Supplementary memorandum by the ICAEW
IMPROVING THE
CONSULTATION PROCESS
A supplementary note from the ICAEW Tax Faculty
to the House of Lords Economic Sub-Committee on the 2008 Finance
Bill.
INTRODUCTION
Consultation is fundamental to the development
of a reasonable, usable and acceptable tax system. It allows the
airing of views and the deliberation of issues. It can help build
upon a sound idea, turning it into good legislation. It can also
prevent poorly conceived ideas from becoming tax law. Consultation
is important to the integrity and credibility of the tax system.
It is for these reasons that we identified consultation as one
of our 10 tenets of excellence in the Tax Faculty's discussion
paper entitled "Towards a better tax system".
What should consultation be seeking to achieve?
The dictionary defines "consultation"
as an "exchange of opinions", a "discussion, especially
in order to ascertain opinions or reach an agreement" or
the "process of discussing something either with experts
or with other participants and asking for their opinions or advice".
The underlying theme is a "two-way" process, where both
the originator of the proposal and the person being addressed
can debate and learn from each other.
The less obvious theme is that if you are going
to embark on a consultation process, it should be with the intention
of noting that advice (even if you do not always want to follow
it) and explaining the resulting course of your actions.
Government recognises the importance of consultation.
There are frequent requests for views and comments from interested
parties. These take the form of formal and informal consultations.
Consultation should harness the experience of
those who have detailed technical knowledge and who can pinpoint
the possible traps new legislation may bring. A detailed knowledge
of previous tax legislation is frequently helpful in considering
new legislation, and many experienced tax practitioners, as well
as others, freely give their time to assist with consultations.
We recognise that the consultation process should
not take-away from the overriding principle that it is the Government
that should be applying authority in the development of the tax
law. The authority it has to do this is conferred by Parliament.
Those asked to participate in the consultation process are not
being substituted to take over this constitutional role. Nevertheless,
once it has been accepted that consultation is an essential aid
to the tax law process, it become necessary to ensure that consultation
is undertaken in a manner which does more than pay lip service
to the notion. Few would argue against the premise that consultation
can play an invaluable part in the development of tax law.
PROBLEM AREAS
However, recent events such as the 2007 PBR
policy announcements on CGT and residence and domicile have highlighted
the need to improve tax policy formulation through improved consultation.
There is a clear need to:
— consult at a much earlier stage in
policy formulation; and
— ensure that proper consideration
needs to be given to the comments that are made in the consultation
process.
The need to consult before tax policy is decided
The theoretical approach to consultation as
set out in the Code of Practice (see below) is not always reflected
in the practical implementation. There is a need to consult much
earlier in the process, ideally before the key policies have been
decided.
In 2000, we remarked that the introduction of
taper relief, which was a fundamental change to the taxation of
individual capital gains, was introduced without any substantive
consultation, either beforehand or at a later stage when draft
legislation was included in the 1998 Finance Bill. The result
was predictable, with the rules already having to be amended to
correct poor legislation.
In 2008, we have faced exactly the same problem
over the withdrawal of taper relief and its replacement with the
18% flat-rate. There was no prior consultation and the change
has proved to be highly controversial with a number of amendments
made to ease the transition to the new rules. This was not the
only example of a lack of consultation—the proposed changes
to the residence and domicile rules were similarly highly controversial.
This lack of consultation on key policy changes is a recurring
theme. In 2006, for example, changes to the inheritance tax rules
for trusts were again announced without consultation even though
a consultation process was in place about the income and CGT treatment
of trusts.
The need to listen and act on consultation
Our experience is that once the Government formulates
an idea, it is very reluctant to change or modify the proposal,
except to a very limited extent. This merely fosters a widely
held view that the Government pays lip service to consultation,
even if sometimes it might take note if there is sufficiently
strong opposition. In other words, whilst HMRC/HM Treasury may
be consulting, are they actually listening?
If we take the example of the ongoing HMRC powers
consultation, whilst on the face of it the consultation process
has been very good, the many concerns that have been raised about
these proposals do not often appear to be listened to and acted
upon. There is little point in undertaking detailed consultation
if genuine concerns raised are not acted upon. Again, this merely
confirms in the eyes of many that the consultation process is
little more than a rubber stamping of decisions that have already
been made. This was not helped by the fact that decisions were
announced in the Budget on 12 March 2008, a mere six days after
the closure of the consultation period. We do not see how the
responses could have been assimilated, summarised and decisions
then taken and announced only six days later.
One of the few examples where the Government
appears to have listened was the decision to "shelve"
(rather than drop) the Income Shifting proposals as set out in
the 2007 Pre Budget Report (the 2007 PBR). This followed on from
detailed adverse criticisms from representative bodies.
