Save content
Have you found this content useful? Use the button above to save it to your profile.
Why do we get bad tax law? | accountingweb
iStock_amnajkhetsamtip_legislation

Why do we get bad tax law?

by

Rebecca Cave asks how bad tax law comes about and suggests how the process could be made better.

18th Jan 2023
Save content
Have you found this content useful? Use the button above to save it to your profile.

There is no question that the UK tax legislation contains some bad tax provisions. Just two examples are the High Income Child Benefit Charge (HICBC) and the Loan Charge. By bad tax law I mean provisions that exhibit any of the following attributes:

  • retrospective 
  • costly to implement 
  • unfair or discriminatory
  • creates economic distortions or disincentives.

The question I want to address is: how do bad tax laws come about and pass through all the stages of planning, consultation and parliamentary scrutiny, to end up on the statute book?

Starting with an idea

All laws start with an idea. In an ideal world the ideas that eventually become legislation should grow out of well-thought-through policies that fit into a wider strategy. 

The UK Government does have a number of tax and trade strategies, as set out on this tax policy map. But to form effective and lasting strategy you need solid strategic thinking and leadership – two elements that have been lacking in the UK government lately. 

Who leads on what?

In the UK responsibility for tax strategy and policy development sits with HM Treasury (HMT) and HMRC is responsible for tax policy maintenance and implementation. HMRC and HMT work closely together, as the leadership of both departments is based in the same building in Whitehall. But HMT is headed by a team of government ministers, whereas HMRC must report to Parliament through a Treasury Minister, indicating that HMRC is subservient to HMT. 

The Office of Tax Simplification (now abolished) was part of HMT, but it didn’t have the power to demand that tax policy or existing tax laws should be changed. Some felt that the OTS reports were largely ignored by the HMT policymakers. 

The ten-year strategy for modernising the tax system carries the HMT stamp, but the core part of that strategy, Making Tax Digital (MTD), is the responsibility of HMRC. Wendy Bradley explained why this matters in 2018, and since then the senior responsible owner (SRO) of the MTD project has changed several times.

If the strategy is muddled or the leadership for elements of the strategy is ineffective, the result is a mess. 

Consultation process

There is the potential for bad tax policy ideas to be spotted and removed during the consultation process. 

In 2011 HMT and HMRC launched a tax consultation framework. This specifies five stages of consultation:

  1. Set out objectives and identify the options.
  2. Determine the best option and develop a framework for implementation including detailed policy design.
  3. Draft legislation to effect the proposed change.
  4. Implement and monitor the change.
  5. Review and evaluate the change.

Prior to stage 1 there may be a “call for evidence”, but the evidence gathered does not always make it into the policy options. In many cases the consultation process starts part way through stage 2, when HMT has already decided on a policy option and wants ideas on how to implement it.

In 2016 the OTS pointed out that stage 5 of the consultation process is largely missing, as there is:

  • no systematic process to assess whether the measure delivered value for money
  • no systematic checking to see that the measure was still appropriate and/or needed
  • no systematic assessment of whether it was operating properly
  • no system for keeping measures up to date.

This hasn’t changed since 2016. 

The OTS recommended that sunset clauses should be introduced for new tax measures to force evaluation of the measure in the light of experience. This has happened occasionally, but it is not common practice. 

Skilled job

Tax legislation is drafted by civil servants. It’s a very skilled job, but mistakes do happen. The existing body of tax law is very complex and sometimes it is not easy to see how a new provision will affect other parts of the tax machinery. Inserting new law into old legislation can also result in very convoluted numbering (such as ITEPA 2003 part 7A) and byzantine cross references. 

The Tax Law Rewrite project, which ran from 1996 to 2010, successfully redrafted a number of key tax Acts to make the law more readable and easier to follow. However, the project was discontinued before it had tackled the Taxes Management Act 1970, and its remit didn’t extend to the hundreds of tax regulations (statutory instruments) that are passed with little scrutiny.

