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How to improve tax policy

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19th Jan 2017
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Why is the formulation of UK tax policy subject to much secrecy and limited scrutiny? The CIOT and IFS conclude there is a way to draft better Budgets.

Budget process

We all moan about the complexity of the UK tax system, which gets worse with each Budget announcement. As a step towards tackling this legislative hydra; the Institute for Government (IFG) brought together representatives from the Chartered Institute of Taxation (CIOT) and the Institute of Fiscal Studies (IFS), to discuss how the government could produce Better Budgets. Their report was published on Monday.

Tax policy

The working group quickly identified a root cause of bad budgets as poor tax policy. After taking evidence from many contributors they came up with 10 steps towards improving the formation of tax policy. The goal is to achieve a Budget process which contains fewer tax measures, which are each better thought out.

  1. One event  

A significant contributor to poor tax policy is the political need to announce a change in every Budget to grab the news headlines. The group suggested that Budget statements to Parliament should be limited to one per year to the reduce the temptation to make tax changes for changes sake.

In the Autumn Statement the Chancellor Philip Hammond eagerly took up this early finding, and announced that from 2018 there would be only one fiscal event per year, in the Autumn. Unfortunately, 2017 will be the transitional year, so we will suffer both a Spring and an Autumn Budget this year. 

  1. Guiding principles

The Chancellor should set out his priorities for, and approach to the tax system, shortly after taking office.

  1. Have a plan

Each area of tax needs a roadmap which sets out the purpose and direction of any changes alongside a timetable. This was achieved for corporation tax in 2010, but the roadmap for business tax in 2016 was less effective. However, the roadmap approach should not mean different taxes are developed in isolation.

  1. Early stage consultation

The government should hold open consultations to cover the early stages of framing tax policy, to identify the problem and call for evidence. Too often the tax consultation documents which propose changes jump straight in at the detail/ implementation stage, after the direction of travel and perceived solution has already been decided by the government.

  1. Pro-active consultations

The Treasury and HMRC should take up the proactive approaches to consultation developed by the OTS. These include going holding face-to-face sessions around the country talking directly to business groups and specialist advisers. HMRC should make use of the data gathered by the OTS in these sessions, and not repeat the consultation exercise on the same topic. The OTS should be given a more formal role in the consultation process.

  1. Independent reviews

Some areas of tax policy need a fundamental strategic review, such as the tax treatment of property. The government should commission independent reviews to look at these areas, to ask the questions which are too sensitive for political bodies to address. The OTS review of income tax and national insurance is an example of how such reviews could work. 

  1. Tax expertise in the Treasury

The Treasury needs more tax expertise, to be drawn both from the civil service and from external secondments. The split of responsibilities for tax policy between the Treasury and HMRC must be kept under review.

  1. Remove secrecy and invite challenge

The Budget process is unique within government as the policy announcements are kept secret until the Chancellor speaks. This means there is no expert challenge to the proposals from outside the  group of civil servants working on the issue within the Treasury.

When government departments propose spending money they are challenged on value for money criteria by the Treasury. Tax reliefs proposed by the Treasury should be challenged in the same manner as spending proposals.

Estimates of the impact of tax regulation should be subject to the same scrutiny as other regulations. HMRC should be required to produce TIINs alongside tax proposals and not wait until the legislation is drafted. Those TIINs should be subject to external challenge.

  1. Enhance parliamentary scrutiny

Finance Bills are very long and technical, and are guaranteed parliamentary time for debate, but the allotted time is not always fully used at committee stage. The Finance Bill committee should be permitted to take oral evidence from businesses and tax experts on key themes before debating the finance bill clauses. It should also be permitted to call on expert support to look at the draft tax legislation.   

There should be more effective liaison between the Treasury Select Committee and the House of Lords Economic Affairs Committee and the Finance Bill Committee, to ensure the results of pre-legislative work inform legislative scrutiny.

