Written evidence submitted by the Institute
of Chartered Accountants in England and Wales (ICAEW)
INTRODUCTION
1. The Treasury Committee launched an Inquiry
on 24 November 2010 into the fundamental principles of tax policy.
The call for evidence refers to the publication of recent detailed
reports into the fundamentals of tax policy by both the OECD and
Institute for Fiscal Studies (IFS). Reference is also made to
the publication of the list of over 1,000 tax reliefs published
by the Office for Tax Simplification (OTS).
2. The Committee has invited written evidence
on the following five questions:
1. What are the key principles which should underlie
tax policy?
2. How can tax policy best support growth?
3. To what extent should the tax system be structured
to support other specific policy goals?
4. How much account should be taken of the ease
and efficiency with which a particular tax can be imposed and
collected?
5. Are there aspects of the current tax system
which are particularly distorting?
3. We have set out below our comments on
these questions. As part of our response to question 1, we have
also set out some comments on the OECD and IFS reports and, in
our response to question 2, we have also referred to the work
of the OTS.
WHO WE
ARE
4. The Institute of Chartered Accountants
in England and Wales (ICAEW) operates under a Royal Charter, working
in the public interest. Its regulation of its members, in particular
its responsibilities in respect of auditors, is overseen by the
Financial Reporting Council. As a world leading professional accountancy
body, ICAEW provides leadership and practical support to over
136,000 members in more than 160 countries, working with governments,
regulators and industry in order to ensure the highest standards
are maintained. The ICAEW is a founding member of the Global Accounting
Alliance with over 775,000 members worldwide. The Tax Faculty
is the focus for tax within ICAEW.
EXECUTIVE SUMMARY
Question 1—What are the key principles that
should underlie tax policy?
5. In 1999 we identified ten principles
that provide a framework for evaluating the tax system and we
have used them subsequently to evaluate tax policy changes. Our
key principles are that the tax system should be: certain in operation
with changes kept to a minimum; simple and understandable; easy
to collect and to calculate; fair and reasonable; statutorily
based, properly targeted and subject to parliamentary scrutiny
and proper consultation; it should be regularly reviewed and competitive
so as to encourage investment.
6. A good tax system also needs to be administered
efficiently and effectively. This is subject to a separate Treasury
Sub-Committee Inquiry but we are very concerned that HMRC's efficiency
and effectiveness have fallen and that they need to be improved.
7. The OECD and IFS Mirrlees reviews are
valuable contributions to the debate on what is the best tax policy.
Tax policy should be broadly based with reasonable tax rates and
reliefs kept to a minimum. The OCED suggest moving towards increasing
taxes on consumption and residential property taxes and reducing
income taxes and corporation tax, but in the current climate we
do not think this would be right approach for the UK.
Question 2—How can tax policy best support
growth?
8. The tax system should be competitive,
fair and reasonable and not subject to constant change. Tax policy
should be decided at an early stage and major changes kept to
a minimum.
9. There should be a review of the tax and
administrative burdens on businesses that hinder growth by reference
to the life cycle of a business and the pressure points that arise.
Question 3—To what extent should the tax
system be structured to support other specific policy goals?
10. The tax system should be designed to raise
revenue efficiently to fund spending requirements. Using the tax
system to support other policy goals is at best problematic and
may result in unexpected behavioural changes and prejudice revenue
flows.
11. Where specific policies are adopted in order
to change behaviours, there should be post implementation cost/benefits
reviews and greater use made of "sunset" clauses.
Question 4—How much account should be taken
of the ease and efficiency with which a particular tax can be
imposed and collected?
12. Ease and efficiency of collection are an
important part of the design process and there should be greater
consultation at an earlier stage into the likely admin burdens
and compliance costs incurred by taxpayers, their advisers and
HMRC.
13. Tax policy changes should be evaluated against
specific cost/benefit criteria and if the policy fails the criteria
it should be rejected or modified.
Question 5—Are there aspects of the current
tax system which are particularly distorting?
14. There have always been distortions in the
tax system and we have identified a number of the more important
ones. Most of these distortions are not new. Many of them are
also interrelated and resolving them is likely to be politically
sensitive.
QUESTION 1—WHAT
ARE THE
KEY PRINCIPLES
WHICH SHOULD
UNDERLIE TAX
POLICY?
