To reduce complexity, cut down costly errors and create a more stable, predictable environment for taxpayers, the Government must change the way it makes tax and budget decisions, argues a new report from CIOT and two other institutes.
The CIOT has produced the ‘Better Budgets – Making tax policy better’ report in partnership with the Institute for Government (IfG) – a think tank which works to make government more effective – and the Institute for Fiscal Studies (IFS) – the UK’s leading microeconomic research institute. The institutes worked on the report for nine months, interviewing around 50 stakeholders from across the tax system, issuing two separate calls for evidence and holding three roundtable meetings in London and Edinburgh with tax and policy specialists.
An early output from the institutes’ work was an open letter to new Chancellor Philip Hammond in September setting out some quick changes he could make to improve and simply the making of tax policy. These included reducing the flow of tax change by returning to just one annual fiscal event. The institutes were delighted when the Chancellor adopted this reform in his Autumn Statement two months later, acknowledging the institutes’ call in the process.
The final report was launched at a packed event at the IfG on Monday 16th January, at which three of the report’s authors outlined their conclusions and Financial Secretary to the Treasury Jane Ellison MP responded for the Government. Among those in attendance were Edward Troup, HMRC Chairman, James Bowler, the Treasury’s Director General for Tax and Welfare, Andrew Tyrie MP, Chair of the House of Commons Treasury Committee, and Paul Gray, Chair of the Social Security Advisory Committee.
First to speak at the launch was CIOT President, Bill Dodwell, who showed the audience the single volume tax code he had been given when he started studying tax, and the nine volumes he now used covering just part of the tax code today. He said that one of the biggest contributions to the proliferation of tax measures was politics, including two annual fiscal events which generated pressure for tax measures in and of itself. Sticking to fewer opportunities to announce new measures should allow focus on better measures, developed over longer time horizons, he argued.
Dodwell focused on how the consultation process could be improved. He said that not enough consultations start at the first stage of policy development – thinking about an issue and the whole range of possible policy responses. There was also, he said, a need for better data and more outreach - pointing to the Office of Tax Simplification who take consultations round the country - to get a wider circle of consultees. Proper, more structured feedback for consultees would encourage more people and organisations to devote more time to future consultations. But, he stressed, more effective consultation was not just for government; consultees need to be constructive and realistic in their responses.
Dodwell concluded by observing that all the major advisory firms conduct surveys on the major tax issues facing business. The biggest problem they identify is uncertainty created principally by change. “If we can move to something that is a little more certain that will be good for the economy, good for business investment, good for growth and good for government as well,” he concluded.
The second speaker was IFS Director Paul Johnson. He explained that the IFS was interested in the tax policymaking process because “the structures of the legislature and the executive really matter for what comes out of the ‘sausage machine’ in the end.” He focused his remarks on the need for an overarching plan or strategy to give a sense of what the Government wants to do on tax. As a result of the absence of this, in significant areas of tax policy we don't really know where policy is going, he said.
Having a plan would help engage the public in debate, said Johnson. Currently, unhappily, anything radical is politically difficult. If you are not engaging the population in any kinds of discussions, treating them like grown-ups, then they won’t behave like grown-ups when you announce things, he said. On the particular topic of employment status he said a big open cross-governmental review of where we want to go would be extremely valuable.
Jill Rutter, Programme Director at the IfG, said the IfG had been struck by how often government officials cited tax policy as an example of policy they had seen not being done as well as it could be. They had concluded that a major cause of this was inadequate challenge. The procedures we put in place for tax policymaking design out all of the safeguards that are put in place on other policymaking. This had been justified in the past by Chancellors’ need for secrecy and the idea that the Chancellor is this noble person struggling against the odds to raise money while his spendthrift colleagues all want to spend it. But what we have seen in recent times, said Rutter, is activist Chancellors wanting to be policy makers as well as revenue raisers, but we still apply the same systems.
The usual disciplines we have on policy are absent for tax policy, said Rutter, citing lack of Treasury challenge, the absence of cash limits, that there is no need to get the agreement of ministerial colleagues and that the Regulatory Policy Committee and National Audit Office are kept away from tax matters. She acknowledged, however, that the Office of Budget Responsibility had been a big change and had provided very rigorous challenge to the costs of measures.
Responding for the Government, tax minister Jane Ellison thanked the three institutes for their important report, said that she shared the report’s aim, and promised to give it her detailed consideration. She picked out “four of the key themes it raises which I think really go to the heart of what you need for sensible tax policy”. These were stability, direction, professionalism, and teamwork.
On stability the minister said that one of the most common asks she received ahead of the Autumn Statement was “a steady, predictable tax regime that people could plan with”. She said that was the style the Government wanted to adopt. “We want to take that steady, measured approach – precisely what I hope you saw from us at the Autumn Statement. In fact, as has been noted, the biggest change we made then was a reflection of that kind of approach – a down payment on your report, to abolish the Autumn Statement itself!” She thanked the three bodies for “practicing what you preach” by sharing their advice from an early stage.
On direction she noted that the report “places a really strong emphasis on the value of telling people in advance when and how we are going to change tax policy in the future. This way, they know what’s coming and have the confidence to make decisions on the back of that. And that is an approach we strongly support.” The Corporate Tax Roadmap was cited as an example of this approach.
On her third point, the minister praised the professionalism of HMRC and Treasury staff, and said the Government was working to develop this further. As a particular example, she said that, “for the first time in the Treasury we’re offering full sponsorship for our staff to gain the professional tax qualifications that I know will be familiar to many of you … Whether that’s to become a Chartered Tax Adviser, or to take the Association of Tax Technicians exams. We see real value in boosting our technical capacity and I’m pleased to say that the first cohort of staff will begin training next month.” Taken alongside the Government’s internal training this would “help them develop the skills and expertise to rise up the ranks and lead forward tax policy development in the future,” she said.
