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Is the idea of a new approach to consultation too radical for HMRC, asks ANNE REDSTON
KEY POINTS
- Three stages to tax policy making.
- Starting with the solution.
- Proposed new power to require security from some employers.
- Learn from VAT.
- Role of the Tax Professionals Forum.
Readers of The Hitchhiker’s Guide to the Galaxy know the answer to the Ultimate Question is ‘42’ but that everyone has forgotten the question.
Beginning with the answer and working backwards to the question produces brilliant science fiction, but very bad tax policy. This is not just my opinion: the Government agrees.
One of the government’s first acts after coming to power was to publish a discussion document, Tax policy making: a new approach. In the introduction, David Gauke, Exchequer secretary to the Treasury, promised a ‘more considered approach’ to tax policy design, while the main text spoke of ‘fewer and better developed proposals supported by improved processes for changing tax law’.
Is this the dawn of a new era in tax policy-making? Is it spin or substance, wrapping or reality?
There are certainly some hopeful signs, including significant and timely consultations on corporate tax and pension reform. In contrast, the recent consultation on security for PAYE pays only lip service to the new policy framework.
The three stages
The ‘new approach’ sets out three stages in the development of tax legislation:
Stage 1 – set out objectives and identify options.
Stage 2 – determine the best option and develop a framework for implementation, including detailed policy design.
Stage 3 – draft legislation to effect the proposed change.
In other words: start with the possible problem, explore alternatives, select the most appropriate and then examine the detail. Finally, produce draft legislation and scrutinise it carefully.
This is undoubtedly the correct methodology. As the ‘new approach’ says, ‘It helps ensure that changes are well targeted and without unintended consequences, and that legislation is right first time’.
It is this type of policy making that preceded our most robust fiscal reforms, such as self assessment and changes to capital allowances.
Starting with the answer
In contrast, most poor policy decisions are caused by jumping straight to the ‘solution’. This is superficially attractive to mandarins who are convinced they are correct. Why waste time looking at alternatives, why take a step back to see if a new law is needed at all?
Classic cases of tax policy changes introduced without proper consultation include:
- the 0% corporation tax, which triggered a Gadarene rush to incorporation and significant Exchequer loss;
- IR35, patched up by the managed service company legislation and now on the Office of Tax Simplification’s reform agenda;
- the pre-owned asset rules, which were aimed at the rich, but accidentally caught those on low incomes who offered a home to their parents.
Starting with the answer impairs the integrity of the tax system and causes collateral damage to individuals. Governments of all colours have learnt to their cost that bad policy produces disproportionate political noise. It takes the spadework of consultation to unearth the wider consequences of policy initiatives; there are no short cuts.
PAYE security proposal
On 9 December, a consultation document called Security for PAYE and NICs was published. If the proposals are implemented, HMRC will be able to require businesses to provide security for PAYE and National Insurance liabilities.
In other words, they can oblige an employer to open a joint account with HMRC, place a specified sum in that account, and prevent its withdrawal without permission. Failure to comply will be a criminal offence, carrying a penalty of up to £5,000 a month.
This proposal is tailor-made for the new tax policy approach. Almost all employers are within PAYE, so the potential impact is wide-ranging. Non-compliance triggers a high penalty as well as a criminal record: this is a serious, possibly life-changing, power.
The three-step process would require HMRC to set out, at the first stage, evidence that a problem exists, alternative solutions, collateral risks and the interaction with existing legislation.
If this showed that there was a need for a new power, the second stage would determine the best way to approach the problem. Only then would draft legislation be exposed for comment.
The ‘consultation’
The consultation Security for PAYE and NICs states that the process is:
‘being conducted in line with the principles outlined in the document “Tax policy making: a new approach” published at Budget June 2010.’
It then sets out the three stages, as described earlier in this article, before continuing:
‘on this occasion all three stages are being run concurrently’.
This statement would not be out of place in Yes Minister. It is self-evident that the whole point of having three stages is that each one informs the next.
It may even be obvious after the first stage that no legislation is needed at all. This outcome would be consistent with the government’s other objective, also in the ‘new approach’, that it wants to ‘slow down the rate of change to the tax code, focusing on fewer and better developed proposals supported by improved processes for changing tax law’.
Not only are the stages in this policy process telescoped into a single step, but the relevant legislation has already been published, not only at the back of the consultation document, but also in the draft Finance Bill.
Not properly scrutinised
What makes this particular consultation unusual is that similar draft legislation, again without any consultation, was included in Finance (No 1) Bill 2010. It was one of a small number of provisions withdrawn before the election. The Conservative party’s Mark Hoban, Financial secretary to the Treasury, explained why:
‘We have taken matters into our hands and forced the government to drop them. The problem was that a criminal offence was being created in connection with a requirement that had not been properly explained or scrutinised.’
