When historic tax principles meet modern practices

I recently dealt with a relatively simple question whose answer was not straightforward. This was because the facts did not fit easily within the structure of tax legislation. How to report the matter on a tax return was even more complex. This experience started me thinking about the extent that tax has kept track of modern practices.

Taxation is not a new concept. It was in 1789 that Benjamin Franklin was reputed to have written, “In this world, nothing can be said to be certain, except death and taxes.” Income tax was introduced in the UK in 1799 as a temporary measure to fund the Napoleonic wars, with predecessors to the current inheritance tax existing since the 17th century. In more recent times we have had new taxes introduced such as Capital Gains Tax (1965) and VAT replacing purchase tax in 1973. Within the twenty first century there has been a shift towards industry-specific taxes such as Banking Profits Tax (2016), Sugar Tax (2018) and Plastic Packaging Tax (2022).

Whilst a specific tax might be new the concept of taxation is by no means new. The principles of taxation and the administrative machinery behind them have remained relatively stable for over 200 years. The question is the extent to which these long-standing principles are valid for the modern world.

For almost all of the time that taxes have existed the payers of a tax have had clearly defined incomes with obvious locations from which activities are performed.

With modern working practices as basic a question as “Should someone be paid through the payroll” causes difficulty. The expansion of the gig economy has meant that people may not be clearly identified as employed or self-employed. HMRC recognised this difficulty and introduced the Check Employment Status for Tax (CEST) tool, which was designed to confirm the status of a person. The CEST tool has been criticised for its difficulty in usage. Fortunately, HMRC have acknowledged the validity of various criticisms and it has become more user-friendly over time.

HMRC are not the only party struggling with the complexities of employed versus self-employed. The Courts have been grappling with these concepts. In recent years they have generated the concept of an employee, a worker, and a self-employed individual. Workers are a group who generally perform work personally but are not running their own business and can apply for core protections such as National Minimum Wage and paid holiday. Given that the tax system only identifies a person as being employed or self-employed, it is no wonder that the taxation of the gig economy can be difficult to unravel.

The tax system is geared towards bricks and mortar operations and, therefore, decentralised and/or remote operations cause difficulty. Decentralisation allows for activities to be performed anywhere in the world with the tax authorities requiring ever-increasing amounts of reported information to try and understand global supply chains, allocation of profits and locations of productivity. This has led to matters such as country-by-country reporting and Pillar 2 profit allocation administration.

The e-economy has caused the OECD to consider the extent that an automated process performed by a computer leads to taxable profits being generated in the location of the server. Whilst the UK tends to follow OECD conclusions, it has publicly stated that it does not believe the OECD's conclusion is accurate in this regard. Therefore, the analysis of a server in the UK may lead to different tax profiles from, for example, a server in France.

Even leisure activities can lead to tax complexities. HMRC have had to grapple with the question of whether cryptocurrency gains are increases in the value of holding money, or they are the product of speculative investment returns. Cryptocurrencies are not the only asset class which has caused difficulty. Taxpayers have also had uncertainty about growth in short-term holding of investments. Would that growth be an investment return or was the asset held for such a short period that its resale constitutes a trading activity?

In summary, the world has had a dramatic shift in activities, both business and personal. The UK tax system remains based on historic principles and administrative mechanisms. Those mechanisms do not necessarily fit neatly into the modern world, with the impact being greater administration and ever-increasing tax treatments which are not certain.