Consultation: is it having the desired effect?

e path of tax reform does not always run smooth. There are numerous examples throughout history of tax reform failing to achieve its desired effects, of unintended consequences coming to fruition, of affected parties clamouring for further reform to fix failed reform, and of reforms being revisited or scrapped following their implementation in the real world. While the reasons for bumps in the road of tax reform are manifold and varied, there is undoubtedly a high correlation between the number or size of those bumps, and the extent to which reform is preceded by effective consultation.It is of course debatable whether additional consultation on the taxation of colonial tea under the Tea Act of 1773 would have prevented the Boston Tea Party or the American Revolution – but it is perhaps legitimate to speculate. Consultation can help smooth the bumps on the path of tax reform. So what has the government done to try and make tax consultation more effective? And how is the government faring in its attempts to improve this crucial aspect of the tax policy-making process? The path of tax reform does not always run smooth. There are numerous examples throughout history of tax reform failing to achieve its desired effects, of unintended consequences coming to fruition, of affected parties clamouring for further reform to fix failed reform, and of reforms being revisited or scrapped following their implementation in the real world. While the reasons for bumps in the road of tax reform are manifold and varied, there is undoubtedly a high correlation between the number or size of those bumps, and the extent to which reform is preceded by effective consultation.

It is of course debatable whether additional consultation on the taxation of colonial tea under the Tea Act of 1773 would have prevented the Boston Tea Party or the American Revolution – but it is perhaps legitimate to speculate. Consultation can help smooth the bumps on the path of tax reform. So what has the government done to try and make tax consultation more effective? And how is the government faring in its attempts to improve this crucial aspect of the tax policy-making process?

The ‘old days’

It is instructive to start with some consideration of where we have come from. While the past Labour government promoted a lot of consultation during its period in power, this did not always run smoothly. The proposed wholesale abolition of ‘mixer companies’ for double tax relief purposes in 2000 had been heralded in consultation but were not well understood by industry. This ultimately led to a political compromise that resulted in many years of unnecessary complexity. Here the consultation led to complacency rather than enlightenment.

The government’s new approach

So, more than ten years on, where is the government now on tax consultations? Since taking charge of HM Treasury in May 2010, the new Coalition government has made a major point of improving the way in which it develops tax policy. Better consultation sits right at the heart of this. In June 2010 the government published Tax policy making: a new approach which set out its vision to reform the way tax policy is made. The government’s stated ambition was ‘for a more predictable, stable and simple tax system’. Underpinning this was the need for greater transparency and the government explicitly talked about ‘ensuring there is sufficient opportunity for policy and legislation to be properly scrutinised’.

In March 2011 the government followed up on its new approach by publishing its Tax Consultation Framework, establishing five stages for the development and implementation of tax policy (see the table). Again, this contained lots of sensible principles for guiding the government’s approach to tax consultations, along with encouraging statements about recognising the ‘the importance of engaging fully with individuals, practitioners, businesses and other organisations in the development of tax policy’.

The proof of the pudding

So much for the theory. With two Budgets under its belt and a third imminent, the time is now right to start judging whether the government is serious about its new ways of consulting on tax policy.

There have been a number of significant tax policy reforms since the Coalition government came to power, and, on the whole (with some notable exceptions), the government’s commitment to a new approach and better consultation must be given the ‘thumbs up’. In several cases, for example on corporate capital gains simplification, HM Treasury has engaged constructively with industry through detailed consultation processes that have significantly reduced the complexity of, and improved, the resulting tax legislation.

The good, the bad and the ugly

However, it would be wrong to give HM Treasury a completely clean bill of health against its own tax consultation aspirations. While significant strides have been made, some recent developments suggest there is still room for improvement, and certainly no room for complacency. The Tax Professionals Forum published its first annual report on the government’s new policy-making approach in December 2011, and it is worth drawing out three substantive reforms discussed in their report that each tell their own story.