Parliamentary scrutiny 

Most tax law starts its parliamentary journey in a draft Finance Bill. National insurance contribution (NIC) measures are included in separate National Insurance Contribution Acts, because NIC “is not a tax” (an argument for another day). 

The draft Finance Bill is supposed to be examined line by line by the Finance Bill committee, which is established for that particular piece of legislation, and this can be a daunting task given the size of many Finance Bills. In practice, most of a large Finance Bill is voted through by the committee as there isn’t sufficient time to discuss the proposals in detail. 

Unlike Parliamentary Select Committees, the Finance Bill committee will have a government majority. This means that amendments put forward to Finance Bills are almost always guaranteed to fail unless they are government-backed amendments. Voting for an opposition amendment is a career-limiting act for an MP from the governing party. 

There is a House of Lords committee (Economic Affairs Committee Finance Bill sub-committee) that examines the operation of Finance Acts, but it has little real power.

How to make it better

A route to better tax legislation must start with tax policy formation, which needs to draw on the experiences of subject experts as well as a wide variety of individuals and businesses. This type of wide-ranging consultation, which the OTS used to carry out, was a good model. But as the OTS wasn’t independent (like the Office of Budget Responsibility), it was easy to ignore, and ultimately abolish.

The second criterion for good tax policy is that it needs to be made with a view to the long term. Unfortunately, most governments tend to focus on the next four to five years when the party needs to win the next general election.

Parliamentary procedures need to be reformed to ensure there is time for effective scrutiny of tax measures in a non-partisan environment. The current public bill committees are not effective scrutineers as the built-in government majority means sensible amendments are often ignored.

We also need a fairer voting system so we end up with a Parliament that is representative of the population, and which forces different political groups to co-operate for the good of the county.

Replies (27)

Please login or register to join the discussion.

avatar
By Hugo Fair
18th Jan 2023 16:24

All good points ... especially regarding policy formulation and the subsequent lack of accountability as attempted implementation founders on islands (rather than integration) of competing taxes.

But I fear the most basic step is still being omitted - even from HMT's/HMRC's 'framework'.
Namely you can't properly "Review and evaluate the change" UNLESS you've quantified the measurable objective(s) right at the start of the project - and put in place the resources to take accurate measurements *before* (as well as during the process of) making changes.

Of course this leaves much less wriggle-room than fuzzy objectives do, but it does allow accurate assessment of the effectiveness of the changes when implemented - and, more importantly, it also provides the basis for measuring (or even merely modelling) potential future tweaks.

In short, if the intention is to increase effective tax law then you need to be able to reference the effect it is having (before and after changes) ... not, as is currently often the case, re-defining the objectives after the event in order to claim (an unquantified) 'success' whilst only benefitting the mandarins (not the country at large or any intended individual taxpayers).

Thanks (4)
paddle steamer
By DJKL
18th Jan 2023 16:35

You need to know where you want to go before you set out rather than pivoting the ship of state at every sign of bad weather.

( The worst thing about computers has been it has become very easy to change documents which , due to ease of executing, encourages tinkering, doing nothing is at times a skill that is often sadly lacking these days- we should really vote for lazy politicians)

Thanks (2)
avatar
By Justin Bryant
18th Jan 2023 17:43

How to make it better?

Ask someone like me to write it i.e. someone who knows their stuff with real world tax advice experience, rather than some clueless Parliamentary Counsel (or even worse, HMRC).

Here's two recent good examples of HMRC not understanding their own legislation due to its unnecessary complexity.

https://www.accountingweb.co.uk/any-answers/dotas-penalties-toothless-ag...

https://www.accountingweb.co.uk/tax/personal-tax/hmrc-hammers-away-at-hi...

Thanks (2)
Replying to Justin Bryant:
avatar
By Justin Bryant
23rd Jan 2023 15:04
Thanks (0)
the sea otter
By memyself-eye
18th Jan 2023 17:47

Bad tax law?
Because politicians like soundbites..

Simples.

Thanks (0)
Replying to memyself-eye:
avatar
By Hugo Fair
18th Jan 2023 21:03

Which just goes to show that what works for a Meerkat is not fit for purpose when designing rules (including taxation) for human social societies!

