This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by the Exchequer Secretary to the Treasury.
Good morning, and thank you for inviting me to speak here today.
It’s a pleasure to speak with so many leading professionals, academics and business people from the world of tax and to take a short break from Whitehall where, as you can imagine, the focus has been on making tax policy, and have a chance to talk a little about how we make tax policy. And 13 days away from the Budget, that, I hope, is a subject I can safely talk about.
We are committed to fundamentally reforming how we make tax policy in the UK.
Engaging with tax professionals to build ever greater stability, certainty and simplicity in the tax policy process.
Providing businesses with confidence in the tax system, enabling them to take critical, long term investment decisions.
It all goes hand in hand with our commitment to create the most competitive tax system in the G20.
A competitive business tax regime is at the heart of this Government’s commitment to build a pro-business culture in Britain.
Yes, that involves cutting taxes on businesses…reducing the UK’s main rate of corporation tax to 23% by 2014… the lowest rate this country has ever seen, and the lowest in the G7.
But competitiveness is much more than just rates and thresholds.
It’s also a question of how businesses experience the tax system - including how businesses experience the tax policy making process.
I fully welcome the Centre for Business Taxation’s work on this important area, and it provides the opportunity to detail two areas where we are fundamentally transforming the tax policy process in UK.
Firstly, ensuring that tax policy making embeds certainty and predictability.
And secondly, ensuring that tax policy is simply to understand and easy to comply with.
Certainty and predictability
We take these principles very seriously, and we set out our approach in our 2010 document Tax Making: A New Approach.
As we said then, we want to build a framework for making law that is:
- Predictable not haphazard
- Stable not disorderly
- Transparent not opaque
And to reassure businesses that we wanted to be held accountable in meeting these objectives, I also established the Tax Professionals Forum to oversee our implementation of this new approach to tax policy making.
In their first report last December the forum welcomed the new framework and noted the work done so far by the Government.
Not only did they agree that we had identified the correct path to better tax policy making, but that we were implementing these changes through such announcements as the corporation tax roadmap.
But try as we might, we cannot get everything right the first time.
Realising our goal of reforming tax policy making will take time, but we have already made substantial progress rooted in extensive engagement with outside parties on how to do so.
And its best demonstrated through our announcements in the 2010 and 2011 Budgets where we set out measures for a multi-stage consultation approach before enacting measures.
On both bills we published the draft legislation, receiving over 200 comments each time.
And with respect to Finance Bill 2011, it was because of those comments that we improved a number of clauses before introducing the Bill.
And we are doing the same this year. Those of you who have followed our reforms to the Controlled Foreign Companies rules will have seen the updates in January and February that built on comments from interested parties.
The relative lack of Government amendments in the 2011 Finance Bill demonstrate the huge benefit of early and pro-active engagement.
Getting the legislation right with the tax community first is not only possible, but makes for better policy altogether.
This is an unprecedented approach to policy making, but one that we are extending across the tax policy spectrum.
As with last year, we will plan to launch consultations through a staged approach after the Budget and as the Chartered Institute of Taxation has said, this is ‘a big step towards improving the way UK tax law is made.’
I recognise nonetheless that for some, the Government’s changes to the oil tax charge or the changes to the bank levy are seen as undermining the drive to greater certainty.
However, the bottom line is that the Government will always need to retain some flexibility on tax policy.
We have sought to be clear that generally the Government can’t and won’t consult on rate changes or where consultation would otherwise present a risk to the Exchequer.
Of course, more recently, I’m sure you’re all aware of the decision that we took last week to close two abusive tax avoidance schemes, and in one case with full retrospective effect.
It’s a bold step that we haven’t taken lightly.
Retrospective legislation should only be used in exceptional circumstances. But where a taxpayer has signed a code of practice agreeing not to engage in aggressive tax avoidance and where government has previously legislated to close down very similar loopholes and, in doing so, put up a very clear ‘keep off the grass’ sign and where failure to act would cost hundreds of millions of pounds, I believe that this decision was justified.
It is entirely unfair that while the vast majority of businesses pay their full tax bill, others seek to avoid doing so through continued schemes.
Now more than ever, as we tackle the deficit that we face, it is vital that we all pull in the same direction, and all pay the taxes that we owe in full.
Any sense that some are avoiding their tax bills through contrived behaviour undermines public support for a business tax system and reduced rates of business.
In fact, it’s because of our action to tackle tax avoidance and close loopholes, that we have been able to afford tax cuts for business.
Aggressive and highly contrived tax avoidance merely serves to chip away at the sustainability of our tax regime.
Greater tax stability and certainty can’t be a one way street.
It depends on constructive, positive and pro-active engagement from businesses.
It’s only by working together with full transparency and open engagement that can we secure a stable and competitive tax system.
A tax system with low rates and a broad base.
And in addition to that, a tax system that is simple to understand and easy to comply with…free from burdensome layers of rules and regulations to stymie elaborate and contrived attempts at avoidance.
For many businesses, stability and simplicity go hand in hand.
The more that tax is buffeted by the winds of media opinion, or the whims of political opportunitism, inevitably, the more complex the tax system becomes.
There is always pressure from those who believe that the tax system should be used not just to raise revenue but also to achieve other policy objectives.
And, of course, there are times when tax can do just that. For example, it is legitimate for the tax system to encourage expenditure in research and development.
