Written evidence submitted by The Chartered
Institute of Taxation (CIOT)
1. Introduction
1.1 The Chartered Institute of Taxation (CIOT)
is pleased to have the opportunity to submit comments to the Treasury
Committee inquiry into the fundamental principles of tax policy.
Our comments are intended to cover the whole range of UK tax policy
making, though we have not commented specifically on matters relating
to the unrepresented and tax credits. These are dealt with in
the response from our Low Income Tax Reform Group (LITRG), whose
submission has our support.
1.2 How a country's tax revenues are designated
and collected are clearly fundamental to the well-being of all
aspects of the country. A modern tax system touches all areas
of society and all individuals and businesses contribute to some
extent. The CIOT has regularly commented on aspects of tax policy
in the past, particularly on the way tax changes are effected.
We have often called for improvements to that process and to the
principles that underlie the tax system that we have in the UK.
There are real signs that the calls we and others have been making
are being heeded and we welcome the Treasury Committee's focus
on this crucial issue.
1.3 We will address each of the Committee's five
questions in turn and conclude with some further general observations
on aspects that do not fit easily into the five headings.
2. What are the key principles which should
underlie tax policy?
2.1 The primary reason for raising taxes is to
raise money to fund government expenditure. That is hopefully
an obvious initial point to make but it is a necessary one. Governments
must be prepared to ensure that taxpayers appreciate this rationale;
allowing taxpayers to understand why taxes are being raised contributes
materially to their acceptance and so has a positive impact on
their collection.
2.2 Having decided that taxes are needed, we
think the most important principle is Certainty. In this we echo
Adam Smith. The point is that taxpayers need to be sure of what
taxes are to be levied and at what level; those in business can
plan their investment knowing what taxes will be charged. The
Certainty principle then has some subsidiary points:
— There
should be long term frameworks in which taxes can operate, so
that if there are changes, then the main principles continue.
— Taxes
should as far as possible be simple, so that they can be understood
and operate under clearly-expressed rules enshrined in statute;
the system must be easy to operate.
— As
most taxes will inevitably not be simple, there must be scope
for the taxpayer to confirm their position. This is a key issue
for businesses planning investment: we need to have more opportunities
for rulings where there is genuine uncertainty.
— Taxes
should be applied consistently: the same actions should achieve
the same taxing results year on year and should not be dependent
on the tax authority's way of interpreting the rules; there should
be no retrospective changes[70].
— Where
changes are made to tax rules, these should flow from proper consultation.
By this we mean open consultation, over a proper timeframe, with
the changes developed in stages and with appropriate feedback
throughout the process. Those changes should then be subject to
proper Parliamentary scrutiny.
— Fiscal
neutrality must be borne in mind (we return to this issue in section
4).
2.3 The Government's paper on "Tax Policy
Making—a new approach" does, we think, offer a much
improved way of effecting tax policy and we have welcomed it[71].
It endorses the need for proper consultation—something we
have long campaigned for and on which we have commented separately[72].
The main shortcoming in the document is the way it stops short
of addressing the issue of Parliamentary scrutiny, which our paper
"The Making of Tax Law"[73]
seeks to address; we think there is a need to utilise the expertise
available in the House of Lords, which can be done without interfering
with the primacy of the House of Commons in matters of tax rates.
2.4 We also welcome the Government's commitment
to developing a framework for corporate taxes, which is much needed.
There is a similar need to develop a framework for environmental
taxes, so that these develop in accordance with the principles
set out above rather than on an ad hoc basis.
2.5 The possibility of a GAAR is an interesting
one in terms of these key principles. The challenge will be to
deliver certainty, consistency of application and simplicity—though
it does, we accept the offer of the possibility of simplifying
anti-avoidance rules[74].
3. How can tax policy best support growth?
3.1 This should follow from the key principles
and can be summarised as "commit to a stable tax system".
Stability will encourage business confidence and encourage businesses
of all sizes to plan on a long term basis.
3.2 Simple, low taxes will naturally be more
attractive that complex, higher taxes that try to compensate with
a range of reliefs. We do not say that there should not be specific
reliefs in a tax system, just that these need to be thought through,
properly designed and carefully targeted. Reliefs also needs to
be simple to claim, otherwise they become ineffective. Research
& Development: the additional relief is clearly welcome to
those who claim it and the possibility of a tax repayment is particularly
valuable to smaller companies. But for a long time claiming the
relief was seen as too complex (though HMRC have certainly improved
the process) and arguably it still concentrates too much on the
"R" rather than the "D".
3.3 We accept that changes will need to be made
to the tax system and in particular to its rates. However, such
changes should follow from consultation (at least on systemic
changes) and should always have regard to the impact on stability
and confidence. Whether or not the withdrawal of industrial buildings
allowances was necessary, doing so over a four year period when
investors had anticipated a 25 year writing down period did not
enhance the UK's business tax environment. Constant detail change
also damages growth prospects: businesses have to devote resource
to dealing with change and have no confidence that future change
will not damage their plans.
