Written evidence submitted by Low Incomes
Tax Reform Group
EXECUTIVE SUMMARY
1.1 "Tax policy"covers a wide spectrum:
international to local taxation (including devolved administration
variations); the large corporate body to the small sole trader;
the high net worth individual to the low-income taxpayer or benefits
claimant. All government policy should consider whether tax is
an issue and be designed accordingly.
1.2 The tax system should be progressive across
the board, not just in terms of income tax rates, but also wealth
and consumption taxes.
1.3 We generally recommend aligning rules and
definitions, but only where it makes sense to do so in terms of
simplifying compliance, minimising distortions and saving administrative
costs all round. Tax policy must always be workable by design;
otherwise it is bound to fail or descend into complexity (in which
case it is often the taxpayer who is willing to comply but inadvertently
gets it wrong who suffers the consequences). We hope that in due
course the Office for Tax Simplification will be able to play
a role in such further development of the system.
1.4 Thorough consultation in advance of policy
implementation, where possible, is imperative. Government should
over-compensate for the likely inability of the unrepresented
and low-income taxpayer to speak for himself, by proactively seeking
views of charities which seek to represent them. LITRG can assist
by co-ordinating those efforts, particularly where tax non-specialist
charities need to be consulted.
1.5 Each year, a proportion of the Finance Bill
and debates should be devoted to addressing problems of the low-income
population. We suggest a HM Treasury, HMRC and voluntary sector
working group is established to identify key issues, linking also
to the Treasury Committee.
1.6 In designing tax policy, simplicity of its
administration, communication of its meaning and clarity of the
law itself should be paramount. If complexity cannot be designed
out of the system, it should remain hidden behind properly resourced
customer service, whether delivered through the civil service
or an appropriately funded voluntary sector.
1.7 Tax policy can support growth by linking
with welfare benefits policy and its aims to encourage more people
off benefits and into work. It can also provide reliefs for those
who become ill or disabled while in work to help keep them in
work and off benefits.
1.8 Tax policy can also encourage self-employment
with flexible payment arrangements and relief for losses and capital
investment, particularly in the early years of a new trade. But
this will fail if welfare benefits policy does not similarly recognise
these issues.
1.9 In answer to question five, though by no
means an exhaustive list, we have identified below a number of
distortions in the current system. These include: pensioner problems
(giving an example of where policy aimed at more wealthy individuals
impacts on those of much lesser means); the confusion created
through different rules for tax and National Insurance; and the
uncomfortable relationship between independent taxation and household
assessment of welfare benefits. In conclusion, these examples
illustrate that policy needs to be continually reviewed to check
it remains valid; and that different definitions create confusion
for the individual which in turn argues for a more cohesive system,
not just within tax but looking across to associated fiscal (and
sometimes even non-fiscal) policy.
2. ABOUT US
2.1 The Low Incomes Tax Reform Group (LITRG)
is an initiative of the Chartered Institute of Taxation (CIOT)
to give a voice to the unrepresented. Since 1998 LITRG has been
working to improve the policy and processes of the tax, tax credits
and associated welfare systems for the benefit of those on low
incomes.
2.2 The CIOT is a charity and the leading professional
body in the United Kingdom concerned solely with taxation. The
CIOT's primary purpose is to promote education and study of the
administration and practice of taxation. One of the key aims is
to achieve a better, more efficient, tax system for all affected
by it - taxpayers, advisers and the authorities.
3. OUR RESPONSE
TO THE
INQUIRY'S
QUESTIONS
3.1. What are the key principles which should
underlie tax policy?
What is included in the term "tax policy"?
3.1.1 Fundamental to this inquiry is firstly
to consider what is meant by "tax policy". The term
could encompass many things: European taxes such as VAT; other
indirect taxes such as excise duties; direct taxes such as corporation
tax and income tax; social security (National Insurance) contributions;
taxes on wealth such as stamp duties, inheritance tax, capital
gains tax; local and devolved taxes; and perhaps even other items,
such as student loan repayments, which are collected via the tax
system.
3.1.2 The overall impact of tax on a person's
or entity's situation cannot be considered without looking at
this entire spectrum. In general, alignment of rules and definitions
across the different duties creates simplicity; but as we have
said during the review of HMRC Powers over recent years, alignment
for its own sake should not be not be pushed through at the expense
of fairness or where it makes sense to make exceptions.
A progressive system
3.1.3 The tax system should be progressive across
the board, not just in terms of income tax rates, but also wealth
and consumption taxes.
Targeted support
3.1.4 One of the key questions is whether the
tax system is the best means of offering support where, for example,
the Government wishes to encourage growth or target help at a
certain group. Generally, we think the tax system can be useful
in either being the key means of delivering such policy intentions
or supporting their delivery (see comments on welfare benefits
in answer to question three below). But inevitably, the more detailed
the rules are in offering reliefs and exemptions, the greater
their complexity. There is therefore a balance to be struck.
