An article (by Adrian Rudd, PricewaterhouseCoopers, Tax Adviser's representative on the Technical Committee) summarising the results of the Institute’s survey of tax consultations.
Published in the September 2001 issue of Tax Adviser. The good, the bad and the complex – a survey of tax consultations
There has been a Code of Practice in place for consultations by the revenue departments since 1997. The publication of a draft Code of Practice on Written Consultations, to apply to all Government departments prompted the Institute to pose some fundamental questions about the consultation process. How does the process work in practice? Does it work? Can it be improved? The research – led by Charles Barcroft - examined the conduct of 73 written consultations on 39 important subjects published between May 1997 and 1 January 2001 (the date when the new Code of Practice came into operation).
The Institute believes that proper consultation produces better tax law and practice. In a number of instances tax law changes have proved to be less than satisfactory (for example, requiring significant amendment, or producing an over-complex regime). Coincidentally or otherwise, these correlate well with consultations which omitted important stages from the ideal process.
The tax authorities do not have a monopoly on wisdom, and generally lack practical taxpayer experience. Good consultation ensures wider knowledge and experience is applied to the process.
The consultation process
Consultation should involve something more than commenting on the way in which a decision is to be implemented, and the process should be applied more widely and with fewer exceptions and reservations. The Institute recommended that:
- consultation should be undertaken more widely on the stance to be taken by the UK in relation to proposed EU legislation;
- Where consultations are planned, they should generally take place before decisions are made;
- Decisions made without prior consultation should be confined to cases where they are clearly needed (e.g. for reasons connected with anti-avoidance or market distortions);
- Where decisions have to be made without prior consultation, the Government should be prepared to consult after the decision is announced (perhaps on the basis of draft legislation) and to reconsider aspects of their decisions in the light of the views received;
- Announcements of anti-avoidance measures having immediate effect should be sufficiently detailed to avoid creating unnecessary uncertainty for taxpayers;
- The Government should normally consult where policy develops between the pre-Budget report and the Budget proper;
- Wherever possible, advance notice should be given of an intended consultation exercise;
- All members of the public should have access to information on the progress of consultations.
The Code of Practice gives guidance on the content, presentation and publication of consultation documents and the time allowed for responding to them. The Institute recommended that every effort should be made to comply with the Code’s provisions, and in addition:
- The terms of reference should be stated clearly (as indeed has been the case in 80% of documents surveyed);
- The reasons for the proposals should be clearly set out in the consultation document itself (as broadly speaking happened in 90% of the survey documents);
- The legal and factual background to the proposals should be described unless it is so straightforward or so well known as to make explanation superfluous;
- The text of the document should clearly indicate whether a decision has been taken and, if so, in respect of which issues;
- Any questions posed should meet the real issues (as happened in 89% of cases in the survey);
- Given the complexity of most tax issues, more time should be allowed for responses so that the 12 week ‘standard minimum period’ recommended in the Code of Practice is met with greater frequency;
- The time allowed for responses should be increased if (as frequently occurs) the proposed response period includes public holidays or the month of August;
- Consultation documents should be carefully drafted: in the survey, 90% of the documents were felt to have been well written;
- The new central register of consultations should be comprehensive and indexed in a manner which enables users to locate documents by subject, including tax.
Participation in all or part of the consultation process may be limited to a segment of the public, such as trade associations. The Institute recommended that:
- This type of consultation should be regarded as very much the exception and should be confined to cases where the bodies consulted really represent affected taxpayers;
- The tax profession should always be independently represented in discussions with trade associations and business organisations;
- The fact that limited consultations are taking place should normally be announced to the public generally.
The main stages of consultation
The Institute considers that a consultation should normally progress by means of three broad stages: a “whether” document, a “how” document and a draft text.
Consultations should normally start on the basis of a “whether” document. In effect, the Government has a reasonably clear idea of what is necessary , but wants some input before deciding whether or not and how to proceed. In many cases the need for change is so obvious that the decision is almost a foregone conclusion. Here, it is a matter of ensuring that everything which needs to be changed has been brought within the scope of the proposal and the main thrust of the consultation is “how” to proceed rather than whether to do so. However, the question is sometimes less obvious than it seems. It is always beneficial to test the assumptions underlying a proposal before making irrevocable decisions.
A “how” document should normally follow-up a “whether” document. Its purpose is to ensure that “nitty gritty” practical problems are solved before draft legislation is prepared. However, the relevant problems may have already been solved during a “whether” consultation. Thus, this stage can be omitted in an ongoing general consultation unless important details remain unresolved.
The Institute accepts that some decisions must be made without prior consultation – eg measures carrying a risk of forestalling. Thus, there are some circumstances in which the first consultation necessarily takes the form of a “how” document. The Institute regarded this type of first-time consultation as very much the exception: it proceeds on the basis of departmental assumptions which are not necessarily correct and does not give taxpayers any say in the development of policy.
The final stage of the consultation process is a consultation on draft legislation. The Institute recommended that all consultations should have this final stage.
The Institute accepted that decisions on anti-avoidance matters are likely to be irrevocable. Here, the importance of consultation is to ensure that the proposed measure neutralises the right target and that it does not give rise to unforeseen consequences. The need to block some perceived loophole is no excuse for not consulting – at a minimum the draft text should be published at the same time as the announcement with representations invited.
Omitting one or more stages can lead to unsatisfactory legislation. In addition, the consultation must involve real listening and a willingness to contemplate change. The Institute called for better reporting back on consultations – more explanations of why particular routes have been chosen and others rejected.
Conclusion from the survey
Two overall themes emerge from the survey. First, the commitment to consultation on tax law proposals announced in 1997, and embodied in the code of practice adopted by the revenue departments, has given rise to extensive consultation on a wide range of proposals over the last four years. Most of it has run smoothly and, even where it has not, the process has generally worked at a practical level. The Government has generally proved willing, albeit sometimes rather belatedly, to listen to the views expressed and to modify its proposals in order to go at least some way towards meeting genuine taxpayer concerns. The result has been better tax law.
The second theme is “more haste, less speed”. The Institute’s review suggest three clear stages in the consultation process: first, seeking agreement in principle; secondly, agreement on how to implement, and thirdly, consultation on a draft text of the legislation or other instrument implementing the proposals. A casual reviewer may be forgiven for thinking that this progression is a recipe for slow, ponderous government and that the Institute’s recommendations may impede progress. However, experience suggests that the opposite is the case. The Institute’s recommendations of good practice – based as they are on a detailed review of the workings of a wide range of individual consultations – provide a path to a more efficient process and a more economical use of time by all parties to it.
The most important conclusion drawn from the survey is that the consultation process is most likely to fall into difficulty when one or more of the three stages has been omitted. For example, the direct move from the first to the third stage in both the CGT taper relief and DTR exercises. The result has been complex, difficult legislation which has had to be amended several times in the months and years after (or sometimes even before) it came into force. The Institute suspects that sometimes the Government and the revenue departments are over-enthusiastic for particular proposals – a feeling that they are right, proper and just – which results in their over-hasty adoption. The Government has sometimes come to realise, once consultation is underway, that problems are more difficult than they first appeared. Taking a shortcut has sometimes resulted in unnecessarily complex legislation requiring early amendment to correct its shortcomings. Moreover, the Government’s relationship with the business community has been strained in the process.
Codes of practice emerge from experience – building on what has gone well and drawing conclusions from past mistakes. The lesson to be learned is that it is sometimes necessary to proceed cautiously and that it is always worth taking time to get things right. On the whole, the Institute concluded that this should have happened rather more often than it did in practice.
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September 2001 by