamp duty land tax (SDLT) should be abolished and replaced with a reformed council tax system. This new Housing Services Tax, based on real property values, would "effectively stand in place of a VAT on housing", it said.

SDLT is charged on all land transactions in the UK, including freehold sales and the grant or assignment of a lease.

Jennie Newton, a property tax expert with Pinsent Masons, the law firm behind Out-Law.com, said that such a major change would be "unlikely" in the foreseeable future.

"Few would disagree with the review's conclusion that stamp duty land tax is a mess. However a land value tax based on realistic values would be a major change," she said.

The report suggested that a new tax which would be the equivalent of VAT on financial services should be implemented. VAT itself should be extended to nearly all spending, with existing reduced rates and exemptions removed.

The report also suggested a more consistent method of environmental taxation, including a consistent price on carbon emissions from different sources. This could include a tax on domestic gas consumption, it said.

Taxing of interest earned by standard bank and building society accounts should be abolished, the report said. Instead, only larger than normal returns on more risky corporate investments should be taxed. Any taxes should be at the same level as those on earned income, including national insurance contributions (NICs). This would "reduce distortions between different economic activities and opportunities for avoidance", the report said.

New allowances for corporate equity should also be introduced to make corporation tax fairer. Again, only profits above the 'normal' should be taxed.

Income tax and NICs should be more fully integrated. Maintaining a separate social insurance contribution "only serves to create confusion and complexity", the report said.

The idea of merging income tax and NICs is not new said Matthew Rowbotham, a Pinsent Masons employment tax expert. "The key question is whether there is the political will for such radical overhauls," he said.

"The proposals put forward are very ambitious. They would remove what many see as odd, or unfair, incentives creates by the current system and create a very different landscape for property owners and the financial services industry," he added.

The Government is already consulting on proposals to integrate income tax and NICs and will bring forward further proposals later this year. However, a Treasury spokesperson said that the cost implications of any proposed reforms would need to be thoroughly considered.

"The Government has embarked on a programme of ambitious reforms of the tax system to address the instability of recent years. These are based on clear principles to support growth, reward work, reduce complexity and increase fairness," the spokesperson said.

The Treasury said that its recent reforms had already taken over 800,000 of the lowest earners out of the tax bracket, reduced corporation tax and established the independent Office of Tax Simplification.

Sir James Mirrlees, who led the review, said that his findings showed that the current tax system imposes "unnecessary costs" on the economy.

"There is no getting away from the political difficulty associated with some of the proposed changes. But there is also no getting away from the enduring costs of failure to reform," he said.

"A government focussed on growth cannot afford to ignore some of the fundamental reforms required to the tax system," said Paul Johnson, director of the IFS.. "That does not mean small gimmicks and one-off allowances; it means a long term, considered and systematic approach to tax policy. This is an approach which has been sadly lacking for many years."

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