Leading article: Radical tax reform is the route to fairness

Britain's tax system is a tangle of levies and loopholes as arbitrary as it is inefficient

That Her Majesty's Revenue and Customs is cutting secret deals with some of Britain's biggest companies and slicing millions off their tax bills is, of course, unacceptable. That officials may be conniving to hide the details from parliamentary scrutiny, as the Public Accounts Committee is alleging, hints at an even deeper malaise. But to conclude that HMRC is dysfunctional and needs a radical overhaul, while reasonable, is only half of the answer.

The particulars of the only two such deals in the public domain make salutary reading. A "mistake" by HMRC saw Goldman Sachs let off interest payments of anything between £8m and £20m, while Vodafone settled its long-running row with a payment of £1.25bn, a fraction of the £6bn that campaigners claim was owed.

The notion of the taxman doing deals with business would be unedifying at any time; in a climate of fiscal retrenchment, it is doubly objectionable. But more corrosive still is the implication that large companies may get a better deal than everyone else. And worst of all is the assertion from Margaret Hodge, the PAC chairwoman, that the root of the problem is a "far too cosy" relationship between the Revenue and its large corporate clients.

The Revenue has been quick to deny the allegations, dismissing yesterday's report as based on "partial information, inaccurate information and some misunderstandings of the facts". Maybe so. But the allegations raise questions about governance and procedure that cannot pass unanswered. Equally, confidentiality, while a valid principle, cannot be allowed to veil questionable practices in need of reform. The activities of HMRC demand urgent, independent and comprehensive review.

But the matter does not end with changes at the Revenue. There is a far wider issue here. The defence of HMRC deal-making is that the public coffers might otherwise have received no money at all. And it is an argument that deserves to be heard.

Britain has one of the most complex tax systems in the world, a near-incomprehensible tangle of levies, exemptions and loopholes that is as arbitrary as it is inefficient. Big corporations employ specialist lawyers to ensure they get the best possible deal, leaving the state to pursue them in the courts just to establish what is actually owed. The contention that a settlement is at least cash in the Government's hand is not disingenuous. But it does underline the paramount need for a radical simplification of the tax system.

For politicians of all persuasions, pledges to crack down on both tax evasion (illegal) and tax avoidance (legal) are hard to beat, combining easy moral posturing with huge (and unverifiable) potential revenues. Few do much about it. One of the most vociferous of recent crusaders was Gordon Brown, who claimed in 1994 that as Chancellor he would "rewrite the tax rules". In fact, Mr Brown's endless tweaks to the system only made the situation worse, adding yet more layers of complexity and yet more opportunities to be clever.

George Osborne must do better. He, too, has promised to eradicate "morally repugnant" tax evasion. He has found £900m to fund HMRC's enforcement efforts and made moves to close specific loopholes. But neither will be enough. He should take the opportunity to simplify the entire system of individual and corporate taxation, stripping out the distortions of overly convoluted rules on everything from VAT to housing taxes to National Insurance.

In the light of recent revelations, it is clear that HMRC is defective and in need of reform. But the system it administers is at least part of the problem. Mr Osborne has talked tough on tax simplification. With Britain facing economic stagnation and £25bn worth of uncollected taxes, it is time for him to turn talk into action.