“Better Budgets: Making Tax Policy Better” report launch

Yesterday saw the launch of the report “Better Budgets: Making Tax Policy Better” jointly issued by the Institute for Government, Chartered Institute of Taxation, and the Institute for Fiscal Studies. The launch event had panellists from all three organisations, joined by Jane Ellison MP, Financial Secretary to the Treasury.

The panel was as follows:

Chair: Julian McCrae, Deputy Director at the Institute for Government

Jill Rutter, Programme Director at the Institute for Government

Paul Johnson, Director of the Institute for Fiscal Studies

Jane Ellison MP, Financial Secretary to the Treasury

Bill Dodwell, President of the Chartered Institute of Taxation

The report can be found here.

The event started with comments from three of the authors of the report. Here are some highlights of what was said.

Bill Dodwell

Bill started by highlighting the dramatic increase in the volume of UK tax legislation by compering his first single volume edition to the current pile of books.

He identified one of the problems relating to tax policy making as being the British approach, which involves setting out how legislation applies in different situations, rather than a principles-based approach. This leads to lengthy legislation. I can also result “ducking and weaving” by taxpayers trying to avoid paying tax, and resulting anti-avoidance legislation.

Another problem is Chancellors introducing reliefs, then at a later date anti-avoidance rules when it becomes clear that incentives are being unfairly exploited.

Bill welcomed the more considered approach now, which generally sees a proposal announced in the Budget, summer consultation documents, a government response at the Autumn Statement, December draft legislation and further consultation, and introduction through the following Budget.

However, Bill said that assessing the effectiveness of legislation needs data. He welcomed the work done by HMRC in sharing data with academics and NGOs, asking for “more please”.

On consultations, Bill congratulated the Office for Tax Simplification on doing a good job taking consultations on the road to get broader responses from those who wouldn’t normally do so.

But those responding must take a realistic approach and make sensible suggestions. This has not always happened. Bill gave two examples. On BEPS, some advisors responded at start of process that everything was ok with international tax, and there was no need for change. Similarly, others have called for a system of global formulary apportionment. Making proposals that have zero chance of happening is not productive.

In particular, proposals for additional reliefs should be supported by tangible evidence. So, for example, a call for a Patent Box regime should be supported by evidence of the real benefits.

Bill finished by saying that anti-avoidance policy has been through a difficult decade. Things have gone too far with people claiming things patently not intended by legislation. However, there have been too many knee-jerk anti-avoidance responses. Professional bodies are doing their bit to cut out the marketing of schemes.

If something it a loophole, why not announce it is dead, then discuss how to close the loophole in a considered and consultative manner?

Paul Johnson

Paul posed the question “What is the right way to get at the right policy?”

The most important element is some sort of plan, strategy or green paper on what government wants to do. We don’t really have that in tax policy. So in significant areas we don’t know where the policy is going.

We get lots of consultations, but these tend to be on policy details rather than strategy.

We are in very unhappy equilibrium. Anything vaguely radical will be deemed too unpopular to consult on in advance. So anything progressive that does come out, is a surprise, and is therefore deemed radical!

Paul believes that a new way of making tax policy would help Chancellors, who can currently find themselves introducing and then rapid abolishing policies that have not been fully tested.

A big open review would be valuable.

On the evaluation of tax policy, Paul said that there are none of the conventional controls that exist for other policy areas. There is no oversight by the NAO, and no consistent way of knowing how effective tax policy has been.

Paul said that he hoped that changing things less frequently would help, and quipped that “hopefully one budget means one budget”! 

Jill Rutter

Jill explained that the IfG is very interested in better policy making. They spend time looking at how government spends money. But it can only spend money raised relatively efficiently.

There are lots of examples of tax policy making being held up as examples of how not to do things.

Jill echoed Paul in saying that part of that stems from tax policy processes that carve out much of the hurdles faced by other policy areas. This is often justified by the need to Chancellors to maintain secrecy around Budget announcement.

Some of the manifestations of tax policy fails set out by Jill were:

• Lack of clarity of intent
• Weak evidence base behind policy
• Poor policy design

Jill believes that the role of the OTS is only going to get bigger and more important.

One proposal is that there could be more collective discussion at Cabinet level pre Budget, to test proposals with colleagues. Could there also be some mechanisms for external challenge pre announcement?

Jill also said that Parliament could and should do a better job of scrutinising Budget proposals and how they impact. This could include evidence sessions from interested parties at an early stage of the Finance Bill.

Jane Ellison MP - FST

The FST focused in four key themes: Stability, Direction, Expertise and Teamwork.

Stability

Tax policy shouldn’t be about grabbing headlines with sweeping reforms. One of the most common asks is a steady, predicable tax regime, or no change at all if that is right. In tax policy, sometime not making a change is seen as inaction.

Holding two major fiscal events every year is something no other major economy does, and the FST acknowledged that they have listened to recommendation. The FST said that a single main fiscal event each year can be more strategic and consultative. It should allow more time for the consultation process.

From 2018 there will be just a single fiscal event each year, with the Budget in the autumn. I the spring there will be a statement in response to the OBR forecast (there is a commitment to present 2 forecasts per year) which may include some long term fiscal issues, launch consultations or even make tax changes if events (such as Brexit) dictate.

“Stability is a cornerstone of tax policy.”

Direction

The value of telling people in advance when and how we will make changes in the future allows people to make decisions based on that. The FST referenced back to the Business Tax Roadmap as an example of this, but acknowledged that government can do more.

The FST was in full agreement about being clear about the direction of travel when possible and gave the changes made to salary sacrifice as an example of this.

With some of the really big tax issues, it is right to “warm people up” to the idea, and unpack some of the issues in advance. Taking views from across the tax profession puts HMT in a better position to assess the issues.

Expertise

The FST paid tribute to HMRC staff.

She also set out the new policy of allowing full sponsorship for HMT staff to take professional tax qualification, boosting their technical capacity. This is in addition to internal training.

Teamwork

Good tax policy also benefits from expertise beyond government. Policy makers should listen to what people have to say, and make sensible changes as a result. The OTS has already contributed a considerable amount.

Scrutiny from all directions will help to build public confidence in our tax system.

Finally, she talked about implementation.  There is a huge amount of potential to to bring the tax system into line with what taxpayers expect.

On Making Tax Digital, The FST plans to reflect on challenges from the Treasury Select Committee and respond in due course. Investing a lot in making the change and HMRC ambitious. Hasn’t always been good enough to keen to step up.

What makes good tax policy is a steady, measured, consultative approach that gives people the time and confidence to plan ahead.

The FST also questioned whether there is too much reaction to the public debate on tax. It is important to have trust between taxpayers and government. It is impossible to express how angry smaller businesses and individuals get in the face of seeing others getting away with it.

There were questions from the floor. Two key contributions were:

Rt Hon Andrew Tyrie MP, Chair of Treasury Select Committee

Andrew confirmed that the Treasury Select Committee has set out six principles for tax policy reform, including stability, simplicity and competitiveness.

They are developing methods to score each budget measure based on certain criteria and are now interested in re-marking measures at an interval in the future.

Andrew called for:

• Improved Finance Bill scrutiny
• Taking oral evidence at start of the Finance Bill process
• Better and more effective debate
• Permanent House of Commons expertise to help scrutinise proposals

Edward Troup, HMRC’s Executive Chair and Permanent Secretary

Edward commented that we hadn’t heard much about democratic and constitutional importance of tax.

Within the rich mix of politics and administration, there is a balance between what is the responsibility of the Chancellor and wider engagement.

Edward said that there are examples where much more lobbying and input does don’t necessarily get better tax system, eg USA.