Beyond the OTS – delivering meaningful tax simplification
To be fair and responsible, tax needs to be able to be understood by those liable to pay it, as well as by wider society. The rationale behind tax rules needs to be visible, the tax consequences of decisions need to be foreseeable, and the effort involved in being tax compliant needs to be proportionate, says CIOT's George Crozier in a new All-Party Parliamentary Group on Anti-Corruption and Responsible Tax pamphlet titled What is fair and responsible tax?
In other words, tax needs to be simple – or at least simpler than it is now.
The good news is that pretty much everyone across the political spectrum agrees with this.
The bad news is that delivering meaningful simplification in practice is proving somewhat harder. Despite the setting up of the Office of Tax Simplification (OTS) 11 years ago, most people think that in the period since then the tax system has got more, not less, complex.
So were the Government right to announce the abolition of the OTS in September’s mini-Budget?
No.
The OTS has many achievements to its name. Its first report led to the abolition of more than 40 (admittedly mostly fairly niche) tax reliefs. Cash basis reporting has made compliance simpler for more than a million small unincorporated businesses. There have been useful reforms to employee expenses and inheritance tax reporting. In fact pretty much every Finance Act of the last decade has had measures in it which owe their genesis to the OTS, and which have made navigating the tax system easier for some group or other.
Where the OTS has failed is when it comes to its more ambitious suggestions – for example, two reports in 2016 making the case for closer alignment of national insurance (NI) with income tax.
Broadly the pattern has been that where the OTS has proposed technical or administrative tweaks the government has at least considered it. But where it has proposed to simplify the actual rules, its calls have usually fallen on deaf ears.
The recent OTS investigations into capital gains tax and inheritance tax are a case in point. The OTS produced two reports on each tax looking separately at the design of the tax and at technical and administrative issues around it. The government adopted more than half of the technical and administrative recommendations, but not a single one of the design proposals.
While ministers buy in to the principle of simplification whenever it comes up against political or revenue obstacles they seem to trump it. If a significant reform costs money (for example the 2017 recommendation of smoothing the VAT threshold) or produces losers who would make a fuss (as with aligning the NI and income tax bases) it goes nowhere.
Sadly not many substantial simplifications are cost-free and upset no-one.
So we should not be too surprised that the OTS has not made more progress towards simplifying the tax system.
But rather than abolishing the OTS the government could have chosen to strengthen it.
It could have been given a greater role in scrutiny of new proposals. It could have taken on post-enactment review of new legislation, examining the actual impact of measures a few years on compared to that envisaged, and identifying ‘lessons to learn’. The government could have been required to respond formally to all its recommendations within a prescribed period, as they are obliged to do with select committees.
This is the direction the Chartered Institute of Taxation would have liked to see the government go in – giving the OTS a louder voice, a wider remit and greater resources.
But the government have chosen a different path.
The Growth Plan states that: “Instead of having a separate arms-length body oversee simplification, the government will embed tax simplification into the institutions of government… and set a mandate to the Treasury and HMRC to focus on simplifying the tax code.”[1]~
Okay. Let us take the government at their word and assume they are truly serious about simplification – and that they are abolishing the OTS because they regard it as insufficiently effective, rather than because it asked difficult questions and made suggestions they disliked. How then should they move forward?
First they need to put flesh on the bones of the words in The Growth Plan: set out what this mandate will look like in practice, identify how success will be measured.
The OTS itself produced a report in July identifying ways to better embed the principle of simplification in the general tax policy making process. This included a framework of questions for officials and ministers to consider when developing policy. Will ministers build this into their embedding process?
One thing the OTS has an especially good record on is effective consultation, meeting proactively with affected groups around the country to identify burdensome tax complexities and how they might be removed. Will HMRC and the Treasury be taking this on? If not this work will be missed.
Similarly the OTS has been a valuable interface between policy officials in government and external experts in the private sector, professional bodies and academia. To be effective, embedding tax simplification must continue to engage external expertise and not simply allow a retreat into institutional – or political – group-think.
Moving forward is not just about government. In the absence of the OTS Parliament needs to take a closer interest in simplification. A select committee might usefully question ministers and officials, and produce an annual report on progress towards simplification. An annual debate on simplification on the floor of the House would raise the profile of the issue.
Ultimately, of course, with or without an OTS, the success or otherwise of efforts to simplify the tax system depends on senior policy-makers, and above all, ministers. If ministers are serious about simplification they must be prepared to amend or drop otherwise attractive proposals if the complexity cost is too high.
There have been some praiseworthy moves towards simplification in recent years. The flow of tax legislation has reduced somewhat (as advocated by the 2017 Better Budgets report[2]). Aligning income tax and NI thresholds is a step in the right direction. But if we want a genuinely less complex tax system we need to ‘think simple’ at every stage of tax policy consideration. The government needs to remember this and, in the absence of an OTS, Parliament, the tax profession and other interested groups need to find ways to work together to challenge them and hold them accountable for delivering on their promises.
Article by George Crozier, Head of External Relations, Chartered Institute of Taxation
Our summary of the APPG pamphlet can viewed here.
Notes for editors
[1] Paragraph 4.13, The Growth Plan 2022
[2] ‘Better Budgets: making tax policy better’, jointly published by the Chartered Institute of Taxation, the Institute for Government and the Institute for Fiscal Studies in January 2017.