15. Since its foundation in the early 1990s the
ICAEW Tax Faculty has been at the forefront of the debate to improve
the UK tax system and the way UK tax policy is developed. As part
of this work, in 1999 the Tax Faculty identified ten principles
(the Ten Tenets) that should underpin a good tax system. These
are set out in Appendix 1.
16. We have used the Ten Tenets in the intervening
period to evaluate subsequent policy changes and we believe that
they continue to offer an appropriate framework to assess the
overall tax system and to evaluate individual tax policies.
17. We have set out below what we consider are
the key principles (tenets) of a better tax system and the necessary
processes (see our comments at para 23 below) that we believe
need to be in place to ensure that such a system can be maintained
and developed.
Key principles of a better tax system
18. A key principle underlying tax policy is
that it should be certain. The importance of this principle
is confirmed consistently in feedback from members and businesses.
Taxpayers in general and businesses in particular need to know
where they stand and make plans for the future, with a clear understanding
of the tax consequences which will result from their decisions.
Clear and certain tax laws minimise the likelihood that taxpayers
and the revenue authority will become involved in disputes about
the tax effects of transactions and the need to resort to the
appeals system.
19. The tax system needs to be designed to be
as simple as possible while achieving its various objectives.
It also needs to be fair and reasonable. The maintenance
of a proper balance between these two tenets can most obviously
be a source of tension: if the system is too simple (for example
a flat-rate of tax rather than a more progressive system of rates)
it may not be generally perceived as fair and reasonable but on
the other hand a tax system that seeks to ensure that all taxpayers
are treated fairly will inevitably result in greater complexity.
20. Tax law also should be properly targeted
so that it can best achieve the underlying policy objective. We
also believe that tax policy should be constant, in other
words tax policy should be set and then not be subject to constant
changes every subsequent year.
21. The purpose of the tax system is to raise
money for government expenditure in the most efficient way. We
do not think that the tax system is best suited to encouraging
changes in behaviour. Such changes often result in considerably
increased complexity but may have little impact upon behavioural
change - an example being the rates of capital allowances, where
business's investment timescales are not likely to be influenced
by regular changes to the rates. Conversely, changes to encourage
behaviour may have adverse effects, for example the policy behind
the introduction of the 0% rate of corporation tax was to encourage
companies to reinvest and grow but the absolute tax saving resulted
in considerable numbers of businesses incorporating solely to
save tax, with the result that the policy had to be changed.
22. Finally we believe that tax needs to be easy
to collect and to calculate. It should be relatively easy
for the majority of taxpayers to understand and calculate their
tax liability without the need for external assistance.
Processes
23. The formulation of tax policy and resultant
legislation needs to be subject to proper consultation
and it needs to be statutory i.e. enacted by statute and
subject to proper Parliamentary scrutiny. It also needs to be
constant so that changes to the underlying rules are kept
to the necessary minimum but it is also important that there are
regular reviews so that when the economic and commercial
reality changes the law can be suitably updated.
24. We have set out our detailed comments on
appropriate processes in Appendix 2.
The need for a competitive tax system
25. The current Government has as its aim to
create the most competitive tax system amongst the G20 countries.
In a globalised world where businesses in particular have real
choices as to where they operate, the UK needs to provide a tax
system which is attractive for businesses which already operate
in the UK and which encourages future inward investment. However,
a balance needs to be struck between a sufficiently attractive
tax regime and the need to protect the UK tax base while ensuring
that businesses make a fair and reasonable contribution to the
public finances.
26. The UK is currently coming towards the end
of a major review of the way in which it taxes international business.
The final part of this process is an interim amendment of the
existing CFC (Controlled Foreign Company) legislation, in FA 2011,
with a recasting of the rules in FA 2012. This is coupled with
a change to the taxation of foreign branches to be completed in
FA 2011. It would be appropriate to review these changes in the
light of the move towards a more territorial approach to UK taxation
in order to determine what aspects of the current, and proposed,
legislation are crucial to maintaining the competitiveness of
the UK tax system.
The administration of the tax system
27. However good the tax system is in design,
in order to deliver its potential benefits it needs to be administered
efficiently. We have been extremely concerned in recent years
by the drop in service standards and efficiency of HMRC. This
is a major concern of our members. At the end of 2010 we published
the results of a member survey[52]
that sets out the concerns in detail.
