responsible tax: ne...brexit brings opportunities for a different type of public dialogue on tax...

ResponsibleTax: New rules forBrexit Britain?

New rules for brexit Britain?

T H E

R E S P O N S I B L E

T A X L A B

Forwards

About the Responsible Tax Lab

The Responsible Tax Lab is an ambitious programme

led by Common Vision (CoVi) focusing on how

businesses and civil society can work together

to design and encourage a responsible tax

system. Through the Lab we convene people

and organisations who want to be proactive and

aspirational in developing and providing the practical

ideas, tools and resources that would make our

future tax system fit-for-purpose.

Contents

Forewords 2

Executive summary 6

Introduction 15

Why we need to talk about tax policy 24

The foundations of a responsible tax system:

Purpose, principles and process

42

Tax policy in Brexit Britain: Rules of engagement 50

Acknowledgements 63

N e w R u L e s f o R B R e x i T B R i T A i N ?1

ForewordKate Bell, Head of Economic Affairs, TUC

The TUC has long argued that a more strategic approach

to the economy is necessary to addressing the challenges

we face if we want to see decent jobs and living standards

for everyone.

The current political climate means that there are

new questions at hand about how we achieve greater

productivity, balanced growth, and jobs with fair

conditions and decent wages. As a country, we need to

have a clear sense of the tools at government’s disposal to

help build a better economy.

Tax is one of these tools, and clearly has a role to play in

planning for the UK’s long-term economic future. There’s

no shortage of debate about the level of business taxation

that best balances the need to support the social and

physical infrastructure that businesses rely on, with the

right incentives for businesses to invest – and the TUC has

been vocal in warning against a global race-to-the-bottom

on corporation tax. However, the other tax mechanisms

used by government, such as reliefs and allowances, are

not subject to the public discussion and scrutiny that is

applied to other government policies.

This needs to change if we are to think about the

important questions of tomorrow – including achieving

the goals set out in the government’s Industrial Strategy,

and how the tax system could or should be used to

achieve these. Of course, these are questions we should

be asking anyway, but the debate around Brexit provides

new impetus. This is why the TUC have been pleased to

support Common Vision’s Responsible Tax Lab to explore

the principles that need to underscore a tax system that

works for the long term, and would best enable a post-

Brexit economy that delivers better living standards across

the country.

f o R w A R d s N e w R u L e s f o R B R e x i T B R i T A i N ?32

ForewordGrace stevens, Chief Tax officer, Legal and General

How can we design a responsible tax system in post-Brexit

Britain? An interesting question and at the moment one

which elicits more questions than answers.

We live in interesting times and the future shape of our

world is likely to look very different from today. Our

tax system will need to change to deliver in that new

world. We need to think long term and ask ourselves:

What are we trying to achieve? What is the role of

the tax system? What and who should be taxed? How

should we tax people, companies, robots, data, capital,

digital, innovation, portfolio careers, or even space

travel appropriately? How does this fit with our broader

objectives for UK plc, investment in infrastructure, and

delivery of public services? As the nature of work,

national demographics, and international borders change,

how do we make tax policy so that corporate and personal

taxation is equitable and effective?

These are questions that already pose challenges to

traditional tax frameworks. We have an opportunity right

now to think this through and ask ourselves what shape

we want the future to be, but to get it right we need to

think long term and holistically about the best way to get

there. That might mean pressing pause on piecemeal tax

changes, and remembering tax is one part of the puzzle

and needs to work with the wider policy environment to

deliver on our ambitions for UK plc.

It is clear tax policy has a role in developing the economy

and society we need. But we need to first agree what we

are trying to achieve through our tax system, to whom we

are responsible and how we can respond to the disruption

and changes of the modern world. Whatever the answers

are, the key components will be a balance of interests, and

transparency. The time is ripe to answer some of these

key questions as we move forward and make the most of

the opportunities we have in a post-Brexit Britain, which

is why we have welcomed the opportunity to support

Common Vision’s Responsible Tax Lab to do so.

f o R w A R d s N e w R u L e s f o R B R e x i T B R i T A i N ?54

Executivesummary

In the days and months following the 2016 EU

referendum, numerous commentators have set out

their economic vision for Britain outside the European

Union. Some suggest that immediate changes to the

taxation and regulation regimes could attract many

more businesses to locate and invest in the UK. Others

have warned against engaging in a global ‘race to

the bottom’ on business taxation or accused the UK

government of seeking to become a tax haven.

Clearly, a number of possibilities lie in store for the UK’s

tax system outside the EU. The extent to which potential

changes to state aid rules, the four freedoms of the

single market, and other legal and regulatory transitions

affect the UK’s ability to make and effect tax policy

decisions remains to be seen. Not to mention the specific

tax changes which might be enacted on a practical basis to

achieve Britain’s social and economic goals outside the EU.

It would be easy to be overwhelmed by the vast

array of ideas and ‘solutions’ proposed from a range

of perspectives for the tax system. But beyond the

instrumental discussions around how taxes could be used

to meet particular political ends, or technical discussions

around its implications on the UK tax code,

Executive summary


Brexit brings opportunities for a different type of public

dialogue on tax policy. This conversation would start by

asking: “What is the tax system for?”

In ‘Brexit Britain’, a climate in which endless change is

possible, it becomes even more important that decisions

are made in a responsible, consistent manner. Then there

is the need for open and transparent public dialogue so

that people understand and can scrutinise these changes,

even if they do not agree with them. This is why a first-

principles discussion of tax policy making is not only

necessary, but ever more urgent. Although tax has been

the subject of public debate for almost a decade when

it comes to corporate behaviour, this concern has not

necessarily led to a more informed understanding of tax

from citizens. Tax policy making – that is, the process

of designing the rules which apply to taxpayers - is

notoriously subject to low levels of parliamentary and

public scrutiny, particularly when compared to other types

of policy making.

Brexit provides the context to look at what can be

done differently to build the foundations of a more

constructive dialogue, so that all citizens can have a

shared understanding of what we are trying to achieve

with our tax system, who is responsible for achieving it

and who ultimately bears the cost. This means taking a

look at the tax policy making process and whether it is

fit for purpose, as set out in Chapter One. Is the way in

which the government designs tax policies and engages

others in the consultation process rigorous enough to

stand the test of time, or does it simply result in short-

term, piecemeal measures? The complexity of the tax

system, with over 1,000 tax relief schemes administered

by HMRC, and 100 tax reliefs added by the coalition

government from 2010-2015, would seem to imply the

latter. Are these policies scrutinised appropriately by

Parliament and others tasked with holding government

to account? And how are the impacts measured and

evaluated in line with the stated objectives?

