Tax after coronavirus Contents

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7Tax strategy and simplification

Tax strategy

212.In April 2020, the Institute for Government published a report titled Overcoming the Barriers to Tax Reform, in which it proposed that the Government should set clear objectives for the tax system as whole. The Institute suggested five advantages which a tax strategy with objectives would offer,250 which may be summarised as follows:

• Clear objectives would allow the Government to better explain tax reform to the public;
• Objectives would allow Government to plan effectively over longer periods;
• Declared objectives should enable other departments to engage better with the Treasury to help ensure consistency between policies;
• Objectives would allow Members of Parliament to better hold the Government to account on whether tax announcements had met their stated goals; and
• Clear objectives could help build cross-party consensus.

213.The concept of a strategic approach to tax policymaking over a period of years is not new. In June 2010, the then Coalition Government published “Tax policy making: a new approach”, a discussion document which set out principles explicitly aiming to achieve greater predictability, stability and simplicity.251 That was followed by the Corporate Tax Road Map, published in November 2010, which set out how the Government intended to approach reform of the corporate tax system over the next five years.252 At Budget 2016, the Government introduced a new plan for business taxes, the “Business tax road map”, which sought to provide similar certainty for business for the period through “to 2020 and beyond”.253

214.In 2010, the Government recognised the benefits of setting out its strategy in terms of certainty for businesses and creating the conditions for growth.254 This extract from the introduction to the Corporate Tax Road Map is still relevant today:

The quality of tax policymaking and the frequency and predictability of changes is a key concern of business and has the potential to undermine perceptions of stability, which can make businesses less likely to invest in the UK. In recent years the way that changes have been made to the tax system has damaged business confidence. Particular concerns have been raised about a lack of clear direction, the frequency of change and, on some occasions, the lack of attention paid to the real impacts on business.”255

215.Witnesses spoke favourably of the Corporate Tax Road Map. Annie Gascoyne, Director of Economic Policy at the CBI, told us that

[ … ] certainty is a really important part of a competitive tax system, not only for attracting international investment but for business planning and thinking about investment decisions. You have to think about the way companies operate. For their five-year strategy and their investment decisions going forward, they think about what the central scenario is. When we have a tax roadmap, it is really useful. It needs to be both specific and realistic for firms to be able to buy into it and plan that into their investment decisions.256

216.Chris Sanger, Global Government Leader at Ernst and Young, and Chair of the Tax Professionals Forum, agreed:

I really would like to see a corporate tax roadmap. That was very successful in the 2010 era because we were partway through a longer-term transition to being a truly territorial regime and one that had a competitive tax rate.257

217.He set out what he saw as the purpose of a road map:

It is not right to ask the Chancellor to set something in stone, but set a sense of direction. A stability of direction is what is needed by companies when they are looking to invest and that is something that can be included in a roadmap. Indeed, one that applies to the end of the Parliament is good but one that also sets the aspirations ready to be included in manifestos post one Parliament is also very helpful.

Contrasting the 2016 Business tax road map with the 2010 Corporate Tax Road Map, he said:

I would contrast the corporate tax roadmap with the one that came after it, which was a business tax road map. That sought to get close to what Annie is mentioning there. To my mind, that was much more of a travel journal, if you like, about what had happened in the past rather than a road map for the future.

218.Dr Gemma Tetlow, Chief Economist, Institute for Government, cited the Corporate Tax Road Map as a welcome example of strategy:

“I think there are rare areas where there has been strategy: the corporate tax road map in 2010, which set out a plan to lower the rate but broaden the base of corporate tax was an area where there did seem to be a clear strategy that was followed through”258

219.John Cullinane, Tax Policy Director, Chartered Institute of Taxation, said that the Government

“ … should set out broad objectives in advance. More than that, they should be prepared to float options publicly on much more of a blue skies basis, so that public opinion could have time to assimilate what problems they are trying to deal with and what the possible options are”259

220.Paul Johnson, Director of the IFS, told us that

It is hard to discern a set of principles underlying tax policy over the past decade … In every other bit of Government you have Green Papers, White Papers and strategies coming out of your ears—probably far too many of them, because they change very regularly. We have literally never had such a thing for tax policy, and I think we are desperately in need of it.260

221.We believe that a tax strategy setting out what the Government wants to achieve from the tax system and identifying high level objectives would have much merit. We recommend that the Government should draw up a draft tax strategy for consultation. We propose that any such strategy should include principles for:

• The role of the tax system in meeting fiscal goals
• Securing a neutral tax system which treats similar activities in similar ways, including fair taxation of different structures of work
• Ensuring that taxation is progressive and fair to future generations
• Meeting climate change goals for net zero and other environmental objectives whilst giving consideration to those who are on lower incomes
• Ensuring growth of business and employment, including a new business tax roadmap to provide investment certainty for business and a five to ten-year strategy for corporation tax rates
• Reducing the tax gap
• Indirect taxes such as VAT which were previously covered by EU law which no longer applies
• Reducing compliance costs, especially through appropriate tax simplification.

