House of Lords inquiry: Policy making process under the spotlight

Hearing with Malcolm Gammie KC

The sub-committee questioned Gammie primarily about the tax policy process.

Gammie, who was until recently a member of the Tax Professionals Forum, said that he has also worked for many years with the Institute for Fiscal Studies and other professional bodies, such as the Chartered Institute of Taxation and the Law Society, but during this session he would speak “as myself, not on behalf of any of those bodies.”

Evolution of Tax Policy Making Principles

The sub-committee began by probing the government’s new Tax Policy Making Principles and how they compared to the framework established in 2011. Gammie reflected on the 2010–11 process, describing the resulting framework as “quite a substantial one,” which “provided a basis upon which the Tax Professionals Forum could produce its reports and against which the government, the Treasury and Revenue consulted and developed the tax policy over those years.”

By contrast, he characterised the new principles paper as “a much thinner document and a much less satisfactory document”. He warned that “it is not entirely clear whether and when consultation will be undertaken and whether it will be undertaken in a public forum or by, in effect, selecting the people that the government wish to speak to, which is not necessarily the best approach.”

Gammie did not see a motivation for the change beyond a new government wanting “to put their own stamp on the way in which they do things”.

The sub-committee pressed on the government’s stated desire for a “smarter, more agile way” to develop policy. Gammie observed that agility and flexibility are not necessarily bad things to have in mind, but “if that means that you are going to make it up as you go along, that is not a good idea, because that is generally a way of getting things wrong, or at least not dealing with things in the optimum way.”

Consultation and stakeholder engagement

Gammie expressed concern that the Tax Policy Making Principles paper “does not seem to recognise the need for early input in the development of tax policy”.

He highlighted what he saw as a concerning statement from the Principles: “The government will consult on tax policy where it deems it necessary to do so. If a consultation is needed, it will be targeted, precise and only seek information that is genuinely needed.” Gammie commented, “Those are not necessarily of particular benefit to an approach to developing a good tax policy.”

Asked how the government’s compliance with its own principles could be assessed, Gammie responded that assessment needed to be by those outside government. He believed that while spreading consultation more evenly over the year could be beneficial, “it is all left rather unspoken as to what their thinking behind these principles is for that sort of activity.”

Pre-legislative consultation and inheritance tax reforms

The Committee enquired about pre-legislative consultation, in particular whether it had been carried out for the proposed inheritance tax reforms.

Gammie said that you get better outcomes “if you have taken account of a wide range of views from people who may come at a problem from different angles.”

He stressed the importance of data, saying “if you do not tax something at the moment, then the Revenue will not be a good source of data about it because it is not something that is reported to it or that it knows about—that is an absolutely critical reason why you need to go out and find the data, or at least assess the data before you take policy decisions.”

Observing that inheritance tax “arises at random times in people’s lives” Gammie said that matters concerning IHT require long-term planning.

Could the government have consulted more effectively? “There are obviously some taxes where that creates a problem because of people taking forestalling action,” said Gammie. “However, basically speaking, if you are talking about a tax which arises when somebody dies, unless you are talking about somebody who is going to jump in front of a train or something like that, these are not necessarily things which people can react to in quite the same way.”

The session concluded with a reflection on the seven-year gift rule, with the committee asking if there had been consultation before potentially abolishing the rule, and whether the ‘problems’ might have been mitigated. Gammie clarified that the rule, unlike exemptions for certain owned assets, makes inheritance tax similar to a lifetime gifts tax. He disagreed that the consultation could prompt people to act differently, adding: “I would have thought that quite a lot of people have made gifts against the risk that the seven-year period might be extended”.

Hearing with Dr Andy Summers of the Centre for Analysis of Taxation (CenTax)

The sub-committee’s questioning focused on the inheritance tax changes.

IHT modelling and valuation issues

The peers began by asking Summers how consistent his IHT modelling was with the government’s own estimates. He thought the government’s published statistics “a reasonable estimate” of the number of farm estates that would pay additional tax if there were no change in behaviour.