Thanks (3)
By ireallyshouldknowthisbut
19th Jan 2023 11:00

I thought tax law worked like this:

1. Political idea on back of fag packet
2. Tell Civil Servants to draft something, they come back with some issues.
3. Ignore issues, announce anyway
4. Civil servants try and sort the least worst option
5. Its law
6. Accountants find holes in it.
7. It either says as it is, full of holes (especially if a chum has paid for those holes in the first place), or further legislation passed to deal with the holes is passed some years later.

Thanks (3)
Replying to ireallyshouldknowthisbut:
avatar
By Justin Bryant
19th Jan 2023 11:55

Yes. As they say:

Laws are like sausages. It’s better not to see them being made.

Or

To retain respect for laws and sausages, one must not watch them in the making.

Thanks (3)
Replying to Justin Bryant:
avatar
By raybackler
20th Jan 2023 09:54

There won't be many accountants on AWeb that have actually run a sausage factory - 500 tonnes per week!

Nothing wrong with manufacturing sausages. I can't say the same for where the raw materials come from - its slaughterhouses that are not pretty.

Which brings me to how tax legislation is developed. It is more reminiscent of the slaughterhouse than a sausage factory. It is usually a blood bath.

Rebecca and the contributors above have made some excellent points. Worst of all is poor consultation and failing to listen even when heading for a brick wall.

How on earth can we get a 60% tax rate sandwiched between 40% and 45%? How does a single earner claiming child benefit end up with a tax rate of 52.60% on the income between £50270 and £60000 and be much worse off than where the family has two working?

Taking National Insurance into account the real standard rate tax is 32% rising to 42% at £50270, then rising to 62% at £100000, then dropping back to 47% at £125140. The policy for taxing employees is all over the place.

Thanks (3)
Replying to ireallyshouldknowthisbut:
avatar
By Philb8807
20th Jan 2023 10:31

That is pretty much it. The Govt always wants a simple solution, HMRC points out that keeping it simple results in scenarios of blatant unfairness. Govt insists it must also be fair. HMRC points out simplicity is lost and high solution cost. Result solution is bodged and is neither simple nor fair.

Thanks (0)
avatar
By rememberscarborough
19th Jan 2023 13:24

If tax law was simple why would people need lawyers and accountants? Turkeys don't vote for Christmas....

Thanks (0)
Replying to rememberscarborough:
avatar
By Hugo Fair
19th Jan 2023 13:52

They might if they didn't understand the impact of doing so (as seems to be the case with a substantial portion of the electorate)?
Maybe they think 'getting stuffed' has a different meaning. :+)

Thanks (1)
Mark Lee headshot 2023
By Mark Lee
19th Jan 2023 18:19

Good analysis and ideas Rebecca. Reminded me of one surprising revelation at the time of the tax law rewrite project. We were confused why Finance Bills were being written in the 'old style' such that amendments to rewritten laws stood out like a sore thumb.

It transpired that Finance Bills are written by whichever parliamentary draughtspeople are available. So they are written using the same techniques and approach as ALL parliamentary legislation. That was when I concluded that the rewrite project was doomed to fail!

Thanks (2)
avatar
By johnjenkins
20th Jan 2023 10:30

When my clients ask me "how do I reduce my tax bill?" I give them the same answer, "Don't concentrate on getting your tax bill down, concentrate on what makes your business tick and expand on that." The ensuing tax bill reduction will be natural.
I give that same advice to Government. Concentrate on what makes our country tick and expand on that. Forget trying to increase the tax yield. Our tax system is so full of sticking plasters due to the want of increased taxation, nothing more.
I will give just one example. IR35. If HMRC kept their noses out of employment status then that would be a start. This constant concern for increasing taxation is doing more harm than good. We are taxed up to the eyeballs and then Government wonder why we fight back.