Having been correctly singled out for excision from the final Finance Act of the departing government, why has it now returned, almost unchanged, to be included in the first full Finance Act of the coalition government?
It is not because the issues have now been ‘properly explained or scrutinised’. There are still significant questions as to whether the legislation is necessary, proportionate or appropriate, and how it fits with existing law.
These are all issues that would have been addressed by the first part of a three-stage consultation, but in its absence they are considered briefly below.
Is it necessary?
The new powers relating to PAYE and National Insurance are expected to protect a mere £5 million a year of tax revenues (paragraph 3.12 of the consultation document). Is it really necessary to give HMRC extensive new criminal powers to protect such a small sum?
Indeed, the amounts at risk are likely to be lower still. April 2010 saw the introduction of new penalties for employers who are late paying their monthly PAYE.
But no penalty notifications are being sent out until April 2011, so there is limited information about how effective these new penalties will be in encouraging timely payment. The consultation document does refer to these brand new penalties, saying (at paragraph 3.3):
‘Early indications are encouraging as there seems to be an improvement in the numbers of PAYE payments that are being made on time, although HMRC are unable to quantify the full extent of the behavioural change at this stage.’
A three-stage consultation would surely consider whether it would not be more sensible to wait until the in-year penalty regime has had time to deliver results, before adding yet another powerful weapon to the HMRC armoury.
Is it proportionate?
Proportionality must be judged against the £5 million at risk. In exchange for protecting these revenues, HMRC will obtain significant extra powers over employers they consider are at risk of not paying their PAYE and National Insurance. The cost to those who fail to pay is a criminal record plus a steep penalty.
Yet at the stage the security is sought, no liability for tax or National Insurance exists – just HMRC’s perception of a non-payment risk. Similar legislation is in place for VAT, where the case law shows that the security has often been wrongly required, for example:
- when returns were submitted two days late;
- when the wrong figure was used as the basis for the calculation;
- where previous defaults were not those of the taxpayer, but of his parents, spouses or employees.
Is it appropriate?
The stated aim of the new powers is to prevent businesses going into liquidation while owing PAYE and National Insurance. But most financially stretched employers are already at or near the limit of their banking covenants.
Providing security to HMRC may cause them to exceed their limits, triggering insolvency and preventing payment of any tax debts. Has the law of unintended consequences been considered?
It is true that employers who have already obtained a ‘time to pay’ arrangement will fall outside these new provisions. That does not, however, protect businesses currently managing within a tight budget, who are now faced with an unexpected fiscal demand.
Once the security has been required, it is too late to ask for ‘time to pay’; insolvency may be the only option.
What about existing powers?
A key purpose of the new powers is to prevent phoenixism, i.e. contrived insolvency where a new business is born again out of the ashes of the old.
However, the consultation document fails to mention the Social Security Administration Act 1992, s 121C, which contains National Insurance provisions against phoenixism; it does not explain why these existing powers are inadequate, or whether the new rules will form a further layer on top of these current rules.
Is the new approach compulsory?
The new policy model allows the three-stage approach to be bypassed where it is not ‘proportionate or practical’ to consult, where ‘forestalling presents a significant risk’, where there are straightforward changes to rates, allowances or thresholds, or where ‘revenue protection measures’ are being introduced.
Given that the latter is usually interpreted to mean tax avoidance, none of these exceptions covers the PAYE security proposals.
It is true, too, that the ‘new approach’ document states that ‘for the simplest tax changes these three stages may run together’, but this is not a simple tax change, it is a significant extra power.
There is a final fig leaf: the ‘new approach’ document sets out proposals, but these have not yet been formalised. There is an oblique reference to this excuse in the PAYE consultation document, which says that ‘this is a transitional year for the tax policy making framework’.
However, the paragraph continues by stating that ‘this does not change the nature of the consultation’: in other words, the new approach is allegedly being applied to these proposals.
What next?
Not only has the government published this new methodology, it has also set up a team of tax policy angels to act as its guardians and protectors. The role of the Tax Professionals Forum includes:
‘providing real-time feedback on whether the government’s stated principles and this new approach to tax policy making are being followed in practice: challenging the government where this is not the case.’
I hope the forum takes up this particular issue. At this stage, I don’t know if these new powers are needed or not: but neither, I suggest, does anyone else. That is why a proper consultation process is needed.
Conclusion
The Government’s new approach deserves a ringing endorsement: it is the best way to achieve appropriate, targeted, workable legislation. Genuine consultation is, of course, scary for some: the ‘new approach’ document does warn that it will ‘establish greater discipline on policy makers’.
Perhaps it would help if, like The Hitchhiker’s Guide to the Galaxy, the new tax policy framework had the words ‘don’t panic’ in large, friendly letters on its cover.