More fundamentally, are various tax reliefs and

incentives sufficient or effective instruments to ensure

we have a productive and growing economy in Brexit

Britain, or would other measures be more effective?

The way that the current tax policy making process

works, how we judge outcomes and value for money,

and how this is conveyed to the public, doesn’t help

answer this question. Tax is often siloed from the wider

e x e C u T i v e s u m m A R y N e w R u L e s f o R B R e x i T B R i T A i N ?98

policy environment – risking a situation where the same

behaviour is both incentivised by tax and simultaneously

prevented by other regulations. Chapter Two considers

the shortcomings both with the policy making process

itself around tax, and the way that we discuss it.

Various groups have conducted work into improving the

tax system over the years - the 2011 Mirrlees Review was

widely recognised by policy experts and tax professionals

as providing the most comprehensive analysis of the UK

tax system in over 30 years. Chapter Three reviews this

work and some of the ‘best practice’ on principles and

process that can be applied to the tax system. However,

these discussions have received neither public salience nor

political traction. And yet other tax issues have achieved

public ‘cut through’. We have seen from the debate on

corporate tax avoidance that public interest in business

taxation is not going away, which proves that issues that

were once seen as confined to the realm of technical

experts can quickly form a longstanding part of public

debate. Brexit is an opportunity to extend the public

debate to tax policy making at a time when best practice

policy design, parliamentary scrutiny and evaluating the

impact of tax measures will be all the more important

given the pace of legislative and regulatory change.

Chapter Four sets out a ‘checklist’ for anyone interested

in holding decision makers to account on tax policies.

Political factors and ideology cannot always be removed

from policy making and, therefore, it may be impossible

to agree on the best rate of tax or whether tax should be

used for specific purposes, such as behavioural change.

However, a clear and coherent set of objectives, with

defined desirable outcomes and appropriate measurement

of whether these are being achieved – the ‘what’, the

‘why’, the ‘how’ and the ‘on whom’ - can transcend the

differing rationale for taxes. We encourage anyone

interested in holding decision makers to account on tax

policies, to ask the following questions:

e x e C u T i v e s u m m A R y N e w R u L e s f o R B R e x i T B R i T A i N ?1110

✔ What are the objectives which specific tax policies seek

to achieve?

✔ Why are incentives and reliefs proposed as a way to

achieve the government’s goals and ambitions, and to

what extent are they more appropriate or effective than

other expenditure such as industrial grants?

✔ How would specific tax measures be implemented and

over what period of time?

✔ Where would the incidence fall - who would

ultimately bear the burden and reap the benefits?

✔ How would the effectiveness of the tax policies

be monitored and who would be tasked with

measuring impact?

✔ At what point will a formal post-implementation

review of outcomes take place?

We propose ideas for improving the tax policy making

process and the resulting public debate in the short,

medium and long term.

Certainty

• Recalibrating Britain’s economic policy alongside

Brexit may provide an opportunity to have a coherent ‘theory of change’ which underpins tax policies. We propose that a joint sub-committee led by HM Treasury and the Department for Business, Energy and Industrial Strategy (BEIS) outline an industrial strategy tax roadmap to 2030. There is also a case for a ‘sunset clause’ to be applied to all new tax reliefs outlined in such a roadmap, so that the impact proposed is time-bound and subject to a review within

a three to five-year period for example.

simplicity

• To aid public understanding and therefore legitimacy of the tax system, we propose that the Chancellor commissions a comprehensive review of tax reliefs prior to the UK’s formal exit from the European Union. This could be conducted by the Office of Tax Simplification. In the longer term, this might be extended to a review of the opportunities for tax

simplification more broadly.

scrutiny

• In the short term, we propose that tax policy implementation is subject to additional scrutiny mechanisms via parliamentary select committees,

e x e C u T i v e s u m m A R y N e w R u L e s f o R B R e x i T B R i T A i N ?12 1312

rather than the main challenger role resting solely with the Treasury Select Committee and, more recently, the Public Accounts Committee. This is particularly important at a time when unprecedented executive power lies with the government.

• More support for parliamentary vehicles such as the Public Accounts Committee and the Treasury Select Committee, through resources for parliamentary libraries and committee staffers, would enhance their capacity to challenge measures.

Accountability

• In the longer term we advocate a review of government structure and apportionment of responsibilities when it comes to tax policy making. With increased national competencies on tax, it may be more effective for tax measures to be assessed and implemented as a joint effort between the Treasury and other government departments, similar to other policy instruments.

• Civil society has a role to play in extending efforts to scrutinise the tax system. We encourage civil society and business groups alike to embrace their scrutiny role within the policy making process.

Introduction

1

Introduction

e x e C u T i v e s u m m A R y14

Tax is widely recognised as an important tool in the

‘toolbox’ which government can use to achieve their

economic and social goals. But tax is also something that

is exploited for political ends, used to attract certain

voting demographics or curry favour with some at the

expense of others in society, and often subject to much

lower levels of public scrutiny than other government

decisions. This makes discussions about specific tax

policies fairly divisive, while simultaneously based on

low levels of public understanding.

As far as tax and Brexit is concerned, the debate so

far amongst the ‘experts’ - including policymakers,

economists, tax professionals, politicians and campaigners

– would seem to encompass:

‘instrumental’ projections

Not a day goes by without new ideas and controversies

surfacing in the media, and from across the political

spectrum, about what the effects of Brexit on the British

economy will be. These predictions are accompanied

with ideas for (depending on perspective) how we could

encourage or safeguard against certain economic

scenarios. From international economic competitiveness

or the UK’s industrial strategy, to safeguarding funding for

the welfare state, these discussions hinge on normative

ideas for what society or the economy should look like,

and how tax measures can help achieve this.

‘Reactive’ discussions

Often, discussions on tax in the context of Brexit refer to

ideas or measures which the UK government has always

had the power to change or implement regardless of EU

membership. However, from the rate of corporation tax

to the way that we tax land in this country, these ideas

are viewed by their proponents as a greater concern or

priority because of Brexit.