28. In December 2010 we submitted written evidence
to the continuing Treasury Sub-Committee Inquiry into HMRC's efficiency
and effectiveness. In view of the critical importance of this
aspect of the tax system we would be happy to assists the Sub-Committee
further with that Inquiry.
The OECD and Mirrlees review
29. The OECD and Mirrlees reviews are valuable
contributions to the debate on what is the best tax policy. These
detailed and comprehensive reviews are written primarily from
a macro economic standpoint and we will be studying them and their
conclusions in more detail over the coming months.
30. As professional accountants closely involved
in advising on tax and the proper operation of the tax system,
we also believe it is vital to ensure that whatever tax policies
are adopted, they are designed to be efficient and that they work
properly in accordance with the ten tenets referred to above.
31. As a general principle, we believe that tax
policy should aim to be broadly based, that rates are kept reasonable
and that the number of reliefs is kept to a minimum needed to
ensure that it operates fairly.
32. We agree with the view expressed in the Mirrlees
Review that the tax system should be considered as a whole with
the benefit system, seek neutrality, and achieve progressivity
as efficiently as possible. We also agree with the OECD that the
tax system should distort economic incentives as little as possible.
33. The OCED report suggests moving towards increasing
taxes on consumption and residential property taxes and less from
income taxes and corporation tax. The 22 June 2010 Budget "Red
Book" shows that Council Tax, Business rates and VAT combined
raised £131 billion (23%) of total revenue and that stamp
duty land tax raised a further £5.8 billion. In contrast,
income tax, NIC and corporation tax raised £292 billion or
about 53% of total revenues. Our initial conclusion is that, even
if such a move was desirable economically and let alone whether
it would be politically acceptable, it would involve a major rebalancing
of the UK tax system which would take to time to achieve and risks
introducing considerable distortions and behavioural changes.
34. Ultimately, the relative proportions of tax
raised from the various sectors of the economy are policy questions
for the government of the day to decide. In the current fiscal
climate, we believe that the overriding need is not to rebalance
the tax system but to ensure that existing revenue flows are stable
and not put at risk.
QUESTION 2—HOW
CAN TAX
POLICY BEST
SUPPORT GROWTH?
35. As noted above, a key requirement of businesses
is that they want certainty year on year. In relation to the tax
system, this suggests a competitive but fair and reasonable system
which is not subject to constant change. Tax policy and rates
should be set at an early stage in the Parliamentary cycle and
thereafter major changes in tax policy should be kept to a minimum.
36. The government is pursuing a growth agenda
and we believe that there is a need to review the tax and administrative
burdens on businesses that hinder growth. Such a review could
be integrated with the work of the Office for Tax Simplification
(OTS). The call for evidence referred to the work of the OTS and
the identification of over 1,000 tax reliefs - this work is proving
valuable but there is a need for a more detailed review of where
are the real pressure points in the tax system.
37. One approach would be to review the burdens
by reference to important events and decisions that businesses
are required to make, for example: starting a business and adopting
the most appropriate business structure; taking on your first
employee(s); registering for VAT; buying capital equipment; raising
external finance; selling internationally etc. The precise burdens
at each stage should be identified and quantified and consideration
given to how the burdens could be reduced.
38. We also believe there needs to be a clearer
recognition that the policy approach needs to recognise that there
is a significant difference between micro, SME and large businesses.
QUESTION 3—TO
WHAT EXTENT
SHOULD THE
TAX SYSTEM
BE STRUCTURED
TO SUPPORT
OTHER SPECIFIC
POLICY GOALS?
39. As noted above the overriding aim of the
tax system should be to raise revenue efficiently to fund the
government's spending requirements. This requires a stable and
reliable tax system that produces a predictable flow of revenues
within the limitations of forecasting error and the stage in the
economic cycle. In our experience, supporting other policy goals
is at best problematic and often results in unexpected behavioural
changes that may prejudice revenue flows, for example by encouraging
tax avoidance. It will often be more efficient to achieve other
policy goals by different means that can be better targeted, for
example the use of government grants.
40. There would be merit in examining the UK
rules for capital allowances and the extent to which the system
should, or should not, be used to encourage behaviour. There are
competing pressures to encourage UK business to invest in additional
productive capacity while at the same time achieving other policy
objectives, such as encouraging innovation and addressing the
Government's environmental goals.
