Look to China says HMRC's Dave Hartnett

China has many supporters but until now it was not known that Britain's senior taxman numbered among their ranks.

Yet Dave Hartnett, HM Revenue & Custom's permanent secretary for tax, has held out China's small business tax as a potential model for Britain to ape.

He has told David Gauke, the Exchequer Secretary to the Treasury, and the independent Office for Tax Simplication (OTS) that China's new "turnover tax" has "appeared to have a very positive effect on tax compliance".

Mr Gauke has now asked the OTS to examine new ways of taxing Britain's 1.8m sole trading businesses that are earning less than £20,000 a year. Mr Hartnett said small firms were responsible for a "sizeable element" of the UK's "tax gap" and the OTS's proposals should "take into account the possible effect on tax compliance."

John Whiting, tax director of the OTS, said: "We know that China is very different to the UK. You might say we should look at the Germans or the South Africans but we have to look at any ideas in this area. We want to cast the net wide for radical ideas."

Mr Whiting said the review could result in reforms that reduced Britain's own Black Economy. "That might be a spin off. If we make it easier to comply and it's a modest bill, it might be a factor. That's something Dave has cited from the Chinese experience.

A flat turnover tax would see traders pay a flat rate of tax on gross income rather than having to comply with income, national insurance, and other taxes.

Mr Whiting said: "We are not necessarily going to reduce the bill but hopefully we will make it easier to comply."

Flat taxes on personal and corporate income are used in China, South Africa, Russia and many Eastern European countries.

An HMRC spokesman said Mr Hartnett was "not saying that the turnover tax was necessarily right for the UK".

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