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KEY POINTS
- Proposed Office of Tax Simplification and Joint Committee
- Legislation to be announced no later than PBR
- These changes would not have solved the problems of the past year
- Structural changes should require approval of both Houses of Parliament
It was unusual to see a party political event at Moorgate Place, but on 3 July the report of a Conservative working party into tax simplification, Making Taxes Simpler, was given its official launch (after being vigorously trailed for the previous couple of days on all the news media) at Chartered Accountants' Hall.
The reason, presumably, for allowing grubby politicians through the hallowed portals was that the issue of tax simplification has been a key concern of the Institute of Chartered Accountants in England and Wales, and particularly of the Tax Faculty.
Also, the working party was chaired by Lord Howe of Aberavon, who had given the 2001 Hardman Memorial Lecture on the subject, and (as he reminded us in his presentation) had given a key lecture on the subject to the Addington Society while still Shadow Chancellor in the 1970s. Adam Broke, the 2000 lecturer on the same subject, was also on the working party.
There were three key proposals in the short report:
- the establishment of an Office of Tax Simplification;
- the establishment of a Joint Parliamentary Select Committee on Taxation, with membership drawn from both Houses; and
- the entrenching of a new convention that any changes to tax law with technical content should normally be proposed by the previous Pre-Budget Report, unless the Treasury could show good reason why they should not.
Office of Tax Simplification
The report says that the Office of Tax Simplification (OTS) is 'probably the most substantial innovation' proposed by the Forsyth report, on which Making Taxes Simpler builds. It is essentially the same idea as the Tax Law Commission proposed previously by the CBI and the CIOT, and the report says that it would not be dissimilar to the Tax Law Rewrite Project.
The OTS would examine areas of tax law as it saw fit, and would put forward proposals for tax law reform and simplification. It would not have authority over tax rates, etc., and would need some way of identifying the budgetary effect of its proposals.
The aim is to create an authoritative voice on tax law, and its authority is bound up with the interrelation between the OTS and the Joint Committee, as explained below.
The OTS would need access to, and co-operation from, HMRC and the Treasury. Initially its remit is likely to be limited to existing tax law, but as time goes on it is likely to examine Finance Bill proposals as well.
Even before that, the report anticipates that there will be increasing dialogue between the OTS and those who develop fresh proposals within HMRC and the Treasury.
Core staffing would be from academics and HMRC, led by an HMRC official, but it should also have some people from the profession, either on secondment or on two to three year contracts. It would be overseen by a steering committee appointed by the Chancellor, in the same way as the Tax Law Rewrite.
The Joint Committee
The Joint Parliamentary Select Committee on Taxation (JPSCT) was again a Forsyth proposal: a committee with membership drawn from both Houses of Parliament which would scrutinise the government's proposed changes to tax law, but would not bring forward any proposals of its own.
It would also examine and make recommendations on proposals presented to it by the OTS. It would, as a matter of course, look at the legislative proposals announced in the previous PBR, and would normally be holding its main sessions just as the Budget and Finance Bill process started in March and April.
The JPSCT would take written and oral evidence, and in particular it would be able to bring the 'extensive (but under-employed) diversity of financial expertise' in the House of Lords to bear on Finance Bill proposals which currently get a poor level of scrutiny in the House of Commons — 'in the words of one experienced MP “no more than a pointless ritual”'.
The main problem is whether this would constitute any form of encroachment on the financial privileges of the House of Commons as the sole arbiters on the rates and incidence of taxation.
The report points out that the establishment by the Lords of a Finance Bill Sub-Committee (FBSC) faced the same issues, and it was decided that, provided it only discussed the technical issues of tax administration, clarification or simplification, this was not an encroachment on the Commons' powers.
It therefore recommends that the same limitation be placed on the JPSCT. It also notes that the reports of the FSBC on aspects of the last five Finance Bills have had a 'distinctly positive' reaction.
The other comparator given is the Joint Committee of both Houses, which has handled the Tax Law Rewrite Project. This has examined the rewrite bills after second reading, before the bill goes back (in practice) to a third reading in the House of Commons.
This means that the House of Commons gets the final say on the bill, but that it has had the benefit of input from the Lords, and therefore the report says that a similar approach should be acceptable for the JPSCT.
Legislative procedure
The implication of the proposals for announcing changes no later than the PBR seems to be that the draft legislation itself should be available, and that is certainly what I took away from the presentation.