‘Technical’ questions

The process of leaving the EU may see certain powers and

decisions ‘repatriated’ from Brussels - from the potential

removal of current EU state aid rules affecting the scope

and scale of tax reliefs applied to businesses, to flexibility

in how VAT is applied to goods and services in the event of

the UK leaving the single market. This provokes practical

discussions around how the UK may respond in terms of

rules and regulations, resources, and the implementation

of these changes.

i N T R o d u C T i o N N e w R u L e s f o R B R e x i T B R i T A i N ?1716

But this is also time for deeper questions. Before seeking

to implement changes to the tax system that are based

on political and economic aspirations, we need a much

broader debate on what we want to achieve as a society,

and whether the tax system should be used to meet

those objectives.

Rather than examine the merits or otherwise of

individual tax policies, this paper looks at the policy

making process around tax, and the principles which

should accompany it. We review the conditions and

criteria for the responsible design, consultation,

scrutiny, implementation and evaluation of tax policies.

Similar questions have been asked over the years by

a range of organisations and individuals – from Adam

Smith’s canons of taxation, as outlined in 1776, to

more recent work both in the UK and internationally.

Yet, while these inquiries have been well received by

professional or technical communities, they have not

always achieved public engagement or political traction.

These discussions are ever more important now – not

only because Brexit will have profound constitutional and

economic implications for the UK, but also because the

population needs reassurance that our decision makers

are accountable to the long-term public interest.

i N T R o d u C T i o N1918

What sort of policy making would allow people to engage in the process even if they don’t agree with the outcome?

How do we ensure that powers repatriated from Brussels to the UK are subject to public scrutiny?

What are the factors that contribute to a stable and competitive economy and a resilient nation?

Taking back control: An electorate that seeks to hold public officials to account.

Reuniting the country: A population that many perceive to be divided in terms of social priorities and global outlook.

Finding our place in the world: A nation in the process of unlinking its political and economic arrangements from those of the European Union.

Important questions for Brexit Britain


Brexit may also provide a generational opportunity

to apply more rigorous, ‘systems thinking’ to the tax

system, ironing out some of the inconsistencies and

contradictions between individual tax measures that

have resulted from years of incremental and piecemeal

changes implemented by successive governments.

This could result in a simpler and fairer tax system,

assist a competitive business climate and help attract

investment. On the other hand, the complexity

associated with leaving the EU may mean that there is

limited capacity amongst politicians and civil servants

for anything more than ‘getting on with Brexit’. On this

matter, opinion continues to vary.

MethodologyThis paper summarises discussions that took place

during three working group meetings held in 2017, and

wider ongoing consultation with a range of stakeholders

including businesses, trade unions, investors, academics,

NGOs and civil servants. We have also drawn on

national and international academic literature and

government reviews.

This work did not set out to examine specific policies, such

as higher or lower tax rates or specific incentives. Rather,

its purpose was to outline a set of conditions or criteria

which can be applied to scrutinise the legitimacy and

effectiveness of policy making on tax. The questions we

posed, therefore, were:

• What specific challenges and opportunities are there to improve the tax policy making process in the context of Brexit and the government’s industrial strategy?

• What principles and objectives underpin tax policy making, and how are policymakers held accountable to these?

• What determines when a tax, tax rate or tax relief is the appropriate mechanism for pursuing an economic objective, or when other government policies and levers are used?

• How could tax policy decisions be measured, disclosed and communicated effectively to increase public scrutiny and understanding, and wider trust in tax authorities and government?


Why we needto talk abouttax policy

2 Is tax an effective tool to ensure we have productive

and growing businesses in Brexit Britain, or would other

measures and types of spending be more effective? The

way that the tax policy making process currently works,

and how it is conveyed to the public, doesn’t help answer

this question.

It Is tax an effective tool to ensure we have productive

and growing businesses in Brexit Britain, or would other

measures and types of spending be more effective? The

way that the tax policy making process currently works,

and how it is conveyed to the public, doesn’t help answer

this question.

It is widely accepted that it is the role of government to

make important tax choices about the types and rates

of tax to impose – or not to impose – on individual and

corporate citizens. In democracies, the electorate will be

asked to vote based on party manifestos, which set out

economic goals and how these will be achieved through,

among other things, taxation.

Therefore, some would argue that leaving discussions

and decisions on tax to government is enough to ensure a

responsible and effective tax system. Yet this is obviously

Why we need to talk about tax policy


not the case when it comes to other democratic functions

of government – or indeed in other types of policy making,

where we expect an outline of purpose, intent, and an

approach to measuring and evaluating the policy in line

with these.

There are shortcomings both with the policy making

process itself around tax, and the way that we discuss it.

Problems with the public debateIn public debate and the media, we hear a lot about

individual, specific tax policies, but far less about the policy

making process itself. Over the last decade tax has become

a firm feature in the headlines, and media soundbites

form the basis of many people’s understanding of tax,

given that the fundamental principles and mechanisms of

the tax system are not taught as a mandatory part of the

curriculum in schools.

However, coverage generally relates either to calls for

varying rates of taxation by different interest groups,

the behaviour of ‘wily corporations’ taking advantage

of loopholes, or ‘rabbit out of the hat’ style policy 1 Common Vision (2015), Re-building a social compact on responsible tax http://covi.org.uk/wp-content/

uploads/2015/07/Re-building-a-social-compact-on-responsible-tax_CoVi_publication-23July2015-FINAL.pdf

announcements by politicians on Budget day or in the run

up to a general election. This coverage often deliberately

aims to evoke an emotional response or public outrage

rather than encourage informed discussion. There is often

inadequate fact checking in reporting on tax, although this

may also be indicative of the lack of independent analysis

and scrutiny provided by third parties.

As described in Common Vision’s 2015 report,1 tax is

a social compact between all people and organisations

in society, yet when we discuss it, we immediately defer

to the inaccessible, technocratic jargon of experts, or

‘demotic’ outrage – there seems to be no middle ground.