Tax policy making process

222.In the Foreword to the 2010 discussion paper Tax Policy Making: A new Approach, the then Financial Secretary, the Rt Hon. David Gauke MP, set out reasons why the Government wanted to improve the process:

I am frequently told by businesses and the tax profession about the importance of predictability, stability and simplicity in the tax system. Business and tax professionals have previously criticised the tax policy making process as piecemeal and reactive, pointing to the wide range of policy announcements in recent years that have been unexpected and insufficiently thought through.

I want a new approach to tax policy making; a more considered approach. Consultation on policy design and scrutiny of draft legislative proposals should be the cornerstones of this approach. The Government will always need to maintain flexibility to make changes to the tax system. But in doing so, it should be transparent about its objectives, and open to scrutiny on its proposals.”261

223.The reforms initiated in 2010 included:

• Creation of the OBR and setting their responsibilities
• Creation of the Office of Tax Simplification
• Publication of more information on costings
• Improvements to impact analysis and implementation of new Tax Information and Impact Notes
• Evaluations of tax policy
• A better framework for tax reliefs

224.The reforms also initiated a new tax consultation framework,262 which established five stages of tax policy making:

Stage 1 Setting out objectives and identifying options.

Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.

Stage 3 Drafting legislation to effect the proposed change.

Stage 4 Implementing and monitoring the change.

Stage 5 Reviewing and evaluating the change.263

225.The Government reaffirmed its commitment to the tax policy making process on 6 December 2017, following the switch of the Budget from spring to autumn, and the creation of a single annual fiscal event.264

226.There has been some concern that the Government does not always stick to its own tax policy-making process. To take one recent example, a consultation on the potential approach to duty- and tax-free goods arising from the UK’s new relationship with the EU265 was quite open in setting out a range of options; but abolition was not trailed as a leading option, and the decision at the end of the consultation to end both the VAT Retail Export Scheme and the Airside VAT concession was contrary to the thrust of submissions to the consultation from retailers and airport operators, who were taken by surprise.

227.Another example is the Government (HMRC-led) consultation on Notification of uncertain tax treatment by large businesses,266 launched on 19 March 2020. This policy has been widely criticised by tax professional bodies in their responses to HMRC, including the Law Society267 and the Chartered Institute of Taxation.268 The Institute of Chartered Accountants of Scotland (ICAS) was also critical:

Unfortunately, this consultation began at stage 2 of the process. It would have been preferable to have started at stage 1, with a clear explanation of what HMRC wants to achieve and the problem it is seeking to address. This would have provided an opportunity to identify options that do not impose unnecessary burdens on all large companies and partnerships—unlike the current proposals”269

228.Witnesses to our inquiry also commented on the Government’s approach to the consultation framework. John Cullinane, Tax Policy Director of the Chartered Institute of Taxation, told us:

At the moment, everything pretty much comes as a surprise on Budget day. The consultation is at a later stage on the details when most of the people who take part feel, “We would not have started from here.270

229.Charlotte Barbour, Director of Taxation, Institute of Chartered Accountants of Scotland agreed:

we could follow the 2011 tax consultation framework better. It has five stages, but quite often we come in beyond stage 1 or stage 2. The policy position has been set and all we are asked for is how to make whatever has been decided work … it is just a case of making it work better.271

230.The tax policy making process instituted in 2010 (and reaffirmed in 2017) appears to be sensibly designed; but concerns have been expressed to the Committee that the Government does not always adhere to it and so risks losing the confidence of stakeholders. If the process cannot be followed, for example because there is not enough time to cover all the stages before a change needs to be implemented, the Government should be open about it and should set out its reasons for doing so.

The case for tax simplification

231.A simple tax system is something to which all governments, economists, tax professionals and taxpayers aspire; yet, through time, the tax system has become more and more complicated with a strong growth in the volume of tax legislation. But simpler can also mean cruder and less able to deal with specific exceptions or needs. Therefore some complication is unavoidable in a society which is itself complex.

