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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