These are just some of the nuances that get lost in the

mainstream media debate:

”The Government controls the tax system by changing the rates of tax”

Tax rates - whether something is taxed at 5%, 10% or

25%, for example - is just one type of tax measure that

can be implemented by government. The government

also makes decisions about the tax base – the entities or

financial streams which fall subject to tax or not (do we

w h y w e N e e d T o T A L k A B o u T T A x p o L i C y N e w R u L e s f o R B R e x i T B R i T A i N ?2726

2 Resolution Foundation (2018) UK’s £155bn tax relief bill costs more than health, transport, justice, home and foreign office budgets combined http://www.resolutionfoundation.org/media/press-releases/uks-155bn-tax-relief-bill-costs-

more-than-health-transport-justice-home-and-foreign-office-budgets-combined/ [accessed February 2018]

tax workers below a certain income, for example, or levy

a specific tax on robots?) Another type of policy is a tax

subsidy, credit or relief, designed to encourage particular

types of behaviour. Yet tax reliefs are often subject to

much less public scrutiny than other expenditures from

the public purse. The Resolution Foundation estimates

that spending on tax reliefs amounted to £155bn in

the 2017/18 financial year – more than the budgets of

the health, transport, justice, home and foreign office

departments combined.2 With an estimated 1,140

tax reliefs administered by HMRC, there has been a

considerable amount of debate during recent years as to

how much tax reliefs cost and whether they are justified.

Although HMRC, the National Audit Office (NAO) and the

Office of Tax Simplification have all conducted work into

the costs and effectiveness of tax reliefs, this is still far

less than scrutiny of public spending.

”higher rates of taxation mean more money for public spending”

Often the general assumption amongst the public is that

higher tax rates means more money is raised for public

services such as the NHS. This is true in many cases, but

not all. For example, higher tax rates on individuals and

businesses alike may be offset by tax credits or tax reliefs,

meaning their ‘net burden’ is the same or lower. There

is a longstanding debate about the relationship between

tax rates and revenues raised from any given tax, with a

balance between the incentive that low tax rates could

offer for businesses to locate in a given place, and the

impact of these lower tax rates on overall revenues.

“higher taxes on businesses are paid by their wealthy shareholders”

There is more to business taxation than corporation tax,

although you wouldn’t necessarily know it from the media

coverage. Employment taxes, trading taxes and transaction

taxes all make significant contributions to the public purse

too. Many people understandably assume that business

taxation falls on the wealthy shareholders of a business,

which may be true in some cases, but there is often

confusion and disagreement on the ‘economic incidence’

of the tax – that is, who ultimately bears the burden.

Changes to business taxation might mean higher prices

for customers, lower wages for employees, lower returns


3 Office of Tax Simplification (2015) Summary of Recommendations https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/417798/OTS_List_of_Recommendations.pdf

to shareholders, or reduced returns from pension funds

which have invested in a business – to name just a few

examples. Sometimes where the burden of tax actually falls

in practice may differ from the government’s original intent.

A higher quality debate on tax policy is all the more

timely in Brexit Britain. Leaving the EU not only has

consequences in terms of the tax policy making powers

that could potentially be ‘repatriated’ to the UK from

Brussels, but also has wider implications as the UK

develops a new industrial strategy and shapes economic

goals for the future of ‘Global Britain’.

Problems with the policymaking process A complex system

Taxation is a technical issue so will be naturally complex

to some degree, and globalisation and technological

change (such as the gig economy) also adds to this

complexity. But, as tax law changes at pace and under

different administrations with no ongoing ‘guiding

principles’, this complexity is exacerbated. The UK tax

code is more than 20,000 pages long, with an estimated

1,140 tax relief schemes administered by HMRC.3 These

include R&D tax reliefs for businesses to invest in research

and development, the Seed Enterprise Investment

Scheme (SEIS) which offers tax reliefs to individual

investors who purchase new shares in early-stage startup

businesses, or the Enterprise Investment Scheme (EIS)

which applies to investment in all SMEs not just startups.

The coalition government of 2010 to 2015, for instance,

added 100 tax reliefs.

There is no framework of guiding principles which

underpin the design of all tax policies. Many tweaks and

changes have been made incrementally over the course of

time, by successive governments with different and even

conflicting goals, and often with a ‘short-termist’ outlook.

Many experts view the resulting complexity of the tax

system as an accident of history.

It has been noted that complexity has implications for

tax avoidance and evasion – rules which are harder to

understand are more difficult to comply with, even for

those with the best of intentions, or enforce when there is

misinterpretation.


4 Public Accounts Committee (2015) Effectiveness of tax reliefs, improving tax collection: reports published https://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/

news/reports-taxation/

policy rationale: To tax or not to tax?

Many tax experts contest whether to use tax incentives

and reliefs as instruments in meeting economic objectives

or whether there are simpler routes, such as direct

expenditures, to achieve the same thing. They may also

question whether the tax system is equipped to support

particular interventions, and whether the types of rules

required to define the scope of a relief properly in tax law

are unlikely to sit well with encouraging a specific behaviour,

leading to complications in both implementation and

monitoring. There is inadequate information and evidence

on the effectiveness of tax measures and whether they meet

their goals in encouraging investment from other sectors.

For example, the cost of R&D tax relief alone has increased

from £100m in 2001 to £2bn in 2017, “while the actual

amount of business expenditure on R&D has stayed more or

less the same,” according to a report by the Public Accounts

Committee.4

Without a clear narrative of ‘intent’ – i.e. what a government

wants to achieve and why a specific tax measure is the right

vehicle to do this, civil society groups and the public lack

insight and therefore the basis for scrutiny.

policy design

The exclusive role of the Treasury in developing tax

policies may seem illogical given that these are expected

to have economic and social impacts in given fields, such

as health or transport. Specific departments and officials

are often left outside of the decision making process on

taxation, even if this affects their spending remit. For

example, a government grant scheme to promote cultural

access may fall within the remit of the Department for

Digital, Culture, Media & Sport (DCMS), whereas the tax

relief for orchestras would be controlled by the Treasury.

This sort of siloed approach does not benefit the system

as a whole. Government departments working together,

rather than compartmentalising policy making roles,

would not only ensure better design, but also trust from

others that government is working in a joined-up way.

Consultation

There is often a lack of preparation and public

consultation prior to tax announcements. This may be

done in the interests of political expediency - a desire by

government to get measures through quickly and simply

with as little obstruction as possible. It may also be


5 HM Revenue & Customs (2011) Tax consultation framework https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/89261/tax-consultation-framework.pdf

6 Kate Allen (2016) UK ‘relatively lax’ at scrutinising public spending https://www.ft.com/content/564ddd10-057c-11e6-9b51-0fb5e65703ce?mhq5j=e7 [accessed November 2017]

because of the desire to drive news headlines on Budget

day. Surprise announcements may lead to government

U-turns on certain tax policies if they are decidedly

unpopular with the public.