232.Witnesses pointed out that complexity was sometimes a reflection of complicated economic activity and a result of trying to meet policy objectives. Mike Brewer, Deputy Chief Executive and Chief Economist at the Resolution Foundation, said:

Obviously, we all want less complexity rather than more complexity, but the question is what do we lose if we have a simpler tax system? As previous speakers have suggested, we have complexity sometimes to police boundaries between different forms of activity which treat tax differently. Sometimes we have complexity to achieve the social or economic objectives …272

233.We asked Professor Philip Booth, Professor of Finance, Public Policy and Ethics and St Marys University and Senior Academic Fellow, Institute of Economic Affairs, whether tax complexity matters for the economy and individual taxpayers, He told us:

It matters for the economy as a whole for at least two reasons. One is that if you have distorting taxes, they lead people to pursue one type of economic activity rather than another type of economic activity purely on the basis of the taxation position of those different activities. It can also lead people to structure corporations and other entities in such a way that they minimise tax rather than maximise the accountability of corporations to shareholders or whatever other objectives a corporation might have.

Complexity also has significant costs, in that the electorate does not necessarily properly understand the tax system, which I think is important.273

He also said:

If we look at stamp duty, for example, there are something like 16 different rates of stamp duty now, applying to five or six different situations, all of which have to be defined and have large numbers of pages of regulation to try to decide whether one particular property goes into one category or another. We used to just have one rate of stamp duty that applied to all properties across the board.274

234.Anita Monteith, Senior Policy Adviser at the Institute of Chartered Accountants in England and Wales (ICAEW), cited the high-income child benefit charge as a specific example of the conflict between simplicity and fairness. It had both tried to preserve the principle that the main carer for a child, usually the mother, should receive the child benefit payment, while imposing means testing and the charge on the highest earner in the household, regardless of caring duties.275

235.Paul Johnson, Director of the Institute for Fiscal Studies (IFS), told us that tax policy ought to aim for simplicity by default:

“Simplicity is a difficult one. We live in a very complex world and a very complex economy. I think the underlying point is associated with neutrality. We will not get a simple system while we have a system that treats similar forms of income or similar activity differently, so a lot of the complexity that we get is created by the fact that we treat capital income, earned income, self-employment income, employee income, and different forms of assets and profits differently. The core of a set of principles ought to be one in which we look to treat similar economic activities in similar ways for tax purposes unless there is a very good reason not to.”276

236.The current Chair of the Committee recalls having said, following his time as Financial Secretary to the Treasury: “When I was responsible for tax, as a Minister at the Treasury, colleagues would often say this to me in the House of Commons: “It is far too complicated.” Equally, they would then say something like, “When it comes to this particular tax, could you possibly exempt this group within my constituency who I think are rather unique? They are having a really hard time and you should make some changes,” which of course drives complexity in itself. Perhaps we are all guilty of pushing complexity as well as striving for simplicity.”277

The Office of Tax Simplification

237.The Office of Tax Simplification was established on 20 July 2010. It became an independent office of HM Treasury on 21 July 2015 and gained a permanent basis under statute in the Finance Act 2016. It currently has a headcount of eleven staff, or eight full-time equivalents.278

238.The Government said in 2010 that the responsibilities of the OTS would be “ … to identify areas where complexities in the tax system for both businesses and individual taxpayers can be reduced and to publish their findings for the Chancellor to consider ahead of his Budget”.279 Since its creation, the OTS has published 66 policy papers and consultations.280

239.We note that since 2010, far from becoming simpler, the tax system has become more complex than ever. We therefore asked the Financial Secretary what difference the OTS had made. He said that the OTS had been “a very helpful and useful institution” but he appeared to be concerned about its role:

“It is important to be clear about what its role has been. It is not an invigilator of tax policy, and it is not clear that there should be such an institution. After all, Parliament should be the institution that holds Government to account for tax policy, and that is a function that Parliament has historically jealously guarded to itself.”281

240.We asked the Minister what he thought could be done to make the OTS more effective. He said:

“The OTS has a five-year review cycle, which we are just coming up to, so we are thinking at the moment about whether the OTS could be made more effective and, if so, how.”282

He went on to say:

I do not want to anticipate what the review will say, but the pattern of its work over the last few years gives you a sense of areas in which it has been effective and helpful. It has certainly established itself as an independent expert voice.283

241.We believe that the Office of Tax Simplification (OTS) has an important role to play in identifying how the tax system might be simplified. It is right that the effectiveness of the OTS and its ability to carry out its functions are now reviewed, and we await with interest the outcome of the review.

HMRC and tax administration

242.Her Majesty’s Revenue and Customs (HMRC) is at the centre of the tax system, and any reforms to the tax system need to be deliverable by HMRC. HMRC announced on 21 July 2020 a vision for the future of tax administration: “Building a trusted, modern tax administration system”.284 It set out a ten-year strategy for better use of real time and third party information, completing the Making Tax Digital programme, improving the experience of tax for taxpayers and businesses, reducing the tax gap, and improving resilience. It also proposed reform of the tax administration framework.