3.4 As the UK is an open, international economy,
we must have a tax regime that is internationally competitive.
This means far more than tax rates that are comparable (or lower)
than our competitors. It means that the system must deliver the
certainty referred to above and operate in a business-friendly
way. In recent years there has been a growing perception that
the UK's tax system has become less competitive with uncertainty
probably being at least as important a factor than simple tax
rates. Again, there are welcome signs that this issue has been
recognised with initiatives such as the Patent Box.
4. To what extent should the tax system be
structured to support other specific policy goals?
4.1 Taxes will inevitably distort behaviour.
This can lead to unintended consequences. The example of the 0%
corporation tax rate is a classic example of where an attempt
to give a relief went badly awry, much as predicted by the CIOT
and others.
4.2 Ideally the tax system would be fiscally
neutral. That is impossible in its purest sense but the principle
of fiscal neutrality needs to be borne in mind when considering
the use or amendment of the tax system.
4.3 We accept that the tax system can legitimately
be used to address market failures. It can be used to encourage
(or discourage) particular behaviours. However, as this takes
the tax system into non-fiscal areas, such moves need to be undertaken
with care. It should always be part of policy development to question
whether the behaviour modification would be better achieved through
non-tax mechanisms. Using the tax system will inevitably increase
complexity; all too often a new relief or incentive has had to
be regularly modified to better target it or for perceived anti-avoidance
reasons. It also increases volatility of tax revenues: the London
congestion charge is a good case study of how the success of the
charge in its early days (in reducing traffic) led to problems
(it did not generate as much money as was hoped).
4.4 The tax system will always need to be reviewed
to make sure it does not work against wider policy objectives.
An example of this is how attempts to encourage people back into
employment has to contend with the income tax and NICs imposed
from quite low starting points; tax credits and moves to increase
the income tax personal allowance attempt to address this.
4.5 To succeed, these incentives and behaviour
modifiers need to be carefully designed and explained—and
then monitored for effectiveness. There will always be risks that
tax incentives can drive behaviours in ways other than those desired.
Some examples where the tax system has not necessarily achieved
its objective are:
— Financing
incentives: the Business Expansion Scheme started well but was
taken away from its target. The current VCT/EIS reliefs have been
successively modified so that their application is narrower and
narrower.
— Film
tax reliefs: the tax reliefs available were, inevitably, exploited
and led to constant tinkering with the rules to try and get back
to the original purpose.
— Green
investment incentives: the 100% capital allowances for some investments
are complex with boundary issues and can be difficult to achieve
with certainty.
— High
tobacco taxes aimed at discouraging smoking have boosted the attractiveness
of smuggling.
4.6 This emphasises the need for tax incentives
to be reviewed for their effectiveness after a proper period.
We do not seem to have in the UK's tax system the sort of approach
a business would have of systematically reviewing initiatives
to see whether they are proving effective. What has often happened,
as we have alluded to in para 4.3, is constant tinkering, often
argued as necessary for anti-avoidance reasons, but without a
proper overall review or testing against properly-expressed objectives
for the whole scheme.
5. How much account should be taken of the
ease and efficiency with which a particular tax can be imposed
and collected?
5.1 This is surely axiomatic. All taxes impose
administrative burdens on businesses and/or individuals. Taxpayers
generally accept that they have to pay their taxes but governments
must not add to the financial burden any more than they have to
when it comes to the administration of those taxes.
5.2 Employers always cite the burdens of the
tax system as a significant issue (although it is accepted that
some of the burden relates to matters beyond taxation). The default
attitude of government in recent years has seemed to be that employers
can absorb ever-increasing burdens: student loan repayments, attachment
of earnings, and maternity pay all add to the employer's workload.
Addressing the remaining differences between PAYE and NICs would
help: this should include structural features such as the non-cumulative
nature of NICs.
5.3 There is another more subtle burden the employer
has to shoulder—that of being the first port of call for
an employee's problems with tax. Recent PAYE problems have emphasised
this and it is a matter of concern that HMRC's own resources are
so reduced, leading to more of those who have difficulties with
their tax affairs to turn instead to their employer (or the voluntary
sector).
5.4 Some other examples of burdens:
— VAT
is usually cited as a cheap tax to administer—but it needs
to be borne in mind that the registered trader does most of the
work. Boundary issues over zero-rating cause problems for traders:
any evaluation of whether a particular zero rate should continue
should take this aspect into account, as well as fairness for
consumers.
— Online
filing is a sensible way forward—but mandating it in ways
that seem to be driven by HMRC's needs rather than with proper
regard to taxpayers' situations is inappropriate. We have regularly
highlighted concerns over the move to iXBRL, especially whether
software will be ready in time, and requiring online VAT filing
by all when some businesses simply do not have proper access to
IT or broadband is unfair.