Thanks (7)
avatar
By listerramjet
20th Jan 2023 10:33

Actually the basic problem is that there is too much tax, coupled with the fact that the politicians don’t understand it.
To much in the sense of too many taxes, but also in the sense of how much money they seek to collect. It might make sense to look at what it is spent on, and perhaps reducing it to that which government might reasonably do rather than what it actually does. But the link between tax receipts and spending was broken many moons ago.
So the first step to “better tax law” would be to simplify, by getting rid of many of the different taxes.

Thanks (4)
avatar
By Self-Employed and Happy
20th Jan 2023 11:15

You don't need to go into so much detail.

Who writes the tax law?

Civil Servants who largely have no business or qualifications to enable them to be able to put together a decent tax system, Civil Servants who want to make a name for themselves politically and therefore make themselves slaves to politicians whom they wish to curry favour with at a later date.

These politicians are then massaged and lobbied by big accounting firms who want to direct the eyes off of certain areas to enable them to retain the wealth of their clients or at least get a head start on any legislative changes.

Its about time HMRC was gutted from top to bottom and they actually employed accountants, I've said many times on here before that I believe you could select 100 random ACA / ACCA / CTA people to run HMRC and create policy / systems and it would be 100 times better than the failure of a public body that it currently is.

You then also need to look at the software companies who are also clearly lobbying politicians, those same software companies often don't have good enough internal accountants advising them on how updates to tax should work / what the output should be and therefore they make errors in the design stage.

It's still amazing to me that HMRC doesn't have it's own seat on the cabinet, all these positions in cabinet that decide how we spend the money but no one thinks how we bring it in is equally as important.

Thanks (4)
avatar
By Mike Warburton
20th Jan 2023 11:35

Another excellent article Rebecca
One of my former partners became an MP and served on various treasury committees. He told me that when debating a finance bill at the committee stage he would frequently find that it was only him and the government representative promoting the clause being debated who truly understood the technical issues involved.
I have the opportunity to give my thoughts in the Daily Telegraph online Money edition and what you are saying is entirely consistent with some comments I have been making there.
Mike

Thanks (4)
avatar
By tim hervey
20th Jan 2023 12:00

Good article. There is too much short termism in politics and tax policy-making with political point-scoring on most politician's agenda, especially those in the opposition parties.

"The Office of Tax Simplification (now abolished)" - strictly speaking this is not the case. It will formally close when the Spring 2023 Finance Bill receives Royal Assent.

As for the comment "You then also need to look at the software companies who are also clearly lobbying politicians, those same software companies often don't have good enough internal accountants advising them on how updates to tax should work / what the output should be and therefore they make errors in the design stage.", as a CTA who works in the tax compliance software industry, and has done so for 25+ years, I don't agree with all parts of that comment. Clearly, the debacle of MTD for ITSA (which I'm not involved with) has meant software companies needed to point out, and lobby HMRC about, the many technical issues. As for 'good enough internal accountants advising them', there may well be some truth in that but I hope I am good enough!

Thanks (0)
By Nick Graves
20th Jan 2023 12:04

Go full Rothbard.

The problem will fix itself.

Thanks (1)
avatar
By Mr J Andrews
20th Jan 2023 14:17

Why do we get bad tax laws ? In the main they are ill conceived but pushed through ideas by out of touch politicians.
The wantoness of George Osborne's whim attacking the compliant hardworking backbone of our society with his vision of making the plebeians suffer with MTD may have gone down well by his mates at the Bullingdon Club. The ribaldry of Nigel Lawson's Mobile Phone tax may have sounded good after a glass of port or two. With dog attacks at an all time high , Bob Cryer's Dangerous Dog tax certainly had no effect on its aim - ridding the country of fighting dogs. It goes on.

Thanks (1)
Replying to Mr J Andrews:
avatar
By johnjenkins
20th Jan 2023 14:34

Don't forget IR35 where the status of a Limited Company is just taken away to suit a perceived increase in the tax take.

Thanks (1)
avatar
By meadowsaw227
20th Jan 2023 14:37

I see nobody has addressed one of the real problems which is so called clever accountants constantly pushing the boundaries/laws to the limit (and in some cases past it) ending up with government having to implement further legislation try and sort out the ensuing debacle .