243.In its written evidence, the Institute for Chartered Accountants of Scotland (ICAS) made the case for administrative reform.285 Charlotte Barbour, speaking on behalf of ICAS, told us why she thought such reform was necessary:

There are a number of reasons for that. First and foremost is trust. If you want trust in the system—going back to the last question, people behaving well—you need to understand the system. [ … ] We are working with the Taxes Management Act from 1970. [ … ] An awful lot of material in taxes management has been introduced since then, [ … ].

It would be really helpful if we reformed everything, had a look at it, put it all in one place and wrote it in user-friendly language, tax law rewrite kind of language, so that people could clearly see what is expected of them. To my way of thinking, that would bring some trust back into the system and make voluntary compliance a lot easier.286

244.We asked Charlotte Barbour about the scale of this task and she said:

It is probably depressingly big. In fairness to HMRC, it put out its paper in July, about building a trusted modern tax administration system. I think HMRC appreciates that that is something it would like to do, too. We would all like this. Maybe part of the plea here is that we have enough funding put into it so it could be done as a big project, perhaps over 10 years and perhaps with one of these roadmaps or a picture of where exactly you want to get to and what you want to achieve, with full governance around it and a complete articulation of the strategy. …

245.Other aspects of administrative reform were highlighted by Anita Monteith, Senior Policy Adviser at the Institute of Chartered Accountants in England and Wales:

“The biggest problem for a business doing it on its own is knowing what they are liable to pay and what reports they have to make. A company, of course, has Companies House requirements as well as tax requirements. I would like to see a more joined-up process. We were drifting in that direction about seven or eight years ago, where Companies House worked closely with HMRC. That made the obligations that a small company had much more transparent.287

She was critical of HMRC’s business tax account, which is part of the Making Tax Digital programme and which was introduced in 2015.288 She told us that “the business tax account needs a lot of work doing on it to make it achieve the promises we were first given”.289

246.Improvements to tax administration are likely to have wider benefits. We were told during our inquiry into the Economic Impact of Coronavirus that the ability to tailor support schemes was limited by the ability to extract data.290 HMRC’s digital strategy should—in time—enable it to collect more timely and more accurate data about personal circumstances of taxpayers and businesses.

247.We support the plans announced by HMRC in July 2020 to digitise and improve tax administration. If tax reform is to be successful, it is important that HMRC has the capacity and funding to carry out reform and is not hindered by out of date systems.

The case for a tax commission

248.One way of handling tax reform would be to set up an independent commission to review it. This approach has been taken in the UK in the past, after both world wars: the Royal Commission on Income Tax in 1919–20, and the Royal Commission on Taxation of Profits and Income in 1951–55. There has also been the Meade Review of direct taxation (which reported in 1978)291 and more recently the Mirrlees Review (which reported in 2010 and 2011).292 Both of these reviews were managed by the Institute of Fiscal Studies and were not connected to or commissioned by the Government.

249.In other countries “tax commissions” have more recently been used to try to drive reform. These include the Irish Commission on Taxation (2008–9), the Henry Review in Australia, (2008–10) and New Zealand Tax Working Groups (2009–10 and 2017–19).293

250.In its report, Overcoming the Barriers to Tax Reform,294 published on 14 April 2020, the Institute for Government argued that the Government should set up a tax commission. It said that “this could be an effective way of improving public debate and making space for reform”.295 The Institute’s report set out what could be learned from UK and international experience, and it made recommendations about how to maximise the effectiveness of a tax commission.296

251.We asked our witnesses about the merits of a tax commission. John Cullinane, Tax Policy Director, Chartered Institute of Taxation, told us: “I am not exactly sure what a tax commission would do. It may or may not be a good idea, depending on that. Government could make a good start just by consulting at an earlier stage and more generally in accordance with their published framework”.297 Charlotte Barbour, Director of Taxation, Institute of Chartered Accountants of Scotland, could see the case for “a short, sharp tax commission” to look at tax reliefs.298 John Cullinane agreed with that idea and said that the aim of any such commission should be “to try to work out the best way of getting value for money”. He added that “it should be very evidence-based. A commission to look at those areas would make a lot of sense.”299 Anita Monteith, Senior Policy Adviser, Institute of Chartered Accountants in England and Wales, was concerned about administrative complexity for small business and said that “maybe we need a tax commission for small business.”300

252.Tax commissions may play a role in helping reform particular areas, for example tax reliefs. However, the Government already has an effective tax policy making framework, and an overarching tax reform commission is unlikely to be able to achieve anything that the Government could not do anyway by setting out its tax strategy and by following its tax policymaking process. We do not believe that there is currently a need for a tax commission.