41. Where specific policies are adopted in order
to change behaviours, there should be post implementation reviews
to consider whether the policy outcomes have been achieved and
whether the benefits outweigh the costs (i.e. revenue foregone).
42. In order to instil this discipline into the
tax policy making process, greater consideration should be given
to the use of "sunset" clauses. These would operate
so that after a fixed period of time, say five years, a particular
measure will lapse unless Parliament extended it but that should
only be done if a clear and positive case is first made for the
retention of the particular provision.
43. We recognise that this approach conflicts
somewhat with our tenets about the need for certainty and for
the system to be constant. The two approaches can be reconciled
by ensuring that the time limitation is stated at the outset and
that the measure is not changed once it has been introduced.
QUESTION 4—HOW
MUCH ACCOUNT
SHOULD BE
TAKEN OF
THE EASE
AND EFFICIENCY
WITH WHICH
A PARTICULAR
TAX CAN
BE IMPOSED
AND COLLECTED?
44. As mentioned above one of our ten principles
is that tax should be easy to collect and to calculate. It follows
that the ease and efficiency with which a tax can be collected
is a very important part of the design process and needs to be
considered in detail at the design stage and before tax policy
decisions are made. There should be greater consultation at an
earlier stage into the likely admin burdens and compliance costs
of proposed measures.
45. While impact assessments seek to assess this
efficiency, we are not convinced that the figures and costings
used to compute the assessments are always realistic and they
tend to underestimate the costs incurred by businesses in implementing
changes. Further, the approach only takes account of cost incurred
by businesses rather than taxpayers as a whole.
46. We believe it would be worthwhile when evaluating
tax policy changes to develop a minimum cost/benefit ratio that
compares expected tax revenues with the costs of compliance. This
should include costs incurred by taxpayers, their advisers and
HMRC and it should cover all taxpayers not just businesses. If
the proposed tax policy change fails to meet the minimum standards
then it should either be rejected or amended so as to ensure that
it does meet the test.
QUESTION 5—ARE
THERE ASPECTS
OF THE
CURRENT TAX
SYSTEM WHICH
ARE PARTICULARLY
DISTORTING?
47. There have always been distortions in the
tax system but resolving them is often politically sensitive.
Areas of the tax system where there are particular distortions
include:
— the
taxation of smaller businesses with particular reference to different
taxes paid by an employee, the self employed and a person operating
through a company, where all undertake similar work;
— the
general interaction between the income tax and national insurance
rules and in particular the higher taxation of earned rather than
unearned income because of the impact of national insurance on
the former;
— the
difficulty in determining whether a person is employed or self
employed for tax purposes and the different definitions applied
for non tax purposes;
— the
22% difference between the top rate of income tax and the CGT
rate favours capital returns although we appreciate that the current
Government has reduced this from 32%;
— the
impact of higher marginal rates of tax, for example the withdrawal
of personal allowances for income over £100,000 results in
a marginal income tax rate of 60% on income between £100,000
and £113,000, when either side of this band the rate is 40%;
— liability
to tax depends upon residence but the UK continues to have unclear
residence rules based largely on out of date case law; and
— VAT
Low Value Consignment Relief, in particular in relation to goods
despatched from the Channel Islands which enables goods to be
sold in the UK VAT-free.
48. Most of these distortions are not new and
have been with us in some form for many years. Many of them are
also interrelated so policy changes in one area are likely to
have repercussions in other areas that need to be factored in
to any decision making process.
APPENDIX 1
THE ICAEW TAX FACULTY'S 10 TENETS FOR A
BETTER TAX SYSTEM
The tax system should be:
1. Statutory: tax legislation should be
enacted by statute and subject to proper democratic scrutiny by
Parliament.
2. Certain: 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.
3. Simple: the tax rules should aim to
be simple, understandable and clear in their objectives.
4. Easy to collect and to calculate: a
person's tax liability should be easy to calculate and straightforward
and cheap to collect.
5. Properly targeted: when anti-avoidance
legislation is passed, due regard should be had to maintaining
the simplicity and certainty of the tax system by targeting it
to close specific loopholes.
6. Constant: Changes to the underlying
rules should be kept to a minimum. 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.
7. Subject to proper consultation: other
than in exceptional circumstances, the Government should allow
adequate time for both the drafting of tax legislation and full
consultation on it.