Turning to teamwork, the minister stressed the importance of “tapping into the expertise beyond Government too. And the report, I think, makes this point. Because we do, critically, we want a responsive tax system. One that looks at the problems, listens to what people have to say… and to make sensible changes as a result.” The Office of Tax Simplification got a particular mention as, perhaps more surprisingly, did the “useful, constructive scrutiny” provided by opposition MPs.
Concluding, Jane Ellison said that the report “captures some of the fundamentals that any Government needs to get right for effective tax policy making. And what really helps establish a tax system that works for individuals and businesses alike, is a steady, measured, consultative approach that gives people both the time and confidence to plan ahead. The Government has listened, and I can assure you that we will continue to listen.”
(You can read the Financial Secretary’s remarks in full here.)
During questions from the floor, Andrew Tyrie MP, Treasury Committee Chairman, said that the Committee had set out six principles for tax reform including stability, certainty, simplicity and competitiveness. “We are in the process of developing a method of scoring each Budget measure as soon as possible after it’s announced on the basis of these criteria. What I think we now need to develop… is mark measures after an interval – two, three, four years – on these principles again and publish it, and we on the committee will be hoping we can get support from those with the expertise to accomplish this, so we can get this out in a timely way, and a way which will encourage the Government to move in the right direction.” Tyrie asked the Financial Secretary if she would support the measures in the Bill to beef up Finance Bill scrutiny, including the taking of oral evidence at the start of Finance Bill Committee and giving more drafting and other support to Parliament.
Responding to questions the Financial Secretary said that while the Government was “still working through what the cycle of consultation will be in the new single fiscal event world, but I’m pretty certain that would allow for more time in several stages of consultation”. On simplification she reflected that it was probably “easier to try to avoid adding new complications sometimes than it is to actually unravel existing complication. Because for everybody’s overcomplicated relief or exemption there is some industry or region or, sometimes, even a company or an individual, who is really very fond of that and it’s become part and parcel of their business model. And you know Parliament, whilst on the one hand, MPs will say ‘this is all far too complicated’, there’s plenty of MPs who will stand up and say: ‘my local industry or my local business is entirely dependent on this relief’.” Similarly she agreed with the point “about not feeling the need to do something on everything” but said people needed to back him up on this. “The Chancellor got a lot of criticism after the Autumn Statement, which I think generally was very well received, but he got a lot of criticism saying he didn’t talk about social care. But when did it become the norm that every fiscal event we talk about every single area of policy, albeit an extremely important one?”
The minister also spoke about how, in terms of providing evidence, it was particularly useful “when businesses come in and explain in some detail why it matters to them. And I do think sometimes businesses are afraid of sharing with you the detail and complexity. They think it’s a bit too humdrum. But when someone comes in and says, ‘look, I’m currently choosing where to site a new factory or whatever between these three jurisdictions – in these two this happens, in this one this, so we need to know: ‘are you thinking about this relief because that will really help us in this way?’ Actually unpacking it like that, for a minister, is really helpful. You can’t go through everything like that, but that sticks in your mind far more – a real business taking a real decision; not least because it affects real people.”
Finally, on Andrew Tyrie’s points, the minister said she had been “a founder member in 2010 of the Backbench Business Committee, which was essentially set up to make life more difficult for the executive, so I am now classically a poacher turned gamekeeper. But I do recognise… You can’t deny sometimes it is quite easy when nobody turns up and challenges you at all and you all get off two hours early. But it doesn’t in truth make for the best policy-making. It is right to have challenge and we do need well-informed challenge. So I will reflect carefully on all the points that Andrew and the TSC have made and I would look to respond to the spirit in which they’ve been made, as constructively as I can.”
Edward Troup, Chairman of HMRC, also contributed from the floor. He welcomed the report but some concerns about constitutional implications of some of the proposals. “When we’re looking at improvements it is quite important to distinguish things which… are within [the Treasury and HMRC’s] responsibilities, which are process, are about engagement, are about consultation, talking to all of you, trying to get the professionalism in the two departments that we need; to distinguish those from the more constitutional elements. And there are some quite provocative challenges to the constitutional elements here. And those are legitimate debates, but just have the debates with the right people and don’t tell the permanent secretary to the Treasury that he should effectively be offsetting the working of the democratic process, which I think is quite close to what recommendation eight [says].” He also suggested that some of the elements of the report could be read as saying “we in this room, in this bubble know better than those people out there who don’t really understand anything” and he wondered whether that was wise. Finally, equating wider input into tax policy making with lobbying, he said that you didn’t necessarily get better outcomes with more external input. “You only have to look across at the tax system in the United States of America, to say: does this always give you a better tax system than we have in this country?”
In response to this final round of questions, the Financial Secretary talked about the importance of trust between taxpayer and tax collector: “If they don’t like paying their tax to HMRC they can’t shop around, so you have to make sure that relationship is a really good, functioning, trusting one.” People “want to feel it’s a level playing-field and that other people aren’t getting away with it. So I think that democratic mandate, being able to express that, in the way that we make policy, it can never just be a dry exchange of technical views. It has to have that at its heart as well.” She also challenged professional bodies to make sure they represent the views early in their careers as well as what she called the ‘grand fromages’ and other veterans. She also said that some tension between the Treasury and other departments can help scrutiny: “You might have a department that’s particularly close to its stakeholders whereas sometimes the Treasury can be a bit more objective”. Finally she pointed people to HMRC’s ‘fantastic’ resources for schools on explaining tax and money.
CIOT Head of External Relations