  1.   Evaluate tax measures

Finance Acts are exempt from post implementation scrutiny. An assessment of the impact of tax measures should be made three to five years after implementation, preferably carried out by an external body such as the OTS.  HMRC should open up its data lab to more external researchers.

Government response

Jane Ellison, the financial secretary to the Treasury, responded to the report, saying that the Treasury does want to listen to external views. In particular, it is useful for ministers to hear directly from businesses on how a tax relief would be useful, or why a particular tax measure is burdensome.     

What you can do   

The theme running through the report’s recommendations is a need to increase consultation on tax policy at an early stage, and to seek out more views before the law is passed.

You can get involved in tax consultations by responding directly, or by sending your views to your professional body. You can also talk to your own MP, as they do listen to constituents who take the time to meet them face-to-face.

 

What measures would you put forward to improve tax policy?

Replies (10)

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By RobertD
19th Jan 2017 17:37

How many of those boxes are ticked with the changes to FRS and the MTD fiasco?
Only 3.. Have a plan.
A plan so cunning you could stick a tail on it and call it a weasel.

Thanks (1)
Chris M
By mr. mischief
20th Jan 2017 08:34

Unfortunately this respected panel have omitted the one key change which would help the most:

11. Disband the Numpty Department at HMRC and ensure its former members have no influence on proposed changes to tax law.

Thanks (4)
Replying to mr. mischief:
Head of woman
By Rebecca Cave
20th Jan 2017 09:40

If you read the full text of recommendation no. 7 in the report - that is pretty much what the panel is saying.

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Replying to Rebecca Cave:
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By raybackler
23rd Jan 2017 11:56

Point 7 is the Sir Humphrey response. If it gets labelled as the Numpty Department, the message will be far clearer, so I'm with mr.mischief.

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Replying to Rebecca Cave:
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By rbw
23rd Jan 2017 21:25

taxwriter wrote:

If you read the full text of recommendation no. 7 in the report - that is pretty much what the panel is saying.

Well that's a possible reading of it. But it seems to be another is that the O’Donnell Review may have got it wrong by splitting policy from operations and breaking up the cadre of people who did largely spend their whole careers dealing with both tax policy - something which seems to be recommended for reinvention.

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By ajudes
23rd Jan 2017 10:12

Message to the Chancellor and three actionable points for the Treasury to consider

Make tax permanent

We have an antiquated system whereby tax is imposed on a temporary basis for one year at a time and if a budget is not passed by 5 August your right to collect tax (under the Provisional Collection of Taxes Act 1968) lapses and refunds must be given of tax paid since 6 April. This harks back to the earliest days of the tax system when income tax was introduced as a temporary tax in 1799 to finance the war against Napoleon. The consequence of this is that there is never enough time for Parliament adequately to scrutinise tax legislation and there are always problems and unintended consequences associated with introducing tax legislation in a hurry. My first recommendation is therefore to make tax permanent. In this way the budget can be a simple exercise in setting tax rates and new legislation can be introduced in an orderly, strategic way without any artificial deadline of 5 August. This small change will revolutionise the way that tax changes can be introduced​ and allow you to impose order and planning on a presently chaotic system.​

Make tax simple

We have one of the most convoluted and complex tax systems in the world. It is unnecessary. There are some easy radical ways to simplify it and you will have the time to do this properly if you make tax permanent. Start by getting back to the basics that existed when Nigel Lawson was able to announce a Public Sector Debt Repayment rather than a Public Sector Borrowing Requirement. This needs the following ingredients:

Lowering of the maximum rates of income tax and capital gains tax to that of corporation tax
Scrapping all special allowances and lower rates for business assets

I discuss these briefly below.