• Controlled foreign company (CFC) reform: Overall, the story of HM Treasury’s approach on the reform of the CFC legislation is a positive one. The government issued a formal consultation document on comprehensive reform which clearly articulated its policy objectives and enabled constructive dialogue to take place. With the policy objective clear, industry was able to help the government understand that its approach in legislation was not going to deliver its policy intent. While this is still being consulted upon, the latest consultation built strongly from the messages received from discussions with business.
• Disguised remuneration: Less positive has been the experience with the reforms to the rules around disguised remuneration. An announcement at the Emergency Budget in June 2010 was followed by draft legislation on 9 December 2010. This elicited a stunned, and then voluble, reaction from those surprised at the draconian nature of the proposals. Discussions led to amendments and these further complicated the legislation which was eventually amended 90 times in the course of its progress through Parliament. At no point was a formal consultation process initiated and it seems clear that a more orderly approach, in line with the tax consultation framework, would have yielded better results.
• Tax treaty avoidance (TTA): The TTA issue is another example where it is clear that there is wisdom in using the new, more consultative, tax policy process even for proposals that are designed to combat tax avoidance. In August 2011 the government published a technical note on TTA that was withdrawn before the consultation concluded, as the deficiencies of the proposal became apparent. There was no consultation on the policy objectives, and its target and impact was unclear. Furthermore, the draft legislation was too broad and potentially impacted on commercially motivated structures that were already in place. While to release and then have to withdraw such a note was an ugly and regrettable spectacle, the government should be credited for recognising the failings in this case and acting quickly to redress them.

Not just formal consultation

HM Treasury has clearly demonstrated its willingness to engage in informal consultation and to be much more open in its channels of communication, through letters to interested parties, informal approaches, and the use of its website to keep observers updated on its position. This is a positive development. For government, such informal consultation should help it to gather information and avoid it taking public positions before having a good appraisal of the situation. For industry, the greater openness of HM Treasury provides opportunities to engage early in the development of policy, to voice concerns and to develop the evidence base it needs to influence policy for the better.

Another feature of the government’s new approach is its tendency to delegate consultation to others. Tasking the Office of Tax Simplification to review the much contested IR35 rules, and Graham Aaronson to review the case for a general anti-avoidance rule are two major examples of complex tax policy proposals that have been passed to others outside of HM Treasury to start the discussion.

Consultation on tax rates

One interesting aspect of the government’s attitude to tax consultation is its views around consultation on tax rates. While the government is the final arbiter of tax rates and there will clearly be occasions where it would be inappropriate to consult on a rate for fear of the forestalling behaviour it might induce, where the consequences and impacts are unclear, consulting on the tax burden can be a sensible discussion.

An obvious example is around the recent changes leading to an effective 81% tax on some oil and gas production. In such cases, HM Treasury needs to understand the impact of any change and currently could be making decisions based on a distorted view of the current environment and the impact on jobs, growth and the wider economy.

The tax consultation framework states that ‘the government will generally not consult on straightforward rates, allowances and threshold changes; recognising, however, that even in these cases some level of consultation can often be informative’. While the second clause leaves open the possibility of consultation, the lack of discussion in relation to the Budget 2011 oil and gas taxation hike is a disappointment.

The verdict

To conclude, the verdict on the government’s commitment to good consultation on tax policy must be positive overall. The framework is generally good, as has been its application in most cases. But there is room for improvement, not least in the government’s attitude to consulting on tax rates. While there are several recent positive examples of constructive HM Treasury tax consultation, the lessons of disguised remuneration and tax treaty avoidance are that there is no room for complacency. The biggest challenge for HM Treasury is probably still to come: having articulated its framework, it will need to sustain its application and watch for policy developments that might inadvertently ‘fall through the cracks’. Cracks, like bumps, do not make smooth paths to tax policy reform. 

Chris Sanger, Head of Tax Policy, Ernst & Young

The views set out above are the author’s own and not necessarily those of the organisations he represents.