Memorandum from Mr Edward Troup, Head
of Tax Strategy, Simmons & Simmons
1. This memorandum addresses the role of
the Treasury in tax policy making, and its relationship with the
revenue departments. I worked at the Treasury from 1995-97 but
since 1997 have been familiar with the workings of the Treasury
only as a "consumer" of its output.
2. The Treasury identifies as one of its
principal aims "promoting a fair and efficient tax and benefit
system with incentives to work, save and invest[1]",
and takes a lead role in tax policy making. It is clearly right
that the Chancellor's own department should be the principal tax
policy making department.
3. Good tax policy making needs to balance
the over-riding concern to collect tax with economic considerations
("efficiency") and with wider concerns of equity and
social consequences ("fairness"). It also needs to accommodate
the inherent tension between the goal of efficiency (which implies
a tax system which minimises distortions) and Government's wish
to promote particular activities (which tends to increase distortions).
4. In order to achieve this balance the
Treasury's tax policy unit should perform the following functions:
(a) It should translate the broad principles
of Ministerial intention into a coherent framework for the tax
system.
(b) It should provide the analytic background
to enable Ministers to reach balanced judgements in particular
cases on the competing requirements of revenue raising, efficiency
and the pursuit of policy ends.
(c) It should have the necessary technical
expertise to conduct a debate with the revenue departments on
equal terms.
I believe that the Treasury has failed, on a
number of occasions, to fulfil these functions adequately and
as a result has not been able to provide the necessary support
for the tax decisions of successive Governments. Each of these
three functions is considered in turn below.
5. A coherent framework for the tax system:
The Chancellor has stated that "tax policy should be based
on clear principles" and that "the tax system should
be well designed".[2]
There are a number of reasons for thinking that this has not been
achieved. Policy has tended to react to specific initiatives from
Ministers or revenue departments, without any overall framework
to individual measures. Anti-avoidance measures (for instance
on leasing, or one-man companies, NICs on share options) have
conflicted with other policy objectives (encouraging investment,
small businesses, employee shareholding), while specific incentives
(eg for the film industry, R&D, shipping) are at odds with
the stated aims of a broad tax base, reduction of administrative
costs and simplification. The Treasury has an important role to
play to ensure that measures put forward by the Chancellor receive
adequate internal debate, are made part of an overall explicit
strategy for the system and can be explained as such.
6. An analytic background to policy decisions:
Too many individual policy decisions have lacked both evidence-based
justification or ex-post evaluation. The Treasury has too often
either failed to provide that analytic background or left the
task to the revenue departments, whose analysis, quite understandably,
tends to reflect their primary statutory duty of ensuring that
revenues are collected. Some examples are referred to above, and
I have cited examples to the Committee in the past[3].
This year's Budget contains a controversial measure on double
taxation relief, the debate on which has been aggravated by the
lack of any consistent explanation for the measure from the Treasury.
Indeed, most of the discussion on the measure has been between
businesses and the Inland Revenue, even though the measure is
in part justified on wider grounds of international policy, which
is part of the Treasury's responsibility.
7. The expertise necessary to debate with
the revenue departments: The revenue departments are charged with
the "care and management" of taxes, and their Chairmen
are answerable to the Public Accounts Committee for the discharge
of that function. The experience of the departments in implementation
of tax policies is an essential element of tax policy making,
but their input into policy making has been driven by concerns
with tax yield. Against this, the Treasury's lack of detailed
knowledge of the tax system has fettered its ability to debate
the technical concerns of the revenue departments on equal terms
or to understand the practical consequences of particular measures.
This has resulted in difficulties with a number of technical measures,
typically ones justified on revenue protection grounds—the
recent debate over IR35 being a good example. This problem of
a lack of expertise has been tackled since 1997 by the strengthening
of the Treasury's tax policy unit, which I welcome. Nevertheless,
I see the Treasury as needing to take more of a lead role both
in establishing a centre of excellence on tax policy internally,
and promoting the wider debate and study of tax policy[4]
8. These weaknesses may have been aggravated
by the relative neglect of tax policy while monetary policy was
within the Treasury's remit, and hence was the focus of Chancellor's
attention, and by the general reduction in staffing levels across
the civil service. Although some steps have been taken to address
the policy making function recently, I believe a great deal more
remains to be done.
9. I would recommend:
(1) that steps be taken to delineate more
clearly the division of responsibilities between tax collection
and tax policy making (while recognising that the tax collectors
have a vital role in advice on policy);
(2) that the tax policy unit at the Treasury
be more explicitly constituted with clearly defined responsibilities
to provide analytic support and explanation for tax measures;
(3) that consideration be given to the creation
of a Code of Tax Policy, as a statement of the Government's intentions
for the tax system, and against which particular measures are
required to be evaluated, to provide a better link between those
measures and the broad policy aims of Ministers for the tax system.
Such a Code would set out the detailed (as well as the broad)
principles on which policy is to be based, and best practice for
the making and implementation of policy decisions.
11 April 2000
1 The Treasury's Aims and Objectives: http://www.hm-treasury.gov.uk/docs/1999/aims.html. Back
2
Financial Statement and Budget Report, July 1997, page 24. Back
3
Treasury Committee, Fourth Report, The 1999 Budget, page 1. Back
4
It is also worth noting that the problem of a lack of expertise
is not confined to government. With a few honourable exceptions,
tax policy is not widely studied as an academic discipline in
the UK, in comparison to North America, some continental jurisdictions,
Australia and New Zealand. Back
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