Lowering of the maximum rates of income tax and capital gains tax to that of corporation tax

The increase by Labour of income tax to 50% ​wa​s perverse.
​ ​​The action to move it to 45% was half-hearted and dictated by the facts of coalition politics.​
You need to lower the top rate of tax to 40% almost immediately and have a vision perhaps for the next Parliament of a top rate of tax equal to corporation tax, with capital gains tax at the same rate as income tax. This lowering of tax rates will send the message that you do not care how income is generated or wealth created, the rate of tax will be the same. It will remove all of the artificial bias in favour of one form of activity over another (income v gains) and encourage the creation of business, employment and wealth in the UK on an unprecedented basis. The UK will be the European hub of successful business and companies and entrepreneurs will locate in the UK with the result that your tax take will increase hugely. Tax consultants who simply help clients shift income taxed at
​ ​4​5% to gains taxed at 18/28%​ will be redundant and can help their clients instead focus on wealth creation and not tax avoidance.

Scrapping all special allowances and lower rates for business assets

A key part of the simplification is to get rid of the myriad collection of allowances that give specific tax breaks. These effectively reduce high rates of tax for the well advised. By reducing the high tax rates you create the opportunity for scrapping the allowances and so ensuring that all income and gains are liable to tax. Let the accounts of the business prepared and audited in accordance with IFRS standards be the basis for taxation. You will be able to reduce the number of Inspectors of Taxes as well. Abolish the concept of favourable capital gains tax for business assets; if CGT is low enough these assets do not need treatment that leads to a bias and distortion in the market.

​These are three actionable​ plans that will make a difference to the economy

Thanks (1)
Replying to ajudes:
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By raybackler
23rd Jan 2017 12:22

I have never understood the need to separate capital and revenue as far as taxation goes. The pound in your pocket is.... the pound in your pocket.

Why should someone who has spent £1000 of cash on a computer in a big business get treated differently from smaller businesses who can use the Annual Investment Allowance. Capital Allowances are a political football. If you spend a £1, you should get tax relief on a £1.

Whilst I agree with the sense behind having a single tax rate, those who are attracted from overseas by a low corporation tax rate, then have to swallow the hidden tax of Employers NI. For the giant businesses who are adept at avoiding Corporation tax, this is often the only tax they pay.

The true rates of income tax for an employee when adding in NI are 32% rising to 42%. The true rate for the self employed is 29% rising to 42%. The true rate for large Corporations is about to be 32.8%. Where the employment allowance can be used for small director companies, the rate is 19% Corporation tax, plus 7.5% Dividends Tax, which nets down to 6.0% after tax, so this is equivalent to 25% tax, rising to 45.3% once the higher rate dividend tax is reached.

These rates across the various taxes are closer together than the headline tax rates. Unfortunately, politics will always override common sense, because the headline rates will always give political clout for the opposition (of whatever hue).

Thanks (1)
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By johnjenkins
23rd Jan 2017 12:46

Let's get rid of the word "Tax", because we are not paying a tax we are contributing to the health and welfare of our country and the people living in it.
So we work out what we need for the basics then divide that by the number of people working (including Ltd's and partnerships). So we now have a figure each entity has to contribute. A decision then has to be made if an amount "free of contribution" should be allocated and if so "how much". Of course, "benefits" also come into the equation.
Anything else, like Trident etc. will have to be paid for separately with a supplement (tax if you like).
There is also a case for an indirect contribution system rather than an income based one.
Whatever the outcome HMRC should be disbanded and reset with just investigations and collections under their control. Yes us Accountants will deal with the administration which wouldn't amount to much more than we do now.

Thanks (1)
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By North East Accountant
24th Jan 2017 09:52

Stop politicians meddling

Thanks (1)
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By AndrewV12
24th Jan 2017 13:15

Lets pick one ...... number 8

Remove secrecy and invite challenge.

Not so sure about this one, as mentioned in 1, lots of stuff is leaked in advance of the budget, whilst on budget day, lots tax policy is omitted, it seeps out over the following weeks. During one Budget George Osborne rattled on about Academy schools, to find out the bad news about the budget you had to read and interpret a large budget report.

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