The report says that the consultation should be 'appropriate', and comments that draft clauses on the non-domicile provisions were presented but that they were 'riddled with errors and conceptually unsound in many places'.
Nowhere, however, does it actually say in so many words that draft legislation should be available at the PBR.
The report also notes that one major problem with exposing the legislation in this way is forestalling, but points out that this has in itself led to problems in the past, where hurriedly prepared and under-scrutinised anti-avoidance legislation has actually created new avoidance schemes.
While it is acknowledged that there may be exceptional cases in which the Treasury can make the case that either urgency or secrecy is required, the suggestion is that these should be rare.
This could only ever be a convention, since the House of Commons cannot in effect bind its successors to this ordinance. However, the report says that 'a competent and determined administration should be able to establish a strong convention to this effect'.
Secateurs or scorched earth?
My main problem with the proposals is that there is nothing particularly new here. In one form or another, these ideas have been around since at least the time of Lord Howe's Addington Society lecture, and there was a time when the Tax Law Rewrite was expected to take on some of the issues outlined here.
In fact, arguably, the Tax Law Rewrite has been a tangent in progress towards simplification: it was something that needed to be done, and arguably was necessary preparation for simplification, but it was not simplification itself.
In other words, if it was an expense incurred by an employee, it wouldn't be an allowable deduction from income, because it was merely preparatory to the real work, not part of it.
Meanwhile, the length and complexity of our tax system grows exponentially, George Osborne very kindly illustrated this by reference to the growth in the size of the Yellow Book during Labour's term of office; rather less kindly I have to point out that the growth started during Norman Lamont's chancellorship in the 1990s.
When direct tax legislation was still contained in one volume of the Yellow Book, it was reasonable to assume that the legislation simply needed some careful pruning to restore it to good order, and that is what these proposals seem to me to offer.
Now that it is spreading like Japanese knotweed and is scarcely containable within four volumes, I think that something far more radical is required, and that the rather genteel processes which this report propose may trim away some of the minor excrescences of the legislation, but every Finance Bill produced by a Chancellor with an eye for the headlines will create far more complexity than the OTS will abolish.
Present experience
In particular, it seems to me that present experience suggests that this is so. The report highlights the non-domicile changes as an example of bad practice (except, disingenuously, the idea of charging the non-domiciled a flat fee because of course that was originally a Conservative idea).
But this was a proposal that was announced well in advance of the normal date for a PBR because there was a possibility that an early election might be called.
While the legislation might not have had quite the airing that could have been expected under the new rules, there was certainly plenty of time for consultation.
The other major disaster of the past year was the abolition of the 10% tax rate. This was a measure that was announced over 12 months before it was to take effect, and yet the furore did not start until it was really too late to do anything about it properly.
Finally, the CGT proposals were a genuine attempt at simplification: one single 18% rate which would have taken the tax back to the days of its introduction in 1965.
Exposure in this case did not lead to simplification, it led to complexity, as the complaints about business owners having the amount of the gain which they were allowed to keep reduced from 90% to 82% grew to an irresistible climax.
The result was hurried and ill-thought-through legislation, the 'here's one I prepared earlier' whereby retirement relief got dusted down and repackaged as entrepreneurs' relief.
While it is true that the FSBC's comments on the Finance Bills have been praised, they have also mostly been ignored. It seems that the Government will tolerate the Lords talking about tax provided they are not actually allowed to do anything about it.
While there is every reason why the elected government should not have its programme hamstrung by an inability to raise tax, that is no justification for giving it complete and unfettered control over the tax structure.
There must, logically, be a structural system for tax which is good enough not to need changing all the time. Clearly as the world changes it will need to change, but not dramatically, and not every year. Certainly not changing every year so that in five years time we are back to where we were before.
Indeed, Lord Howe reminded his audience last week that one of his early actions as Chancellor nearly 30 years ago was to abolish the then lower rate of taxation, although he pointed out that he compensated low earners fully by increasing personal allowances.
So, let's use the OTS to come up with a real bonfire of unnecessary tax rules and get back to a basic workable system. Then give the House of Commons power to control the tax take by increasing or decreasing rates of tax, but leave the structure of the tax system within the normal rules requiring consent of both Houses, or as a last resort the use of the Parliament Act.
Otheriwise, regardless of conventions and committees, the temptation for Chancellors to pull legislative rabbits out of parliamentary hats will be irresistible.
