Rebecca Cave asks how bad tax law comes about and suggests how the process could be made better.
There is no question that the UK tax legislation contains some bad tax provisions. Just two examples are the High Income Child Benefit Charge (HICBC) and the Loan Charge. By bad tax law I mean provisions that exhibit any of the following attributes:
- costly to implement
- unfair or discriminatory
- creates economic distortions or disincentives.
The question I want to address is: how do bad tax laws come about and pass through all the stages of planning, consultation and parliamentary scrutiny, to end up on the statute book?
Starting with an idea
All laws start with an idea. In an ideal world the ideas that eventually become legislation should grow out of well-thought-through policies that fit into a wider strategy.
The UK Government does have a number of tax and trade strategies, as set out on this tax policy map. But to form effective and lasting strategy you need solid strategic thinking and leadership – two elements that have been lacking in the UK government lately.
Who leads on what?
In the UK responsibility for tax strategy and policy development sits with HM Treasury (HMT) and HMRC is responsible for tax policy maintenance and implementation. HMRC and HMT work closely together, as the leadership of both departments is based in the same building in Whitehall. But HMT is headed by a team of government ministers, whereas HMRC must report to Parliament through a Treasury Minister, indicating that HMRC is subservient to HMT.
The Office of Tax Simplification (now abolished) was part of HMT, but it didn’t have the power to demand that tax policy or existing tax laws should be changed. Some felt that the OTS reports were largely ignored by the HMT policymakers.
The ten-year strategy for modernising the tax system carries the HMT stamp, but the core part of that strategy, Making Tax Digital (MTD), is the responsibility of HMRC. Wendy Bradley explained why this matters in 2018, and since then the senior responsible owner (SRO) of the MTD project has changed several times.
If the strategy is muddled or the leadership for elements of the strategy is ineffective, the result is a mess.
There is the potential for bad tax policy ideas to be spotted and removed during the consultation process.
In 2011 HMT and HMRC launched a tax consultation framework. This specifies five stages of consultation:
- Set out objectives and identify the options.
- Determine the best option and develop a framework for implementation including detailed policy design.
- Draft legislation to effect the proposed change.
- Implement and monitor the change.
- Review and evaluate the change.
Prior to stage 1 there may be a “call for evidence”, but the evidence gathered does not always make it into the policy options. In many cases the consultation process starts part way through stage 2, when HMT has already decided on a policy option and wants ideas on how to implement it.
In 2016 the OTS pointed out that stage 5 of the consultation process is largely missing, as there is:
- no systematic process to assess whether the measure delivered value for money
- no systematic checking to see that the measure was still appropriate and/or needed
- no systematic assessment of whether it was operating properly
- no system for keeping measures up to date.
This hasn’t changed since 2016.
The OTS recommended that sunset clauses should be introduced for new tax measures to force evaluation of the measure in the light of experience. This has happened occasionally, but it is not common practice.
Tax legislation is drafted by civil servants. It’s a very skilled job, but mistakes do happen. The existing body of tax law is very complex and sometimes it is not easy to see how a new provision will affect other parts of the tax machinery. Inserting new law into old legislation can also result in very convoluted numbering (such as >ITEPA 2003 part 7A) and byzantine cross references.
The Tax Law Rewrite project, which ran from 1996 to 2010, successfully redrafted a number of key tax Acts to make the law more readable and easier to follow. However, the project was discontinued before it had tackled the Taxes Management Act 1970, and its remit didn’t extend to the hundreds of tax regulations (statutory instruments) that are passed with little scrutiny.
Most tax law starts its parliamentary journey in a draft Finance Bill. National insurance contribution (NIC) measures are included in separate National Insurance Contribution Acts, because NIC “is not a tax” (an argument for another day).
The draft Finance Bill is supposed to be examined line by line by the Finance Bill committee, which is established for that particular piece of legislation, and this can be a daunting task given the size of many Finance Bills. In practice, most of a large Finance Bill is voted through by the committee as there isn’t sufficient time to discuss the proposals in detail.
Unlike Parliamentary Select Committees, the Finance Bill committee will have a government majority. This means that amendments put forward to Finance Bills are almost always guaranteed to fail unless they are government-backed amendments. Voting for an opposition amendment is a career-limiting act for an MP from the governing party.
There is a House of Lords committee (Economic Affairs Committee Finance Bill sub-committee) that examines the operation of Finance Acts, but it has little real power.
How to make it better
A route to better tax legislation must start with tax policy formation, which needs to draw on the experiences of subject experts as well as a wide variety of individuals and businesses. This type of wide-ranging consultation, which the OTS used to carry out, was a good model. But as the OTS wasn’t independent (like the Office of Budget Responsibility), it was easy to ignore, and ultimately abolish.
The second criterion for good tax policy is that it needs to be made with a view to the long term. Unfortunately, most governments tend to focus on the next four to five years when the party needs to win the next general election.
Parliamentary procedures need to be reformed to ensure there is time for effective scrutiny of tax measures in a non-partisan environment. The current public bill committees are not effective scrutineers as the built-in government majority means sensible amendments are often ignored.
We also need a fairer voting system so we end up with a Parliament that is representative of the population, and which forces different political groups to co-operate for the good of the county.