However, he said, there were additional questions which the government had not published statistics on, in particular whether farms and farm estates would be required to sell some of the farm assets and potentially therefore be broken up in order to pay the tax.

Summers also spoke to concerns about the use of book values versus market values in IHT valuations: “Book values being taken instead of the market value, or being provided to HMRC instead of the market value, is a particular problem when you are thinking about the tenant farmers specifically because, of their total wealth, a larger share is those items of machinery”.

Summers added that he was concerned “that the values that have historically been provided to HMRC when there was not any tax at stake would underestimate the true value of those assets.”

Summers did not think the Defra Farm Business Survey statistics a suitable data source on which to model inheritance tax reforms, as they are collected as a survey at the farm level. “To translate that into the impact on individual owners of farm assets, you have to build in some very strong assumptions about how the assets are split within the farm. Also, those surveys do not capture any information about the value of other assets that those individuals hold besides the farm assets. The simple point is that if you are modelling the impact of a tax change, it is best to use the tax data. That was the right thing for the government to do, and [it] is also the data source that we use.”

Impact on family farms

The sub-committee asked about the government’s claim that smaller farms would not be impacted. Summers replied, “We think the reform would protect family farms to a large extent; but we also say under the hood that it does really depend on what you mean by ‘protect’ and what you mean by a ‘family farm’. This idea of protecting farms does not, I think, in the government’s own perspective, mean that they will not have to pay any additional tax as a result of the reform. It means—more narrowly than that—that farms will not need to be broken up in order to pay the tax”.

“Of approximately 500 estates each year that have some farm assets or other farm activity… around eight out of 10 would be able to fully pay their inheritance tax bill out of non-farm, non-business assets,” he suggested. “So… those individuals or those estates would not have to sell farm assets to pay the tax... That does leave, however, about 70 estates per year… that would not be able to pay the tax out of other assets”.

Policy objectives and the minimum share rule

The sub-committee queried whether the government’s objective was to target wealthier estates using agricultural and business property as a tax shelter. Summers said the government had been “reasonably clear” that this was not an objective. He said that the Prime Minister had appeared to “expressly disclaim the idea” at a Liaison Committee hearing. “If that were an important objective, the reform is not well targeted to achieve it”, he added.

Summers put forward an alternative approach: “What we looked at in the [CenTax] report was an adjustment to that reform that would remove relief from those estates that have a relatively small share of farm and business property in the total estate, which would raise more revenue from those estates, and use that to increase the allowance for the estate that genuinely might face this issue of break-up”. He referred to the proposal as the minimum share rule, saying it has been taken up by MPs from different parties and is favoured by the National Farmers’ Union.

Transferability and measuring impact over time

The committee asked about the non-transferability of the £1 million APR and business property relief nil rate band. Summers replied that “in the long run it is not a good policy design to keep the allowance nontransferable.” He acknowledged this would have some short run revenue cost. (NB. The government have since announced the allowance will indeed be made transferable.)

The committee questioned whether it was appropriate to measure the impact of the changes by reference to a single year. Summers said this was standard practice. However, he continued, there is a reasonable case to think about inheritance tax, “as a once-per-generation tax, over a generation”. “We would not say at all that that is the wrong thing to do. If you wanted to do that, the simplest, crudest way to do it would be to take those annual figures and multiply them by, say, 30”.

Data gaps

The committee asked about the reservations Summers has about the accuracy of the government’s impact assessment of their pension IHT reforms in particular. Summers said it was “highly problematic” that, “[a]s of the Budget, there was no information in the public domain… from anything that the OBR, HMRC or the Treasury had published about where the data that was used to model the pension reform came from”.

Summers continued: “The data source used was something called the Wealth and Assets Survey, which the Office for National Statistics produces. The reason for that is… if you are not currently taxing something then HMRC is generally not collecting good-quality data on it. That makes it difficult to model reforms, so they have to use this survey instead of data that they have currently”.