The principles of tax policy

Written evidence submitted by the British Bankers’ Association

1. The British Bankers’ Association (BBA) is the leading association for the UK banking and financial services sector, speaking for over 200 banking members from 60 countries on the full range of UK and international banking issues. In addition, 40 professional firms are also associated with us. Our members, whilst predominately banks, engage in activities which range widely across the financial spectrum, encompassing services and products as diverse as primary and secondary securities trading, insurance, investment advice and wealth management, custody, as well as conventional and non conventional forms of banking.

2. The BBA welcomes the opportunity to provide written evidence to the Treasury Committee on the fundamental principles of tax policy.

Executive Summary

3. The BBA considers that the key principles which should underlie tax policy are that the system should be: statutory; certain; simple; easy to collect and to calculate; properly targeted; constant; subject to proper consultation; regularly reviewed; fair and reasonable; competitive; predictable; and consistent.

4. The BBA is concerned that increased taxation on the banking sector will inhibit growth.

5. The BBA considers that the Government should, as far as possible, minimise costs on businesses and the burden of complying with the tax system.

Treasury Select Committee Questions

What are the key principles which should underlie tax policy?

6. In the BBA’s response to HM Treasury (HMT) and HM Revenue and Customs’ (HMRC) paper "Tax policy making: a new approach", we stressed that predictability and consistency are critically important features of a stable and attractive tax regime.

7. The increasing politicization of aspects of the fiscal regime has created a tax policy that is sometimes populist, reactive and lacking a principled basis. Tax reform proposals should rather be underpinned by solid research and analysis, culminating in an evidence-based and analytically sound case for reform. The rapid change and volatility in bank taxation over the last three years has caused significant concern about the predictability of the UK’s tax policy. Indeed, predictability was flagged in a report [1] prepared for the City of London Corporation by CRA International as "the most important factor in judging competitiveness, but also the one on which the UK got its worst score and fared the worst in comparison to other countries".

8. Consistency has also been an issue in UK tax policy, with policy statements being made indicating a desire to make the UK more attractive internationally whilst unilateral action is taken imposing uncompetitive new measures. Such inconsistency sends a very mixed and confused message and betrays the incoherence of certain aspects of the UK’s tax policy.

9. More generally, the BBA concurs with the views outlined by the Tax Faculty of the Institute of Chartered Accountants in England and Wales in its discussion paper, Towards a Better Tax System [2] , that the tax system should be:

a) Statutory: tax legislation should be enacted by statute and subject to proper democratic scrutiny by Parliament.

b) 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.

c) Simple: the tax rules should aim to be simple, understandable and clear in their objectives.

d) Easy to collect and to calculate: a person’s tax liability should be easy to calculate and straightforward and cheap to collect.

e) 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.

f) 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.

g) 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.

h) 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.

i) 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.

j) Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade in and with the UK.

10. It is disappointing that such little progress has been made in taking the UK tax system further towards the objectives set by the ICAEW over a decade ago. The BBA would urge the Government, HMT and HMRC to make a categorical statement of support for these principles.

How can tax policy best support growth?

11. New taxes, such as the Bank Levy or a Financial Activities Tax, add to the incremental costs currently being faced by banking groups, such as increased capital and liquidity requirements. Measures that impose new costs on financial institutions need to be borne between shareholders, employees and customers and place pressure on the flow of credit to businesses and households. Such outcomes are not generally supportive of growth.

12. The OECD in its November 2010 Tax Policy Study No. 20, ‘Tax Policy Reform and Economic Growth’ [3] , analysed factors contributing towards or impinging on economic growth. It noted that:

"A country’s rate of economic growth depends on many factors including the rate of economic growth of its main trading partners, the country’s innovative capacity, the availability of venture capital, the amount and type of investment, the degree of entrepreneurship, the skills level and the mobility of the workforce, the flexibility of the labour market, the degree to which individuals have an incentive as well as an opportunity to participate in the labour market, the labour costs for employers of hiring workers, the availability of qualified workers, the administrative burden on businesses, product market regulations, the economic infrastructure as well as the legal certainty and the confidence level of consumers and businesses.

The tax system plays a crucial role as it is likely to impinge on many of these factors. The level of the taxes that are raised, the tax mix, the quality of the tax administration, the complexity of the tax rules and the tax compliance costs, the certainty and predictability for households and businesses of the taxes that have to be paid, the network of tax treaties as well as the specific design characteristics of individual taxes including the availability of tax incentives and the broadness of the different tax bases can have an impact on the country’s rate of economic growth."

13. Finally, the report also concluded that "In general, a growth-oriented tax system may want to create as little obstacles as possible to the growth of economic activities. This implies also that tax systems may not want to discourage … the possible inflow of high-skilled and other foreign workers". We do not find the government’s imposition of a permanent immigration quota constructive in this regard.

14. The immigration cap will have a direct effect on UK trade and business, not only limiting the supply of available, skilled labour that UK businesses can access but also limiting the number of migrant investors and entrepreneurs coming to the UK.

To what extent should the tax system be structured to support other specific policy goals?

15. The tax system should not be structured to support specific policy goals other than economic growth and sound public finances.

16. The BBA considers that fiscal policy is too imprecise a lever to successfully or predictably drive a particular behavioural response. Furthermore, the use of tax incentives and disincentives may result in unintentional consequences, such as an adverse effect on economic growth.

How much account should be taken of the ease and efficiency with which a particular tax can be imposed and collected?

17. The BBA supports the Government’s commitment, in ‘ Tax policy making: a new approach’ [4] , to "a simpler tax system" which would "ensure that, as far as possible, reforms minimise transitional costs on business and the burden of complying with the tax system."

18. Both the Bank Levy and Bank Payroll Tax required extensive consultation and discussion, necessitated by the complexity and confusion, within industry but also within government, surrounding both measures. Complexity adds to the costs of existing taxpayers and acts as a disincentive to prospective investors to the UK.

19. The costs of compliance with the tax regime, for both the tax administration and the taxpayer, should be proportionate to the amounts collected. The same also holds for costs incurred by intermediaries including banks whether in terms of their acting as collecting agents or the providers of information. Where possible the Government should seek to utilise established mechanisms and channels to avoid creating additional burdens with concomitant costs.

Are there aspects of the current tax system which are particularly distorting?

20. The BBA has consistently flagged the different treatment between foreign branches and subsidiaries as a particularly distortive effect of the current tax system. We are pleased to see that this anomaly is now being addressed.

21. While we welcome the consultation on branch taxation, we remain concerned that the proposals, as they stand, may well end up being useful only to structured arrangements rather that to genuine business as a result of a move away from the expected exemption with loss relief and clawback. Therefore, rather than creating a world class competitive regime for the UK we risk ending up with something that is rather less useful.

22. The BBA is also pleased that the distortive effects of the Controlled Foreign Companies regime are being addressed through the CFC review, although we note that this workstream has been problematic and a satisfactory conclusion is not assured.

January 2011