It is worth recognising that there has been more

consultation in recent years, particularly since

2011 when the coalition government adopted a

policy framework which intended to help clarity and

predictability of the tax system by including consultation

at five stages of setting out policy objectives.5 But while

this consultation method may engage with technical

specialists, other stakeholders may be left behind by a

process which is often seen to be dauntingly long and full

of jargon.

policy scrutiny

Various academics and even the OECD have criticised

the parliamentary process in relation to scrutinising the

government’s spending plans.6 Expertise and practical

capacity are both issues here. The parliamentary

committee usually has between three and six months to

look over the annual Budget proposals before it passes

through the rest of Parliament. Other bills generally

average a year to pass through Parliament. The House

of Lords Economic Affairs Finance Bill Sub-Committee

is generally considered a better model, as it has more

detailed deliberations and benefits from expert and

technical support.

Scrutiny of tax reliefs, which have become an important

policy instrument, is even more lacking. Tax reliefs

represent policy choices about which groups and activities

government wishes to support yet they are easier and

quicker to enact than spending policies due to lack

of scrutiny and consultation. Over £100bn each year

represents the standalone fiscal costs of business tax

reliefs and incentives – an enormous amount for just one

or two parliamentary committees to scrutinise.

Scrutiny at the post-legislative stage, on the other hand, is

often reactionary and based on ‘failures’ which could have

been anticipated before legislation is passed. MPs express

outrage about ‘loopholes’ which they may well have voted

on in the past themselves. Hindsight may be 20/20, but

there is a need for proactive foresight too.


7 National Audit Office (2014) Tax reliefs 8 Public Accounts Committee (2014) Tax reliefs, 3rd report of session 2014-15 https://publications.parliament.uk/

pa/cm201415/cmselect/cmpubacc/282/282.pdf

measuring impact

Tax policies, even if their objectives are clearly stated,

are not always subject to a rigorous post-implementation

review to assess their success. When the National Audit

Office undertook a review of tax subsidies in 2014,7

Amyas Morse, NAO head said: “HM Treasury and HMRC

do not keep track of tax reliefs intended to change

behaviour, or adequately report to Parliament or the

public on whether tax reliefs are expensive or work as

expected.” A report by the Public Accounts Committee

in 2014 also criticised HMRC for inadequate control and

reporting of tax reliefs and their cost.8


democratic vote

The elected government will

develop ideas on taxation in the

context of other factors such

as whether the country is self-

sufficient (in terms of energy, raw

materials and food) and if not, the

extent to which it needs to attract

external trade and investment.

Population demographics are

also factors in deciding from

whom taxes are being paid and

what proportion of the ‘pot’ this

amounts to.

1 designing policies

Civil servants in HM Treasury,

lead on strategic tax policy

development, whilst HMRC leads on policy maintenance and

implementation.

The Office of Tax Simplification (OTS) is a statutory body whose

role is to identify areas where

complexities in the tax system can

be reduced, and then to publish

their findings for the Chancellor to

consider ahead of the Budget.

The Chancellor will set out plans

via a financial statement on

‘Budget day’ or after the election

of a new government.

Consultation

A five-stage tax consultation

framework was implemented in

2011, which consists of a formal

commitment to consultation

at each stage of setting out

policy objectives and options

to achieve them; determining

the best option and developing

a framework for how it will

be implemented; drafting

legislation; implementing and

monitoring the change; and post-

implementation evaluation of

impact.

2 3

The tax policy making process


The tax policy making process (ctd)

scrutinising and approving policies

HMRC predicts the impact of proposed changes

to tax reliefs and publishes these statistics,

which are also scrutinised by the Office for Budget Responsibility. As a non-ministerial

department, HMRC reports to Parliament via

the Treasury Minister who oversees HMRC

spending.

One of the roles of the Treasury Select Committee in Parliament is to look at

proposed legislation as outlined in the

financial statement. The report produced by

this committee is followed by a government

report in response to the Committee’s findings,

often with a contribution from the Office for

Budget Responsibility. Further Budget scrutiny

comes from the House of Lords Economic

Affairs Finance Bill Sub-Committee which

examines selected aspects of the Bill such as tax

administration, clarification and simplification.

implementing policies and evaluating effectiveness

New tax rules are implemented by HMRC, which

is tasked with monitoring compliance with the

rules and measuring effectiveness of the new

policies.

Retrospective scrutiny of actual spending and

the effectiveness of tax collection is undertaken

mainly by the Public Accounts Committee in Parliament. The National Audit Office, an

independent parliamentary body tasked with

scrutinising and auditing public spending and the

effectiveness of the way government departments

use their resources, assists with this process.

However, examining specific policies, such as tax

reliefs, falls outside of the NAO’s remit.

54


The Brexit process may lead to increased interest in

the more complex aspects of the tax system, especially

as tax reliefs, incentives and ‘deals’ are made between

government and business.

But what should we be aiming for when formulating,

implementing and measuring tax policies? This is a

complex question that has been set out over the years by

economists, philosophers, social scientists, geographers

and many others.

A basic understanding of tax policy requires understanding

the purpose of taxation, the principles which underpin a

tax system, and the roles and responsibilities of those who

make decisions on tax in line with those principles.

The purpose of taxTax is fundamental to a civilised society. The tax system,

on the whole, is used for different purposes:

• To collect revenues for the public good – paying for essential public services and making investments in physical and human capital that will benefit all of society;

• To redistribute wealth and address disadvantages between different social groups;

The foundations of a responsible tax system:Purpose, principles and process

3

The foundations of a responsible tax system


• To ensure that things that appear to be ‘free’ but which can have broader societal impacts, such as pollution, are correctly priced – what are referred to as externalities.

• To drive changes in behaviour, such as reducing smoking through tobacco taxes or carrier bag waste through the plastic bag tax, or by encouraging certain behaviours through incentives (via tax credits or subsidies) for others to make investments in society or to respond to competing economies.

Some of these purposes of the tax system may be

subject to political or ideological preference. Those on

the left of the political spectrum, for example, may be

more inclined to see the role of the state as redistributive

and therefore the tax system as an important tool to this

end. Those who prescribe to a libertarian, free-market

perspective may disagree with the idea of using taxes to

change behaviour.