CODES OF
PRACTICE ON
CONSULTATION
In order to have a workable consultation process
there is a need to have some form of structure on which the process
is based. This has been rightly recognised by the former Inland
Revenue and Customs & Excise, who first published a Code of
Practice on Consultation in January 1998. This arose as an adjunct
to the Tax Law Rewrite Project and from an Inland Revenue report
suggesting the need for a code of practice in this area. The Code
was later updated in July 1999. The 1999 Code of Practice (the
1999 Code) has been further superseded by the Cabinet Office Code
of Practice on Consultation, published in January 2004 (the 2004
Code). HMRC has also published a Consultation Framework which
is designed to supplement the 2004 Code. The 1999 Code is still
on HMRC's website although its precise status is no longer clear.
Some of the statements in the 1999 Code are not reflected in the
2004 Code but are, we believe, still valid.
The 1999 Code starts with the statement that
the Government "intends to consult on tax policy matters
wherever it is reasonable to do so". We noted at the time
that there is no definition of "reasonable", and this
provided the Government with an open-ended opportunity for avoiding
the necessity to consult.
The Introduction to the 2004 Code states:
Ministers retain their existing discretion
not to conduct a formal written consultation exercise under the
terms of the code, for example where the issue is very specialised
and where there is a very limited number of stakeholders who have
been directly involved in the policy development process. In these
circumstances the general principles of the code should still
be followed as far as possible, and departments should consider
how to ensure that the public is made aware of the policy, for
example through a press notice or statement on the department's
website. This should state the Minister's reason for their decision.
Paragraph 1.1 of the 2004 Code states:
Consultation is a continuous process that
needs to be started early (note emphasis) in the policy development
process.
The inference from the 2004 Code is that consultation
should be the norm is most circumstances where there are proposed
major policy developments that affect a wide variety of stakeholders.
In relation to tax, the 1999 Code sets out circumstances
when consultation might not be possible. These were:
— where there is the risk of significantly
forestalling activity by existing or prospective taxpayers;
— where the area is market sensitive
and where consultation could, of itself, lead to significant temporary
distortions in taxpayers' and market's behaviours. For example,
where consultation could create an unacceptable level of uncertainty,
with a detrimental effect on major transactions and aggregate
business activity until final decisions are announced and enacted;
— where Ministers deem it necessary
to act swiftly (eg take anti-avoidance measures); and
— where policy develops significantly
in the period between the pre-Budget Report and the Budget proper.
It also referred to the possibility of not consulting
where a tax measure is minor, straightforward and non-contentious
(cf the 2004 Code above) so that it does not justify the resources
of full consultation.
On looking at the list of exceptions above,
several points come to mind. Firstly, the genuine occurrence of
these events tends to be small. They are the exception and not
the norm. Therefore, it should be very rare for these incidents
to be cited as a reason for not consulting and they should not
be used as an excuse to avoid the consultation process.
Our view is that any Code of Practice should
start from the position that Government must always consult on
all major tax policy matters, except where it is likely that the
Government's revenues will be seriously prejudiced (for example
the need to act quickly to counter avoidance). Such circumstances
will be quite rare, and the substantive reasons for the decision
must be explained and published. Further, these reasons should
be subject to review by an "independent" body, for example
a parliamentary committee.
For these reasons we think that announcements
such as those made in the 2007 PBR announcements on CGT and residence
and domicile (to give but two examples) should have been subject
to prior consultation in accordance with the principles set down
in the 1999 and 2004 Codes.
As noted earlier and as confirmed in the 2004
Code, consultation should take place early in the policy development
process, ideally before key policy decisions have been taken.
If a wider written consultation is not possible in the very early
stages, then we think that there should be informal consultation
with the professional bodies and other stakeholders who are likely
to be affected by any policy proposals.
Following the consultation, there should then
be a period for consideration of the points raised by respondents
and any arising modification of ideas. This would lead in such
instances into a revised paper on the tax policy which may or
may not at that stage include draft legislation. This would be
fed back to those who had contributed at the initial consultation
phase, plus any other relevant person, for any remaining comments
and a detailed explanation as to why particular ideas were accepted
or rejected.
CONCLUSIONS
It is clear that consultation is an invaluable
part of the process of making tax law. It should be the foundation
upon which all tax legislation is developed. Consultation should
be open and constrictive and not secret and unsatisfactory. The
Code is an important part of this process. It should be rewritten
so that there should be a clear obligation to consult on tax policy
issues. Any exceptions should be extremely rare, clearly defined
and explained and also subject to independent scrutiny. It should
also be made clear as to what is, and is not, within the consultation.
The emphasis should be on consultation right at the start of policy
formulation, well before policy decisions have been made.
16 May 2008
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