Thorough consultation in advance, where possible
3.1.5 The consultation process generally ensures
that everyone who is in the loop has an opportunity to respond
to any proposals. But what about those who are not in the loop
who may be equally affected by the changes? How does government
hear their voice?
3.1.6 As we noted in our response[41]
to the consultation "Tax policy making: a new approach"
last summer, we believe that LITRG (in its position looking at
how tax policy cuts across to other policy) has a special role
here in helping government, and indeed the Committee, to ensure
that the views of everyone affected are gathered. LITRG is uniquely
placed to play a co-ordinating role with "tax non-specialist"
charities to make sure that tax issues are considered by them
where necessary.
3.1.7 We also recommended in that submission
that every year a part of the Finance Bill debate (and space for
clauses in the Bill itself) should be devoted to solving some
of the problems of the unrepresented - various examples of which
we give in our answer to question five below.
3.1.8 In this respect, we believe that the Government
needs to over-compensate for the low-income population by making
a special effort to gather views and analyse their needs in advance
of policy decisions. There is a perception that if there are 50,000
low-income people affected by a tax issue then this is likely
to be regarded as "small" by HMRC and the Treasury and
not deserving of time being spent compared to if those 50,000
were from a high-income sector. We therefore favour creation of
a special low-income team in the Treasury linking to HMRC's Individuals
Customer Directorate and the specialised tax voluntary sector
to redress the balance. It would be helpful if there were a member
of staff working for the Treasury Committee who could take part
in this work.
Clarity of the law and simplicity of administration
3.1.9 We comment further below under the fourth
question, but generally a key principle of tax policy design should
be simplicity of administration.
3.1.10 Moreover, we believe the law itself should
be as clear as possible and its expansion or interpretation through
HMRC guidance kept to a minimum. A straightforward rate structure
would, for example, go a long way towards simplification. One
example is the tortuous 10% starting rate on savings which because
of its complexity is little known, poorly understood and probably
claimed by only a few of those who are entitled. While at present
the role of the Office for Tax Simplification is to look only
at the simplification of the present system, we hope that in due
course they would have the resources to enable them to play a
part in the development of the system.
3.2. How can tax policy best support growth?
3.2.1 As we note in our answer to question three
below, tax policy should be joined up with welfare and benefits
policy. Key objectives in so doing are to:
ensure
that the fiscal system recognises the entire financial situation
of an individual who is both a taxpayer and a claimant;
ensure
the tax system supports those who become ill or disabled to remain
in work, perhaps for example by offering reliefs so that people
can re-train where they are unable to continue in an existing
role;
simplify
the rules, and provide incentives, for new businesses to encourage
those wishing to move into self employment; and
provide
flexible tax payment options tailored to business needs.
3.2.2 In terms of the third bullet above, the
necessity for joined-up policy has been recently illustrated in
the proposed system of the Universal Credit. We have pointed out
that the initial idea for the self-employed to be deemed to earn
the equivalent of the National Minimum Wage, even when their business
is yielding no profit, is divisive. Moreover, this would be a
retrograde step from the current tax credits rules which basically
follow the tax system and allow for the likelihood of losses and
capital outlay, particularly in the early years of a new business.
3.3. To what extent should the tax system
be structured to support other specific policy goals?
Welfare and benefits
3.3.1 In launching the inquiry, the Committee
noted:
"The Mirrlees Review, published by the IFS,
argues that the tax system should be considered as a whole with
the benefit system, seek neutrality, and achieve progressivity
as efficiently as possible."
3.3.2 One of LITRG's key principles has always
been that the tax system should support, not detract from, the
delivery of welfare. In our work, we continually urge policy makers
to look across all tax and welfare systems and assess the impact
of any proposed measures on each individual's or household's financial
situation taken as a whole. It is vital to ensure that the beneficial
effects of a measure designed to help an individual are not countered
by existing rules elsewhere in the tax/benefits system, simply
because policy makers had failed to look across the whole spectrum.
Joined-up policy and legislation
3.3.3 Furthermore, we aim to look at other policy
changes and see how they might be joined up with tax policy (rather
than simply looking at the impact of tax policy on other areas).
In so doing, we can help to identify ways of simplifying policy
across the board. One recent example of this was where we commented
on proposed changes to the National Minimum Wage (NMW) legislation
in respect of travel expenses, suggesting the NMW Regulations
should be aligned with the income tax definition; a recommendation
which was accepted and implemented from January 2011[42].
3.3.4 A further example is our work on independent
living[43],
identifying the tax impacts on people who are enabled, through
direct payments, to employ carers or household help.
3.3.5 We therefore urge that wider government
policy should have a "tax check" to ensure there are
not unforeseen tax consequences.
3.4. How much account should be taken of the
ease and efficiency with which a particular tax can be imposed
and collected?
3.4.1 We believe this is important and should
be considered at the earliest stages of policy design. A tax matter
might be complex, but compliance with the rules should be made
simple for the taxpayer, so as to reduce administration costs
for HMRC and foster good customer relations.