It is perhaps inevitable that just as people hold

different views on other issues, they will have different

conceptions of what makes for a responsible and

equitable tax system. It is extremely difficult to take

the politics out of tax policy for the most part, but

articulating the purpose is nevertheless important.

Principles of the tax systemThere has been considerable past work on the principles

of a good tax system, dating back to the ‘canons’ set out

by Adam Smith in his 1776 book, The Wealth of Nations.

These are:

• Equity – that all citizens should be treated equally by the tax system;

• Certainty – that it is clear to the individual taxpayer how much tax they have to pay, to whom and by what time the tax is to be paid;

• Convenience – that the tax is levied in a way which is easy and does not cause undue inconvenience to the taxpayer; and

• Economy – that the administrative costs of collecting tax do not outweigh the revenue collected.

Over the years, other canons have been developed,

including those of:

• Neutrality – that the tax system does not distort economic activity;

• Simplicity – that taxpayers should be able to understand their obligations;

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• Diversity – that the tax burden of different types should not fall unduly on one type of taxpayer;

• Expediency – that the tax can be justified by government and acceptable to the public;

• Elasticity – that taxes can be flexible, increasing or decreasing in response to changes in demand for revenue.

Other work on the principles behind tax policy includes:

• The ICAEW’s Ten tenets for a better tax system (1999), posits that the tax system should be: Statutory, certain, simple, easy to collect and to calculate, properly targeted, constant, subject to proper consultation, regularly reviewed, fair and reasonable, and competitive.9

• Work by the UK Parliament Treasury Select Committee on the Principles of tax policy (2010-11) made a distinction between two ‘basic’ principles – fairness and economic impact. A system that is widely perceived to be unfair can lead to increased levels of avoidance or evasion, even if the exact definition of fairness achieves little consensus. Economic growth is a term which, according to the Committee, should be a crucial objective of the tax system. The Committee

also identified the “procedural principles” of certainty, stability and practicability, relating more to the administration of tax.10

• The Mirrlees Review, and its final report Tax by Design (2011), set out some principles which can perhaps also be summarised as procedural, including transparency, simplicity of collection, ease of measuring impact, minimal duplication of information processing, ensuring as few agents are involved as possible, and that people are dealing with the same organisation, using verifiable sources of information, minimising ‘gaps’ between programmes, and avoiding as much as possible the need for people to apply for special help.11

Whilst principles such as ‘fairness’ may be subjective,

processes and mechanisms that relate to the way that

policy is decided and implemented can be applied

regardless of subjective views on what the tax system

could and should be used for.

9 The ICAEW (1999) Ten tenets for a better tax system http://www.icaew.com/-/media/corporate/archive/files/technical/tax/tax-policy/ten-tenets-for-a-better-tax-system.ashx

10 UK Parliament Treasury Select Committee (2010-11) Principles of tax policy https://publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/753/753.pdf

11 Institute for Fiscal Studies (2011) Tax by design http://www.ifs.org.uk/docs/taxbydesign.pdf

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A responsible processRecent work by the Institute for Government (IfG),

the Institute for Fiscal Studies (IFS) and the Chartered

Institute of Taxation (CIOT) outlined 10 steps towards

making better tax policy.12 These included a number

of measures relating to how government conveys its

tax policy objectives, such as the recommendations for

one annual ‘fiscal event’ or Budget announcement, that

priorities for tax policy are set out as early as possible in

each new Parliament, and that the Corporate Tax Road

Map model could be applied much more widely to other

taxes.

The report also mentioned the need for consultation on

tax measures to happen earlier and more proactively,

and to enhance Parliament’s ability to scrutinise tax

proposals. It also called for more accessible data to allow

more effective and routine post-legislative reviews of tax

measures.

How do these concepts apply to the current political and

economic context of Brexit Britain? Historic principles

and the concept of a responsible process are both still

12 The Chartered Institute of Taxation (CIOT), Institute for Fiscal Studies (IFS) and Institute for Government (IfG), (2017) Better Budgets: Making tax policy better https://www.instituteforgovernment.org.uk/sites/default/files/publications/

Better_Budgets_report_WEB.pdf

highly relevant. But the current pace of political and

legislative change means that flexibility to the current

economic climate must be accompanied by an approach

that stands the test of time. Calling for specific tax

policies, incentives or reliefs based on short-termism

or self-interest, rather than the common good of the

country on the whole, is not in anyone’s interests.

N e w R u L e s f o R B R e x i T B R i T A i N ?T h e f o u N d A T i o N s o f A R e s p o N s i B L e T A x s y s T e m4948

Tax policy inBrexit Britain:Rules of engagement

4Tax policy in Brexit Britain

The Brexit process may prompt an increased interest in the

more complex aspects of the tax system, especially as tax

reliefs, incentives and ‘deals’ are made between government

and industry sectors within and outside the UK.

But does Brexit actually change anything when it comes to

applying the tenets of taxation that have been discussed

over centuries? The simple answer is ‘no’.

What the Brexit process does provide is two key

opportunities which may be unprecedented, at least

in recent history. The first is a timescale which extends

beyond a five-year Parliament. The negotiation process

and a potential transitional deal with the EU, followed by a

full withdrawal process may take a decade, presenting an

opportunity for a longer-term view of the tax system than

has previously been possible.

The second opportunity is the heightened public interest

that accompanies the most important political and

constitutional juncture of a century. Although tax has

been the subject of public debate for almost a decade

when it comes to corporate behaviour, this concern has

not necessarily led to a more informed understanding of

tax from citizens. Perhaps Brexit can provide the context


for a deeper understanding of the tax system and what

can be done differently to create a more constructive

dialogue. There is a risk, however, that the complexities

of taxation will get lost in the wider Brexit debate. Yet

public awareness and interest in tax affairs has been rising

over the last decade because of concerns over fairness,

transparency and accountability of the behaviours of

taxpayers. Brexit may act as a catalyst for this interest to

shift to tax policy.

Finding our place in the worldand increasing our resilience in a global economyIn January 2017, the Prime Minister set out plans for a

new industrial strategy, promising a ‘new, active role’ for

government in the wake of Brexit. It is as difficult to separate

the politics from industrial policy as it is with taxation.

Some people call for positive action, such as dedicated

government stimulus, while others advocate negative action

– deregulation, or for government to ‘get out of the way’, or

remove ‘red tape’ barriers to trade and export, and indeed

taxation itself.

