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KEY POINTS
- Consultation is an important part of scrutiny
- Impact assessments need to be revisited
- Give objective and preferred solution
The rabbit-out-of the-hat approach to tax legislation is on the wane, but it has far from disappeared
That was the broad consensus at the latest CIOT round table discussion, which followed similar gatherings, such as the one on small business taxation that launched the institute's new approach to professional debate.
It seemed the perfect time for a round table, given the current furore over the abolition of the 10p tax rate, which had been instigated without consultation (albeit with plenty of advance warning, having been announced in the 2007 Budget).
The CIOT event, held on 24 April, was attended by a number of notable tax experts and civil servants, as well as a select few journalists who had agreed to abide by the Chatham House Rule, meaning no names could be mentioned or quotes attributed.
All opinions below, then, are those of active participants in the round table, and not of this reporter or any other.
Accentuate the positive
To start with some of the positive views expressed about past consultations, it was appreciated that the Treasury attaches a lot of importance to consultation and wants to extend its breadth and depth.
The department has tried to allow adequate time with each consultation, first consulting informally with interested parties, and then formally to provoke public discussion.
This is an important part of the scrutiny process, and it is vital that draft legislation is exposed to a wider community, to make up for the lack of in-depth Parliamentary scrutiny.
But there are constraints: the likelihood of forestalling action being taken if tax rules are about to change, for example. However, this should not be used as an excuse for failing to consult.
There is a balance to be struck between lengthy consultation and uncertainty when advisers and taxpayers are eager to know what the new rules will be.
Finally, there is an argument that there is sometimes little need for consultation when the outcome is obvious. ('Children vote for Christmas, turkeys don't.')
Negative feedback
Against this, there was the experience of the aftermath of last autumn's Pre-Budget Report where — in the areas of income shifting, residence and domicile, and CGT — firm policy commitments were announced prior to any consultation.
Each was followed by a Government climb-down, showing a need for longer consultation periods and openness to real change to proposals.
One response to this was that in some instances ministers have clear policy intent and consult mainly on how it will be carried through. In the case of income shifting, for example, the Government was determined that something had to be done.
The degree of consultation also depends partly on complexity. A change in excise duties would be easy for all to understand and good data is already available on its effects, while residence and domicile changes required rarefied expertise and outside advice was necessary.
However, it was argued that, even when support and opposition was obvious, consultation can be a useful fact-finding exercise on the effects of a legislative change — and it can discover who the losers will be and help assess in advance what to do for such people.
This proves consultation to be valuable in avoiding unforeseen outcomes.
Potential improvements
Sometimes civil servants need to be able to talk, secure in the knowledge that they are off the record. There can be the danger of details of an informal consultation being reported and the matter becoming unnecessarily political.
Why not, then, introduce confidentiality agreements when appropriate between the Treasury and interested parties during the earliest stages of consultation?
Criticisms were raised of the consultation documents themselves, a point that was returned to later. This led to discussion on the impact assessment process, with pleas for it to be revisited because the figures it is producing are not realistic. It appears that one of the principal complaints is that the cost to individuals is not being taken into account.
This was particularly obvious for income shifting: the reason the impact assessment came out at nil cost was that people who would be affected by new legislation and were regarded as 'wrongdoers' were not included in the calculations.
If further information would be useful but did not strictly fit into the impact assessment framework, it could be provided as a separate note.
Professional advice
The role of professional bodies in the consultation was discussed next — and that role, it was said, is apolitical. Such organisations have no axe to grind and can therefore concentrate on looking for inefficiencies in the tax system.
Pressure from third parties is resisted and must continue to be so, while the experience of the professional bodies' members and the feedback they offer is valuable.
The groups can play the role of honest brokers to the Treasury and HMRC: consultation, like justice, not only must be done but must also be seen to be done. The Government shouldn't introduce legislation mere days after consulting upon it — as has happened recently.
There clearly are instances when ministers only want to consult on how to introduce new tax rules, not on whether they should do so. However, involvement of professional bodies at an early stage when decisions have not yet been taken could allow the same objective to be achieved in a different way.
Residence and domicile laws, for example, go all the way through the tax system, and the need for many expert views is critical. The rabbit-from-a-hat approach is not a viable method for moving ahead — and ministers must be persuaded that if they take this path, they do so at their own peril.
They have the constitutional right to do so, but they put themselves in danger of potentially embarrassing U-turns.
Professional bodies have long maintained that consultation documents need to be improved, with clearer policy aims and the pros and cons of the suggested legislations — although the quality has improved and continues to do so.
They should also allow for enough time to be taken for all parties involved to create sustainable legislation.
The European touch
The discussion moved overseas, and there was the general agreement that UK tax legislation needs to take into account a European dimension if it is to be sustainable — but such thinking has not yet filtered through to the domestic process.
The UK is not moving swiftly enough or early enough to influence EU processes. (For instance, the guidance on the migration of companies is already available.)
Although to do this seriously, the Government would have to bear the brunt of anti-European feeling expressed in the popular media — and this fear of paying a 'political penalty' leaves ministers reluctant to make bold attempts to influence EU tax rules.
Residence and domicile
It was then put that too often there is a preference in UK tax legislating for immediate results over long-term ones. This was highlighted in the process of the residence and domicile, which was unhelpful because the legislation was not in its final form even when the Finance Bill was unveiled.
The result of hurried changes was that the issue cannot now be revisited for several years.
And in the case of poorer non-domiciled taxpayers — who make up the majority of those affected — they had no direct input into the consultation. When the issues affecting them were raised during the process, they were not taken seriously.
A system in which professional bodies can effectively start a consultation process by alerting the Government to issues is needed.
One of the other problems with the residence and domicile legislation was that there had previously been a lot of consultation, but then there was silence before a sudden announcement not based on past processes, which risked alienating those who had taken part.
Lessons learned
There have been four types of consultations in the past, participants heard: the good, the bad, the ugly and the non-existent. The first kind can be best illustrated by the managed service company legislation, which was a controversial change but successful.
The policy was laudable for not only setting out the targets to be aimed for but also for setting out for discussion a proposed approach. This allowed representative bodies to understand what was intended to be achieved, and no Government U-turn was necessary because, while the detailed legislation changed drastically, the clearly expressed principle was achieved.
The consultation on residence and domicile legislation was then cited as the 'bad' for having no linkage to its outcome, while the 'ugly' side of consultation was illustrated by the paper on HMRC powers: rushed and not taken seriously.
Some legislation is still not consulted on (the 'non-existent'), but it would be a valuable exercise to discuss such matters as changes in rates, to understand the behavioural changes that might result.
Obviously, the profession should be challenged on its response, but equally the Treasury should be listening — and the consultation process ought to be open to individual companies and other interested organisations, not just to the professional representative bodies.
A short, closed consultation kept confidential could be helpful, but then it would need to move forward as a public process.
In the future, the change to purposive and principles-based legislation will remove some of the constraints on consultation, because it would allow effective action to be taken against forestalling.