— The
controlled foreign company (CFC) legislation has become administratively
burdensome whilst raising little real money. It has arguably lost
sight of its real rationale and has been a factor in the perception
of the UK's tax system as uncompetitive. It is good to see this
being addressed, though whether true simplification can be achieved
is far from certain.
— Tax
exemptions and thresholds play an important part in reducing burdens—but
they need to be kept up to date or they risk creating further
burdens. The "Christmas party exemption" has been raised
sensibly in recent years to £150, but the tax-free amount
for moving costs has remained stuck at £8,000.
5.5 One indicator of problems in this area can
be a need for extensive HMRC guidance. We are not opposed to HMRC
guidance and generally welcome it, but it should not be a substitute
for proper legislation. If significant amounts of guidance are
needed, that is surely a signal that the rules need to be reviewed.
Taxpayers and their agents must also be able to rely on HMRC's
guidance.
5.6 A facet of "ease of collection"
is that where disputes do occur between HMRC and the taxpayer,
there must be proper mechanisms for achieving resolution in a
good timescale. We have a good Tax Tribunal system in the UK and
the recently-developed HMRC review process is also proving valuable.
5.7 The administration of the tax system must
also allow for taxpayers to take professional advice and for HMRC
to deal with advisers on taxpayers' behalf. HMRC have historically
not valued professionally-qualified agents' contributions as they
should. There are some current initiatives that may change this
to the benefit of all concerned: the CIOT is participating fully
in the discussions and is keen to move forward appropriately.
6. Are there aspects of the current tax system
that are particularly distortive?
6.1 Arguably the tax system's main contribution
to encouraging growth would be to make sure it does not get in
the way of, nor penalise, legitimate behaviours. Nor should it
distort or contort actions. That said, taxpayers will always have
regard to the tax consequences of their actions and are likely
to choose a route that delivers a lower tax bill. This is something
that needs to be accepted by the tax authorities.
6.2 Some examples of taxpayers exercising legitimate
choice include:
— A small
business will always want to assess whether it should operate
on an incorporated or unincorporated basis (nowadays LLP is another
option).
— Investment
in equipment by purchase or leasing—though the way allowances
for leasing have been changed does mean that this is not a simple
decision.
6.3 Where the tax system distorts behaviour can
be because of the uncertainty in the system as well as inherently
disadvantageous consequences. Some examples:
— The
incorporation decision—while this will always be an issue,
ideally the decision should be taken based on what works best
for the business.
— Share
incentive schemes—complexity and overlap mean these are
less easy to operate and may not be encouraging all the preferred
behaviours.
— Debt/equity—the
tax system undoubtedly encourages debt finance.
— Residence
and domicile—the difficulty of getting certainty causes
individuals to take more extreme actions than are perhaps necessary.
6.4 It is accepted that sometimes the tax system
will legitimately distort behaviour. This must be for clear policy
reasons and needs to be carefully monitored for effectiveness.
Landfill tax is a good example: it has become increasingly expensive
so as to encourage recycling rather than dumping (though there
are always concerns that it results in fly-tipping).
7. Further points
7.1 The impact of tax changes driven by the devolved
governments in the UK needs to be considered in this inquiry.
There is, for example, an inevitable additional burden for employers
with employees in both Scotland and the rest of the UK with Scottish
rate of taxation.
14 January 2011
APPENDIX
THE CHARTERED INSTITUTE OF TAXATION
The Chartered Institute of Taxation (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.
The CIOT's comments and recommendations on tax issues
are made solely in order to achieve its primary purpose: it is
politically neutral in its work. The CIOT will seek to draw on
its members' experience in private practice, Government, commerce
and industry and academia to argue and explain how public policy
objectives (to the extent that these are clearly stated or can
be discerned) can most effectively be achieved.
The CIOT's 15,000 members have the practising title
of "Chartered Tax Adviser" and the designatory letters
"CTA".
January 2011
70 The CIOT recently published
a paper analysing the issue of retrospection and retroaction:
see http://www.tax.org.uk/NR/rdonlyres/6E03C65F-8F28-4F09-B89C-AF6E7642F5C4/0/RetrospectivetaxationandtaxpolicymakingCIOTNov10.pdf
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71
See http://www.tax.org.uk/NR/rdonlyres/661F4FEC-4A51-4894-B302-C8D56BE2CD58/0/TaxPolicyMakingCondoc.pdf
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72
See http://www.tax.org.uk/NR/rdonlyres/69DA4A3E-3521-4600-ACD6-8C7CEDBC3947/0/CIOTTaxPolicyMakingresponse
200910.pdf Back
73
Available at http://www.tax.org.uk/NR/rdonlyres/9265C21D-2CE8-445C-9EC8-590657401327/0/themakingoftaxlaw.pdf
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74
The CIOT's paper on a GAAR is at http://www.tax.org.uk/NR/rdonlyres/3E24A2EB-D618-4D04-B078-E2EFB3B6AC95/0/CIOTGAARresponsefinal150910.pdf
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