Competitiveness is often seen as the main driver for

policy making in relation to business taxes. However,

the resounding consensus from the businesses that we

have spoken to is that stability, certainty and clarity are

just as important when it comes to a competitive tax

system. Piecemeal policies and incentives used to curry

political favour for short-term wins are far less popular

that politicians would like to believe.

Therefore, recalibrating Britain’s industrial strategy may

provide an opportunity to have a coherent ‘theory of

change’ which underpins tax policies.

Some experts would challenge whether the use of tax

incentives to further economic objectives is using ‘the

right tool in the toolbox’. Industrial grants, for example,

are an alternative form of government investment

which are time bound and specific, simpler to enact

in legislation and subject to greater scrutiny as well as

something that may also be more effective in achieving

the goals of an industrial strategy. If tax is to be used as

a tool in industrial policy, then it should be used in the

context of clear goals, such as current and future public

service provision and business needs.

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13 HM Government (2017) Building our Industrial Strategy: Green Paper https://beisgovuk.citizenspace.com/strategy/industrial-strategy/supporting_documents/buildingourindustrialstrategygreenpaper.pdf [accessed February 2018]

14 CIOT, IFS and IfG (2017) Better Budgets 15 While outside the scope of this paper, comprehensive work on Parliamentary scrutiny of international tax treaties has been

conducted by Dr Martin Hearson of the London School of Economics https://martinhearson.wordpress.com/

We propose that a joint sub-committee, led by HM

Treasury and BEIS, outlines an industrial strategy tax

roadmap to 2030, which relates to the plans to use

“policies on trade, procurement and sectors [as] tools we

can use to drive growth by increasing competition and

encouraging innovation and investment.”13

A roadmap approach to taxation is something which many

tax professionals and policy experts have advocated in

the past.14 The 2010 government’s corporation roadmap

was well received by businesses because it allowed them

to have certainty to plan their strategy over a longer

timeframe than one election cycle, reducing the likelihood

of unforeseen surprises.

When it comes to the UK’s industrial strategy, a roadmap

could help avoid a situation in which piecemeal tax

incentives add complexity to the system and make it

harder to predict the direction of travel, as well as more

difficult to judge their effectiveness. There is also a case

for a ‘sunset clause’ to be applied to all new tax reliefs

outlined in such a roadmap, so that the impact proposed is

time bound and subject to a review within a three to five-

year period, for example.

International collaboration on tax measures is also

key given the globalised economy, as we have seen

with the uncertainty generated by measures from the

Trump administration in the US recently. A further issue

which fell outside the scope of this paper, but which is

no less important, is how the UK will coordinate with

international tax rules once outside of the EU ‘first

movers’ club’. Parliamentary scrutiny of international tax

treaties, for example, is even weaker than it is for primary

legislation.15

Reuniting the country: Engaging citizens in the policy making processFor tax policy to succeed, it must be considered

legitimate by the public. It is vital to have firm principles

in place for what changes to the tax structures in the

UK are based on, and what they aim to achieve. Public

understanding of these principles is as important as the

stability provided to businesses.

Terms such as ‘reducing inequality’, ‘benefiting all in


society’, and even ‘balanced growth’ will no doubt be

interpreted differently depending on different political

viewpoints, in terms of how much taxation is required and

at what level such decisions are taken. This is inevitable.

But in order to ensure everyone buys into the decision-

making process – even if they don’t agree with all the

outcomes – there is a clear need for open consultation

from government on tax policies – perhaps as part of

broader consultations - from development of ideas

through to reviewing effectiveness.

Transparency is important to achieve these ends. Often,

when transparency is discussed in regards to tax policy

making, the initial questions are around how much tax

is paid and by whom – with the conversation inevitably

reverting to the pros and cons of public disclosures

of tax returns, rather the ways in which policies are

implemented and measured. Genuine transparency

means that when a policy measure is announced, there

is transparency of intent, a calculation of who will bear

the burden, or incidence of tax, and a plan for how

results will be measured.

However, even the most well-intended consultation would

be situated within the complexities of the tax system as it

exists. The UK tax code is already more than 20,000 pages

long and contains over 1,000 tax reliefs. If and when

additional competencies are repealed from Brussels, this

will only add even more complexity to the tax system. The

tax system needs to be simpler so that taxpayers are able

to understand their obligations, and citizens can apply

appropriate scrutiny of the tax policy making process.

To these ends, we propose that the Chancellor

commissions a comprehensive review of tax reliefs prior

to the UK’s formal exit from the European Union. This

could be conducted by the Office of Tax Simplification,

although additional resources may be required to do this.

In the longer term, this might be extended to a review of

the opportunities for tax simplification more broadly.

A simple tax system is one of the factors which contribute

towards a ‘competitive’ environment for businesses to locate

and invest. This review could also re-examine the arguments

for and against tax hypothecation where revenues from

specific taxes would be ring-fenced for a specific expenditure

purpose – and publicly communicated in this way as a

mechanism for achieving transparency and accountability.


Taking back controlScrutiny of political decisions is particularly key when

many people are still feeling divided by the referendum

vote. Ensuring tax policy making is not driven purely

by political whims requires analysis of the success of

these decisions. Often Budgets will detail the aims

of a tax policy, but the outcomes are not reviewed

or publicised in the same way. This is why there is

a need for more comprehensive measurement and

articulation of outcomes following implementation (a

‘post-implementation review’). The public would benefit

from more information about the incidence of tax, who

benefits from certain reliefs (such as on a geographical

basis) and whether the tax policy has achieved the

goals set out in the ‘theory of change’ – this could

be presented in an annual report format or by using

more creative or narrative-led methods. Greater

simplicity within the tax system, as described above,

would also assist this to a point.

In the immediate term, more support for parliamentary

vehicles such as the Public Accounts Committee and

the Treasury Select Committee, through resources for

parliamentary libraries and committee staffers, would

enhance their capacity to challenge measures. Recent HMRC

secondments to Parliament may prove a good model for

future expert support.

In the short term, we propose that tax policy

implementation is subject to additional scrutiny

mechanisms via parliamentary select committees,

rather than the main challenger role resting solely with the

Treasury Select Committee and, more recently, the Public

Accounts Committee. When proposing a new tax measure

or relief, government should specify its precise aim, and the

department that holds responsibility for meeting this aim

overall. For example, research and development reliefs are

designed to encourage investment in these areas, as part of

the industrial strategy owned by the Department of Business,

Energy and Industrial Strategy (BEIS). This would make it

clear that the BEIS Select Committee should be responsible

for examining the effectiveness of these reliefs in achieving

the specified policy goals.

