Is it time for a tax revolution?

The UK tax system is in need of a dramatic overhaul as it is no longer set up to deal with the increasingly competitive global economy.

This is according to Andrew Sentance, senior economic advisor to PwC, who believes reforms to the system are long overdue, as the current processes are too "rooted in the past" to deal with 21st century challenges.

This view is supported by the Institute of Directors, which labelled the current set-up as "highly dysfunctional and not fit for purpose" when calling for the introduction of a flat 30 per cent rate of income tax two years ago.

Bearing these opinions in mind, politicians, institutions and businesses should be working together to completely change tax processes so the UK is well placed to be successful in the long term.

What are the business challenges?

Mr Sentance, a former member of the Bank of England's Monetary Policy Committee, thinks businesses are becoming internationally mobile, as evidenced by the fact that 94 per cent of the world's population now live in countries that are members of the World Trade Organisation. Emerging markets are also playing a much bigger role in global trade and so the UK's tax system has to reflect this.

The UK is also faced with an age profile problem, as the age of the population is rising. Better healthcare is leading to longer life expectancy, and when coupled with falling birth rates, the result is an older workforce. With technology playing an ever-increasing role in trade, retraining these staff members could be problematic. With the economy becoming more virtual and intangible, while at the same time income inequality is on the rise, businesses are finding the tax environment ever more challenging.

What do people think of the tax system?

While most people think of income tax whenever the word 'tax' is bandied about, there are plenty of other taxes that play an important role in income generation, such as VAT, National Insurance and corporation tax.

A survey carried out by Britain Thinks established that members of the public feel there is little transparency around how taxes are raised. They also view the current tax system as hugely complex, with many never knowing how much tax they pay or will owe at the end of the year.

Political tweaking has been pointed out as one of the main problems, with different groups extracting reliefs or exemptions from politicians over the years. Citizens also feel there should be more of a 'common sense approach' to the issue, as they think simplified flat rates would leave everyone much clearer on where they stand.

Where should the reforms take place?

Mr Sentance thinks there is too big a reliance on personal income and employment in the current tax system - it makes up around 50 per cent. He does not view this system as sustainable due to the fact that businesses are becoming more mobile and "employment patterns are changing and there is increased sensitivity to the tax burden on low income households".

Greater simplicity in the tax system is a must, as a more efficient structure could be accommodated as part of a wider programme of reform. He also wants to see progress made on the role of property, capital and wealth taxes. These charges are currently heavily weighted to property ownership and transactions and Mr Sentence thinks there is an argument for rationalising the tax treatment of property.

A full breakdown of the proposals can be found here.