3.4.2 Any complexity should therefore be hidden
so far as possible, by giving taxpayers clear instructions how
to comply. Therefore, successful tax policy should have its communication
strategy to the taxpayer inbuilt; or, where a change is rushed
through to counter some perceived mischief, there should be time
devoted thereafter to such considerations.
3.5 Are there aspects of the current tax system
which are particularly distorting?
3.5.1 In its work, LITRG has identified many
areas of distortion. There are areas where the system is illogical
and unnecessarily complex.
Pensions
3.5.2 For example, we have recently been reviewing
the issue of small pensions and those who are permitted, subject
to certain restrictions, to "trivially commute" their
entire pension pot as a partially-taxed, partially tax-free lump
sum. This is one area where a change aimed at wealthier taxpayers,
to reduce the total pensions lifetime allowance, could have affected
those, generally lower income, taxpayers who have only accrued
small pensions. This was because the limit on those pensions which
could be trivially commuted was defined by reference to the lifetime
allowance.
3.5.3 Thankfully, that link is to be removed;
but idiosyncrasies remain such as the need to commute a number
of trivial pensions within 12 months of the first such commutation.
We have been unable to determine clearly the rationale for such
a restriction, which seems an unnecessary complication where there
is already a monetary limit on the overall amount which can be
encashed. And indeed the same restriction does not apply to other
commutations, such as those which are non-trivial, or trivial
commutations arising on winding up or death. It can lead to distortions
by, for example:
forcing
the encashment of all policies within a short space of time which
might not make financial sense for the taxpayer; or
forcing
the purchase of an annuity in the (not uncommon) situation of
a forgotten small pension pot coming to light after the 12 month
window has expired.
Thresholds
3.5.4 Distortions can be created where there
are differences in thresholds. For example, income tax starts
to be paid at a different point than National Insurance contributions
which in turn differ from tax credits and benefits taper thresholds.
Moreover, someone working at National Minimum Wage rates and living
below the poverty line can be liable to tax and National Insurance.
3.5.5 These cross-cutting issues are continually
at the forefront of LITRG's work. But even though these considerations
are now coming to the attention of the Government, for example
through the review of benefits and creation of the new Universal
Credit, issues of concern remain.
3.5.6 For example, with the Government's policy
of gradually increasing the personal tax allowance to £10,000,
it does not seem that the knock-on issue of the higher personal
allowances for pensioners has been considered, which continue
to be uprated only for inflation. We have urged that the policy
be considered as a matter of urgency[44].
Tax and National Insurance differences
3.5.7 Recently, increased attention has been
focused on possible alignment, or even merger, of income tax and
National Insurance. We agree that there is merit in reviewing
the two systems to see where consistency can be achieved.
3.5.8 For example, where an employee is not reimbursed
employment-related expenses by their employer, such as for business
mileage, they can make a claim against their income tax liability
for tax relief on the value (although many may not do so because
they are not aware they can). However, a similar claim is not
available for National Insurance.
Independent taxation versus household assessment
of benefits
3.5.9 Following on from our response to question
three above, one of the obstacles to taking an accurate overview
of tax policy interactions with welfare benefits is the conflict
between household assessment of tax credits and benefits as against
independent taxation; and indeed the various definitions of a
"couple" for different purposes. National Insurance
in some ways straddles the two, with the possibility of claiming
benefits by reference to another's contributions or even transferring
credits to someone else in certain situations (see for example
the recent consultation on transferring NI credits to another
family member where the child benefit claimant goes out to work[45]).
This is an area of tax policy which is indeed overdue a thorough
review.
Policy lessons to be learnt from current distortions
in the system
3.5.10 From the example of trivial pension commutations
above, we conclude that it would be useful to ensure reliefs are
continually reviewed for efficacy, that the parameters are still
right, and to see if there are any rules or restrictions which
detract from the economic benefits of the relief.
3.5.11 Furthermore, we have illustrated how failure
to align definitions, rules and procedures creates confusion.
There are myriad examples of such lack of alignment in the wording
of the law, where different terms and language are used to describe
basically the same concept. Also, the same individual may have
to supply the same information to multiple government departments,
or multiple silos within a single department, and in varying ways
depending on which rules they are complying with.
3.5.12 A single financial transaction can result
in income which is taxable but disregarded for tax credits and
possibly treated as capital for assessment of welfare benefits.
How much simpler life could be if these issues were reviewed and
aligned if possible, and if in future policymakers were to consider
matters in the round when initiating change.
January 2011
41 See http://www.litrg.org.uk/submissions/2010/tax-policy-making Back
42
See paragraph 3.4.2 of our consultation response-
http://www.litrg.org.uk/submissions/2010/travel-expenses-nmw Back
43
See our 2008 report - "Independent living, direct payments
and the tax system"
http://www.litrg.org.uk/reports/2008/independent-living-direct-payments-and-the-tax-system Back
44
See http://www.litrg.org.uk/News/2010/tax-policy-pensioners Back
45
See http://www.litrg.org.uk/submissions/2010/ni-credit-changes Back
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