In the longer term, we would advocate a review

of government structure and apportionment of

responsibilities when it comes to tax policy making.

With increased national competencies on tax, it may


be more effective for tax measures to be assessed and

implemented as a joint effort between the Treasury and

other government departments, in a similar manner to

other policy instruments. For example, BEIS would then

be able to share the assessment of whether a tax relief

or another form of financial support would be the best

way to incentivise investment in clean energy. This would

bring about a fundamental change in the balance of power

between the Treasury and other departments, and bring

tax in line with the policy making process on other issues. It

would also mean building in tax expertise and training within

departmental staff, and for knowledge exchange between

departments, as is the case with government statistical

experts, for example.

But, ultimately, it doesn’t just fall to government and

civil servants to design a responsible tax system, it is the

responsibility of others to advocate for one. Various lobbying

calls for government support of different sectors and interest

groups are perhaps inevitable - but that doesn’t mean it is

not worth reflecting on what the tax system would look like

overall if everyone acted in self-interest.

In the meantime, civil society has a role to play in extending

efforts to scrutinise the tax system. We encourage civil

society and business groups alike to embrace their

scrutiny role within the policy making process. This

requires consistent and collaborative requests for open

plans and answers that are in line with the checklist we

outline above, and could include Freedom of Information

requests about the objectives of specific tax measures, or

the impact of certain reliefs.

Political factors and ideology cannot always be removed

from policy making and, therefore, it may be impossible

to agree on the best rate of tax or whether tax should be

used for certain purposes, such as behavioural change.

However, a clear and coherent set of objectives, with

defined desirable outcomes and appropriate measurement

of whether these are being achieved – the ‘what’, the ‘why’,

the ‘how’ and the ‘on whom” - can transcend the differing

rationale for taxes.


We encourage anyone interested in holding decision makers

to account on tax policies, to ask the following questions:

✔ What are the objectives which specific tax policies seek to

achieve?

✔ Why are incentives and reliefs proposed as a way to

achieve the government’s goals and ambitions, and to

what extent are they more appropriate or effective than

other expenditure such as industrial grants?

✔ How would specific tax measures be implemented and

over what period of time?

✔ Where would the incidence fall - who would ultimately

bear the burden and reap the benefits?

✔ How would the effectiveness of the tax policies be

monitored and who would be tasked with measuring

impact?

✔ At what point will a formal post-implementation review of

outcomes take place?

This would serve as a starting point to achieve a basic

understanding of the mechanisms and principles

which currently, or could in future, sit behind the tax system,

in a way which allows public interest groups to scrutinise

these functions.

Acknowledgements

Acknowledgements

T A x p o L i C y i N B R e x i T B R i T A i N62

Working group co-Chairskate Bell

Kate Bell has been Head of the Economic and Social

Affairs Department at the TUC since July 2016. The

Department leads the TUC’s work in many key areas of

economic and social policy, including macroeconomic

and fiscal policy, industrial policy, climate change and

energy policy, corporate governance and capital markets,

social security and the welfare state, pensions policy and

employment rights. Before joining the TUC, Kate worked

as Head of Policy and Public Affairs for a local authority,

as Work and Pensions adviser to Ed Miliband during his

period as leader of the Labour Party, and for the charities

Child Poverty Action Group and Gingerbread.

Grace stevens, ACA, CTA

Grace has been the Chief Tax Officer at Legal & General

Group since 2015 having joined the L&G tax team in

2011. She is a member of the CBI Tax Committee, a

member of the IA Tax Strategy Committee, chairs the

advisory panel for the Winmark Tax Directors Network

and has recently joined the CBI Financial Services

Council. Grace has expertise across UK and international

tax specialising in real estate and financial services.

Before joining L&G Grace worked at RSA, Deloitte and

qualified with Arthur Andersen. Grace was the Treasurer

of the charity Women’s Breakout until mid-2017 and

has recently joined the Board of Women In Prison as a

Trustee.

EditorReport by Caroline Macfarland, Director, Common

Vision

This report was compiled and edited by Caroline

Macfarland, based on working group meetings and

consultation. Any errors are the responsibility of the

author.

With thanksWith thanks to those who participated in our working

group meetings: Adam Corlett, Resolution Foundation;

Adam Jackson, Grant Thornton; Adam Pickering,

Charities Aid Foundation; Andrew Carter, Centre

for Cities; Anneliese Dodds MP; Cathy Cross, PCS

Union; Claire Spoors, Oxfam; Heather Buckingham,

Church Urban Fund; Jane Dawson, Quakers in Britain;

A C k N o w L e d G e m e N T s N e w R u L e s f o R B R e x i T B R i T A i N ?6564

Kamaljeet Gill, TUC; Tim Law, Engaged Consulting;

Allison Roche, Unison; Chris Morris, Usdaw; Professor

Kimberley Scharf; Charlie Elphicke MP; Kieran Devlin,

Prudential and Emily Kenway, Fair Tax Mark.

Special thanks to Jonathan Riley, Grant Thornton; Judith

Knott; John Cullinane, Chartered Institute of Taxation;

Phil Hall, AAT; Stephen Herring, Institute of Directors;

George Bull, RSM UK and Martin Hearson, LSE for their

comments and feedback on drafts of this report. Thanks

also to Rachel Taylor, Jon Ward and Katy Owen from

Common Vision.

Sponsored by the TUCThis workstream from the Responsible Tax Lab was

sponsored by the Trades Union Congress (TUC). The

TUC is the voice of Britain at work. It represents nearly

six million working people in 52 unions across the

economy. It campaigns for more and better jobs and

a better working life for everyone, and supports trade

unions to grow and thrive.

About Common vision

Common Vision (CoVi) is an independent, not-for-profit

think tank launched in 2014. We explore issues which

require long-term, intergenerational solutions and

which require solutions to reach beyond conventional

partisan debates or sector-driven interests. We use

creative and crowdsourced methods to promote

civic engagement and policy understanding beyond

a politically active minority, and to build a vision of

society based on the common good.

A C k N o w L e d G e m e N T s66

T H E

R E S P O N S I B L E

T A X L A B

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