Principles of tax policy - Treasury Contents


Conclusions and recommendations


Introduction

1.  While we attempt to construct some principles to guide policy makers, we recognise that sudden wholesale reform is likely, in some areas of the tax system, to be impracticable. The principles we and others set out can shape the system over the long term. We welcome the fact that tax policy making is currently the subject of considerable analysis and scrutiny, particularly by practitioners. If this can be sustained, there is a reasonable prospect of gradual improvement to the tax system. (Paragraph 13)

The basic principles

2.  A tax system which is felt to be fundamentally unfair will quickly lose political support. However, judgements about the fairness of policy details are politically contested and a major way in which parties distinguish themselves from one another. This can obscure the fact there is a significant amount of consensus on fairness. The differences are often matters of degree and emphasis. (Paragraph 23)

3.  Governments of different parties will have different views of what constitutes welfare and different policies to pursue it. The use of taxation should not be ruled out as a means to that end. However, the indiscriminate use of taxation to achieve wider policy goals may increase the complexity of the system and be counterproductive. Governments should be wary about using tax policy as a substitute for direct policy measures, doing so only after careful analysis shows it to be the most effective tool. (Paragraph 32)

4.  The scope for tax arbitrage has grown substantially over the last quarter of a century. Globalisation is likely to increase it further. A tax system which is not competitive by international standards will not support growth. Competitiveness is not a simple matter of tax rates, although they have a bearing, but of the stability of the system as a whole. (Paragraph 35)

Procedural principles

5.  Legal clarity is important, but the statutes may require interpretation. In theory, certainty could be achieved by giving HMRC greater powers to interpret the law, and giving it power to make binding guidance, or a wider range of non statutory concessions. This would not be acceptable. HMRC's powers should be limited and should be subject to reasonable challenge in the courts. The public interest in ensuring that the HMRC is not sole arbiter of the law overrides the interest in certainty. (Paragraph 42)

6.  However, although tax law should have a statutory basis, we do not consider it realistic to expect that all tax law will be made by primary legislation, or to rule out the use of Commissioners' directions, or the use of extra statutory concessions, providing they are limited to formulating policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate. However, if details are to be left to secondary legislation, or to directions, scrutiny is important. (Paragraph 43)

7.  We support measures to improve the drafting of tax legislation. However, clarity of language will not help the taxpayer establish his or her situation with certainty if the underlying policy is unnecessarily complex. (Paragraph 46)

8.  We welcome the establishment of the Office of Tax Simplification. This has been established for the life of the current Parliament. Whether this body or something similar could make a further contribution in the next Parliament will be assessed by this Committee and others when its current projects are completed, and the Chancellor has responded. In principle, higher quality work from HM Treasury and HM Revenue and Customs in this field should render such a permanent body unnecessary. If and when the benefits of the Office of Tax Simplification are clear, its resources should be reviewed. (Paragraph 49)

9.  Tax policy must be clearly targeted, so that taxpayers can have certainty about which rules apply to them. (Paragraph 53)

10.  The way in which any GAAR might be framed and implemented needs careful consideration and full consultation. While there may be advantages to a General Anti-Avoidance Rule, taxpayers need a safe harbour to operate effectively without the undue uncertainty over their tax liability which an ill thought through or impracticable GAAR might bring. (Paragraph 59)

11.  Sudden and unexpected changes to tax policy are harmful to business and to the Exchequer and should be avoided unless there are exceptional reasons requiring immediate intervention. Tax policy has to change in response to changing circumstances. It is important that business has early warning of policy changes, except in cases where the tax base is at risk. (Paragraph 63)

12.  Greater stability in tax policy, secured by advance notice and better consultation, should also assist in securing the certainty which so many of our witnesses thought was essential in a good tax system (Paragraph 65)

13.  The practicability of a tax—ie the ease with which it can be collected, and the compliance burden imposed on the taxpayer—should be fully understood and explained at the time of the tax change. The accuracy of these assessments, quantified wherever possible, can then be compared with outcomes over time. The Government has introduced a new impact analysis for tax measures which is intended to ensure that compliance burdens and collection costs are systematically considered. We recommend that this impact analysis should include a detailed assessment of the way in which any proposed new tax, or a change to a tax, would be implemented. It should be accompanied by dummy forms, to ensure that the real practical issues are properly addressed. (Paragraph 74)

14.  Publication of such detailed analyses alongside tax proposals will enable the tax profession to assess their quality and alert Government to shortcomings. As a first step, we recommend that the Government should produce an example of such an analysis for a recently introduced tax measure so that we can assess how to make such analyses as helpful as possible. (Paragraph 75)

Scrutiny of tax

15.  Since we recognise that tax law can be a complex and technical subject, we have invited the tax professional bodies to brief us on the Government's proposed tax changes, so that we are in a position to comment at the time of the Budget. This will, we hope, assist colleagues in their consideration of the Finance Bill. We continue to believe that the Government should examine how consideration of the Finance Bill can be structured in order to facilitate engagement between experts and Members, and allow Members the time to debate both technical and politically controversial matters in Committee. (Paragraph 82)

16.  We are attracted by the concept of a specialised unit to provide MPs with technical support and analysis of tax policy. We recognise that in a time of stringency, this may only be achievable by diverting resources from other research centres; but there is a case for ensuring that MPs are better briefed on tax matters by Parliament. We will return to this issue. (Paragraph 83)

17.  The Committee recommends that tax policy should be measured by reference to the following principles. Tax policy should:

1.    be fair. We accept that not all commentators will agree on the detail of what constitutes a fair tax, but a tax system which is considered to be fundamentally unfair will ultimately fail to command consent.

2.    support growth and encourage competition.

3.    provide certainty. In virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs. Certainty about tax requires

i.   legal clarity: Tax legislation should be based on statute and subject to proper democratic scrutiny by Parliament.

ii.  Simplicity: The tax rules should aim to be simple, understandable and clear in their objectives.

iii.  Targeting: It should be clear to taxpayers whether or not they are liable for particular types of charges to tax. When anti-avoidance legislation is passed, due regard should be had to maintaining the simplicity and certainty of the tax system.

4.    provide stability. Changes to the underlying rules should be kept to a minimum and policy shocks should both be avoided. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear.

5.    The Committee also considers that it is important that a person's tax liability should be easy to calculate and straightforward and cheap to collect. To this end, tax policy should be practicable.

6.    The tax system as a whole must be coherent. New provisions should complement the existing tax system, not conflict with it. (Paragraph 84)



 
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