Select Committee on Treasury Minutes of Evidence

Memorandum from Mr Edward Troup, Head of Tax Strategy, Simmons & Simmons

  1.  This memorandum addresses the role of the Treasury in tax policy making, and its relationship with the revenue departments. I worked at the Treasury from 1995-97 but since 1997 have been familiar with the workings of the Treasury only as a "consumer" of its output.

  2.  The Treasury identifies as one of its principal aims "promoting a fair and efficient tax and benefit system with incentives to work, save and invest[1]", and takes a lead role in tax policy making. It is clearly right that the Chancellor's own department should be the principal tax policy making department.

  3.  Good tax policy making needs to balance the over-riding concern to collect tax with economic considerations ("efficiency") and with wider concerns of equity and social consequences ("fairness"). It also needs to accommodate the inherent tension between the goal of efficiency (which implies a tax system which minimises distortions) and Government's wish to promote particular activities (which tends to increase distortions).

  4.  In order to achieve this balance the Treasury's tax policy unit should perform the following functions:

    (a)  It should translate the broad principles of Ministerial intention into a coherent framework for the tax system.

    (b)  It should provide the analytic background to enable Ministers to reach balanced judgements in particular cases on the competing requirements of revenue raising, efficiency and the pursuit of policy ends.

    (c)  It should have the necessary technical expertise to conduct a debate with the revenue departments on equal terms.

  I believe that the Treasury has failed, on a number of occasions, to fulfil these functions adequately and as a result has not been able to provide the necessary support for the tax decisions of successive Governments. Each of these three functions is considered in turn below.

  5.  A coherent framework for the tax system: The Chancellor has stated that "tax policy should be based on clear principles" and that "the tax system should be well designed".[2] There are a number of reasons for thinking that this has not been achieved. Policy has tended to react to specific initiatives from Ministers or revenue departments, without any overall framework to individual measures. Anti-avoidance measures (for instance on leasing, or one-man companies, NICs on share options) have conflicted with other policy objectives (encouraging investment, small businesses, employee shareholding), while specific incentives (eg for the film industry, R&D, shipping) are at odds with the stated aims of a broad tax base, reduction of administrative costs and simplification. The Treasury has an important role to play to ensure that measures put forward by the Chancellor receive adequate internal debate, are made part of an overall explicit strategy for the system and can be explained as such.

  6.  An analytic background to policy decisions: Too many individual policy decisions have lacked both evidence-based justification or ex-post evaluation. The Treasury has too often either failed to provide that analytic background or left the task to the revenue departments, whose analysis, quite understandably, tends to reflect their primary statutory duty of ensuring that revenues are collected. Some examples are referred to above, and I have cited examples to the Committee in the past[3]. This year's Budget contains a controversial measure on double taxation relief, the debate on which has been aggravated by the lack of any consistent explanation for the measure from the Treasury. Indeed, most of the discussion on the measure has been between businesses and the Inland Revenue, even though the measure is in part justified on wider grounds of international policy, which is part of the Treasury's responsibility.

  7.  The expertise necessary to debate with the revenue departments: The revenue departments are charged with the "care and management" of taxes, and their Chairmen are answerable to the Public Accounts Committee for the discharge of that function. The experience of the departments in implementation of tax policies is an essential element of tax policy making, but their input into policy making has been driven by concerns with tax yield. Against this, the Treasury's lack of detailed knowledge of the tax system has fettered its ability to debate the technical concerns of the revenue departments on equal terms or to understand the practical consequences of particular measures. This has resulted in difficulties with a number of technical measures, typically ones justified on revenue protection grounds—the recent debate over IR35 being a good example. This problem of a lack of expertise has been tackled since 1997 by the strengthening of the Treasury's tax policy unit, which I welcome. Nevertheless, I see the Treasury as needing to take more of a lead role both in establishing a centre of excellence on tax policy internally, and promoting the wider debate and study of tax policy[4]

  8.  These weaknesses may have been aggravated by the relative neglect of tax policy while monetary policy was within the Treasury's remit, and hence was the focus of Chancellor's attention, and by the general reduction in staffing levels across the civil service. Although some steps have been taken to address the policy making function recently, I believe a great deal more remains to be done.

  9.  I would recommend:

    (1)  that steps be taken to delineate more clearly the division of responsibilities between tax collection and tax policy making (while recognising that the tax collectors have a vital role in advice on policy);

    (2)  that the tax policy unit at the Treasury be more explicitly constituted with clearly defined responsibilities to provide analytic support and explanation for tax measures;

    (3)  that consideration be given to the creation of a Code of Tax Policy, as a statement of the Government's intentions for the tax system, and against which particular measures are required to be evaluated, to provide a better link between those measures and the broad policy aims of Ministers for the tax system. Such a Code would set out the detailed (as well as the broad) principles on which policy is to be based, and best practice for the making and implementation of policy decisions.

11 April 2000

1   The Treasury's Aims and Objectives: Back

2   Financial Statement and Budget Report, July 1997, page 24. Back

3   Treasury Committee, Fourth Report, The 1999 Budget, page 1. Back

4   It is also worth noting that the problem of a lack of expertise is not confined to government. With a few honourable exceptions, tax policy is not widely studied as an academic discipline in the UK, in comparison to North America, some continental jurisdictions, Australia and New Zealand. Back

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