Thanks (1)
Replying to meadowsaw227:
avatar
By johnjenkins
20th Jan 2023 14:50

If it is a bad tax and Government won't listen there is only one way to show how bad it is. Business cannot go on strike like workers do. So how else do you let them know.
MTD QU is stupidity in its greatest form yet even the Government won't listen. Again we are taxed up to the eyeballs on income and expenditure so it's human nature to fight back. Sensible conversations with those at ground level will always be the way forward.

Thanks (3)
avatar
By maasrw
20th Jan 2023 14:53

The real problem is that Parliament no longer cares! Anyone who doesn't believe me should read, say, the Finance Bill 1972 debates in Hansard when parliament used to scrutinise the legislaion and then read the Finance Bill 2022 debates. In 1972 all MPs from both parties moved substantive amendments which lead to debates on the details.

Nowadays the government tells Parliament, "All the clauses have been consulted on so what you have in front of you is what HMRC want plus those of the changes that others wanted that HMRC are prepared to make. You don't need to know what proposed changes HMRC turned down. You've all got better things to do than worry about tax. The Bill does what HMRC want so all you need to do is formally approve it. We have a Finance bill every year, so it doesn't really matter if the wording is defective. We can patch it up next year or the year after."

In Standing Committee no one (other than the government) any longer puts forward any substantive changes to the text. They simply have a (normally very brief and often non-existent) debate on the general principle of the clause.

It is ridiculous to think that this system can ever produce good legislation.

Thanks (0)
avatar
By moneymanager
20th Jan 2023 17:19

The most pernicious tax of all and which appears in no Statute so far as I know, isn't under the realm of HMRC, nor now even HMT, the "independent (or rather beholden to the BIS) Bank of England" will create billions at the press of a button, inflation, more properly known as the willfull debasing of a currency is the core issue.

In one of his final hustings speeches, Winston Churchill confused soverignty with solvency, he recoverred his position by saying that you couldn't have one without the other, wrong on many matters, profoundly correct on that.

Thanks (1)
avatar
By MartinLevin
21st Jan 2023 15:26

Doesn't the FACT that legislation is drafted by "legally trained" people, who seemingly have lost the plot, indicate the source of the weakness?

Thanks (0)
avatar
By Mallock
21st Jan 2023 18:11

Once i have finished with all the Tax Returns I will then move on to planning remuneration, bonuses, dividends, gift aid and pension contributions for countless clients who are very keen to avoid the 60% band.
When I explain the 60% band to clients they very often get a bit annoyed and consider it grossly unfair (as do those caught by what should now be called the moderate income child benefit charge). Cliff edge taxes never work and it would have been so much simpler to leave everyone with a personal allowance and just make the higher rate of tax, say 45% from £100K.

Other stupid tax legislation has seen people relocate to England from Scotland to save the 1%, soon to be 2% additional tax and the lower higher rate starting point. As one high earning client told me, the savings paid for his mortgage and he quite liked the drive North for a couple of days a week.

I was pleased to see some of the MTD changes which were announced recently and it will take some of the pressure off small landlords but it is still a huge hammer to crack a very small nut - just move everyone on to making monthly tax payments on account and leave the rest the same: I have had a member of staff spend the last 3 weeks trying to correct and reconcile the absolute mess a client had made of Xero. They know it is going to cost them a fortune and they have conceded they should have let us do it for them but they previously kept perfectly reconciled manual records that were a pleasure to use and used those words "how hard can it be?". The fixation with MTD which (according to HMRC) will reduce costs is just fantasy for so many.

I have spoken to two Consultants in their 50s in the last few days, both of whom are going to retire later this year because they are at the lifetime allowance for pensions and have been paying the pension charge for a few years now - their perspective is that they can't be bothered with the hassle and it is easier just to retire than pay such high tax rates. Apparently the pension charges and the LTA are the main topics of conversation for doctors and consultants at the moment.
There has to be a simple fix to stop these doctors feeling over taxed and under appreciated.

Bad tax legislation always has an equal and opposite reaction!

Thanks (0)