8. Regularly reviewed: the tax rules should
be subject to a regular public review to determine their continuing
relevance and whether their original justification has been realised.
If a tax rule is no longer relevant, then it should be repealed.
9. Fair and reasonable: the revenue authorities
have a duty to exercise their powers reasonably. There should
be a right of appeal to an independent tribunal against all their
decisions.
10. Competitive: tax rules and rates should
be framed so as to encourage investment, capital and trade in
and with the UK.
These are explained in more detail in our discussion
document published in October 1999 as TAXGUIDE 4/99; see http://www.icaew.com/index.cfm?route=118111
APPENDIX 2
THE PROCESSES THAT NEED TO BE IN PLACE TO
CREATE AND MAINTAIN A BETTER TAX SYSTEM
1. In formulating tax policy there needs
to be appropriate Parliamentary scrutiny and outside experts need
to be involved. There should be proper time for consultation and
a clear timetable - the proposals of the current Government are
a considerable improvement and should lead to improved tax legislation
in the longer term but it will require sustained effort and processes
to be locked-in for the future. We therefore believe that the
approach should be enshrined in a binding code so that a future
government will be held to account. There should also be external
monitoring of how the government of the day has complied with
the code and we suggest that there should be a periodic review
of new legislation, either by the Treasury Committee or some other
suitable oversight body.
2. It is also worth considering whether
the House of Lords could be given a role in examining and improving
Finance Bill measures without undermining the long established
principle that the House of Commons should be the arbiter on Money
Bills. The deliberative process should be carried out in collaboration
with those who have to operate and actually run the systems, including
agents and the professional bodies. There is an argument for disengaging
many of the measures, particularly those of a technical nature,
from the traditional Finance Bill timetable and putting such measures
through a separate process. The current Government approach demonstrates
that such an approach should be possible and has resulted in improved
opportunities for scrutiny.
3. Drafting of tax law should be clear,
properly targeted and generally included in primary legislation.
It is particularly important that anti-avoidance measures are
properly targeted and are not "catch all" measures whose
scope is then cut down by HMRC guidance. This is not a satisfactory
approach for a number of reasons. First, following the 2005 House
of Lords decision in the Wilkinson case ([2005] UKHL 30)
this approach is legally doubtful. Second, such guidance cannot
be relied upon and may be changed at any time so is of little
practical help in the event of a dispute.
4. It is important that tax law is subject
to proper Parliamentary scrutiny. It is for this reason that we
believe substantive tax legislation should be set out in primary
tax legislation and not in secondary tax legislation where the
level of detailed Parliamentary scrutiny is lower. There has been
a tendency in recent years to include within the primary law powers
for the executive to in effect rewrite the tax legislation by
way of secondary legislation. It is reasonable for Parliament
to delegate minor and administrative measures to the executive
but not otherwise. We believe that as a matter of principle any
changes to tax law which are not merely administrative should
be put through the Finance Bill process and subject to proper
Parliamentary scrutiny. Such principles and practice could be
set out in a binding code and again subject to a review process.
5. Our proposals above are designed to ensure
that substantive tax law is subject to proper scrutiny through
the Finance Bill process. Whether this approach is adopted or
not, we believe that more generally there is a need for greater
scrutiny of Statutory Instruments. The number of tax related Statutory
Instruments has grown considerably over the years and Parliament
needs to be satisfied that they are subject to a thorough review.
6. The role played by guidance is an important
consideration. It should not be used as a support for inadequate
primary legislation but it clearly has a role in helping taxpayers
and their advisers better understand what legislation means in
practice and, as a result, guidance can help to create the required
certainty. We believe that there should be a presumption that
all guidance is consulted on before it is finalised and published.
7. It is also clear that a proper understanding
of tax legislation and the manner in which it will be implemented
require any guidance to be produced at the time that the proposals
are being debated and before they are enacted. Again, the Government
appreciates the need for this approach and we believe that it
needs to be enshrined in a code so as to ensure that it is followed
in the future. There should also be consultation with interested
parties on that guidance so as to ensure that it is clear and
correctly reflects the primary and secondary legislation which
it explains.
January 2011
52 See http://www.icaew.com/index.cfm/route/175054/icaew_ga/Faculties/Tax/Publications_and_technical_guidance/TAXREP_43_10/TAXREP_43_10/pdf Back
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