Rachel Reeves must simplify UK tax rules to drive growth warns OECD

The Organisation for Economic Co-operation and Development has advised Chancellor Rachel Reeves to undertake a comprehensive simplification of the UK tax system if the Labour government aims to fulfil its growth aspirations. The OECD has highlighted that the existing complexities in the tax framework hinder employment and economic growth, imposing significant compliance costs on businesses and individuals.

Specifically, the OECD pointed to the convoluted nature of the UK’s VAT reliefs, which have resulted in protracted legal disputes over exemptions for various items, including Jaffa Cakes. Additionally, the organisation recommended updating council tax valuations, a politically sensitive issue that could significantly increase tax bills, particularly in high property value areas such as London, where house prices have surged since the last valuation in 1991.

Previously, the OECD has suggested eliminating stamp duty, a tax on property transactions, and reconsidering the pensions triple lock to stabilise public finances. The latest recommendations are outlined in the OECD’s ‘Foundations for Growth and Competitiveness 2026’ report, issued after Reeves raised taxes by nearly £80 billion during her initial two budgets, which included a £25 billion increase in employer national insurance contributions.

Recently, the OECD indicated that the UK could face the most severe downturn in growth among G20 nations and the highest inflation rate among G7 countries due to escalating tensions in the Middle East. The organisation advised the Chancellor to commission an extensive tax review to enhance efficiency and promote growth by addressing distortions, closing loopholes, and eliminating reliefs that lack clear economic or social purposes.

While reviews of this nature have been conducted previously, such as the Mirrlees Review in 2010 by the Institute for Fiscal Studies, which advocated for merging income tax and national insurance contributions into a single tax, the momentum for reform appears to have stalled. The Office of Tax Simplification was abolished during Kwasi Kwarteng’s brief tenure as Chancellor in September 2022.

The OECD also noted that many young individuals leave education lacking essential skills, underscoring the necessity of strengthening transitions from education to employment. It pointed out that businesses often utilise apprenticeship subsidies to cover training costs of existing employees rather than hiring new talent, suggesting that these funds should instead support youth employment.

Moreover, the report indicated the need to enhance women’s participation in the workforce by offering comprehensive childcare support to job seekers actively looking for work. The proportion of women among the UK’s inactive population is significant due to family and caregiving responsibilities.

Issues within the income tax system discourage workers from reaching certain income thresholds. For example, when an employee’s earnings exceed £100,000, both their personal allowance and childcare benefits begin to taper off, resulting in disproportionately high marginal tax rates. Many tax thresholds have remained frozen since 2021 as per a policy announced by former Chancellor Rishi Sunak, a decision set to be one of the largest tax increases in British history after Reeves extended this freeze into 2031 despite previously stating she would not raise taxes on working individuals.

The government has yet to provide a comment on these matters.