We know that there is a market failure that needs to be corrected because firms reinvesting in R&D cannot capture all the benefits that accrue from investment in this area.
And there is a place for using the tax system so that externalities are incorporated into the cost of a good, for example.
But, at the same time, where exceptions build to become the norm, the risk is a tangled web of rules, reliefs and exemptions.
It’s worth remembering that when we came to office we inherited the longest tax code in the world.
A burden on businesses across the country, and in particular, small businesses,
That’s why we set up the Office of Tax Simplification up to lead a determined effort to simplify the tax system.
This time last year it produced its review of tax reliefs…having identified over a 1000 in total.
And following this first report we have already taken action to abolish reliefs and remove reams of pages of legislation.
To date, we have abolished 7 of those reliefs identified by the OTS, and we have confirmed that we will repeal a further 28 reliefs, whilst partially repealing a further 3.
And most recently the OTS published interim reports on the taxation of employee share schemes and taxation of pensioners, along with its final recommendations on small business tax.
All vital contributions that will help us continue the work of making life easier for taxpayers who just want to comply with their obligations and pay their taxes.
We will be responding to these reports at the Budget.
The OTS’s work has also raised the profile of complexities associated with income tax and National Insurance - and in particular that administering these taxes can impose considerable cost and complexity on employers.
Greater integration of the operation of the two systems has the potential to reduce burdens, remove distortions and improve fairness.
Last summer, we took evidence from a wide range of stakeholders on the current system, which has confirmed that for many it is opaque and burdensome:
Employers have to deal with two sets of rules, perform two sets of calculations, and run two different systems.
Employees struggle to understand what their NICs deduction is and what it entitles them to.
Our vision is for a simpler, fairer and more efficient system. NICs will remain contributory, but we envisage a more transparent system that businesses and individuals can better understand, and we will set out next steps at the Budget.
Hand in hand with simplicity, we want to make the tax system more accessible and transparent.
The Government has already taken huge strides on improving transparency on the spending side.
We have published more data on spending than any previous Government, and we are leading the way internationally to open up the Government’s books and public services online for the public.
But, over time, we need to do the same on the revenue collection side…making it easier for business to know how much they need to pay.
And in that respect, we are already capitalising on digital technology to deliver simpler services to business.
HMRC already has over 250 services live online, receives more than 70 million returns online, but we need to go further. We promised to make the UK one of the fastest countries in the world to start a new business, reduce the number of forms needed and move towards a ‘one-click’ registration model.
So from this April we will be introducing three new digital services. Business will be able to register for all the main business taxes in a single online process with a new Online Tax Registration Service or ‘Registration Wizard’.
Those setting up a new company at Companies House will be able set up for corporation tax at the same time removing duplication and there will be a new Tax Dashboard that will enable businesses to see simply and clearly in one place online their position on multiple taxes with HMRC.
And we want to take the same ambition to transparency on personal taxation.
At the moment, for a lot of people, the tax line on their pay slip is the only time they see just how much they’re paying in tax, but I don’t think that’s good enough.
We want to make tax more transparent and we want people to be more engaged with their own tax affairs.
So that the impact of policy choices taken by Governments are visible to individuals.
Back in November, we launched a consultation looking at proposals for how we lift the lid on tax so that people understand how much they are paying, what their overall tax rate is, and what they should be paying, in the same way that the Government has lifted the lid on what they are paying for.
Transparency is not a ‘nice to have’ or something you choose to do when suits.
I firmly believe that it’s only by increasing transparency, fostering greater engagement, and working in cooperation that we can secure a more stable and competitive tax system.
Hand in hand with that, and in the long run critical to succeeding in our ambition, is helping to foster a more informed debate on tax with a wider public.
In the Oxford Centre report, I was struck by the comment that the link between taxation and representation appears to be weakening…that political parties shy away from engagement with the electorate on serious tax policy choices.
I can say categorically, that we have engaged in a serious debate about tax.
This Government is unashamedly pro-business and we have consistently agreed that we need a competitive tax environment.
I have consistently argued, for example, that higher taxes on profits simply make the UK business environment internationally uncompetitive…
And ultimately higher taxes will fall on employees through lower wages and salaries, consumers through higher prices, or shareholders through lower dividends.
All taxes are paid by individuals and households in the end.
We have long been clear that businesses will drive our economic recovery, and competitive, low tax regime is critical to supporting their success…ensuring that they can compete internationally, and ensuring that they can use their resources to invest in growth and jobs.
We have consistently made the case for business, in part because the distinction made by some between ‘business’ and ‘people’ is a false one. Pro-business policy which results in more economic growth is, yes, good for business. But ultimately, good for people too.
But at the same time, we need businesses to make the case themselves.
It’s not up to Government alone to reframe the debate.
It’s up to businesses themselves to lead from the front and engage in the debate about the benefits of a more competitive tax system.
To be more transparent in setting out the tax they pay, to open themselves to greater scrutiny, and to demonstrate how critical business success is to the prosperity of individuals and families across the economy.
It’s only through engagement and transparency that we can address some of the myths and confusion on tax, and build a more informed debate.
It’s only then that we can build a stable, sustainable, simple and competitive tax system to the benefit of our entire economy.
I am committed to, and I look forward to working with you all in that task in the years to come.