I would like to start by thanking the Institute of Chartered Accountants in England and Wales for this invitation. It really is a great honour to be here tonight, and to be the guest speaker at the Philip Hardman memorial lecture.
As the Minister with strategic oversight of tax policy, I now deal with issues relating to tax on a day-to-day basis. But, in preparing for today’s lecture, I realised that my first experience of tax policy was, as a schoolboy, listening to Philip Hardman’s analyses of the Budgets of the 1980s.
Now I don’t want to give a false impression that, as a teenager, I had a precocious interest in tax matters, or that I rushed home from school for the sole purpose of watching a discussion about the tax changes contained in a Budget. I like to think I was pretty normal for my age. And that my interests were fairly typical for a teenage boy - cricket, football, girls and, of course, macroeconomics.
But even I, watching Philip Hardman talk about tax, realised that this was something people could discuss with knowledge, flair, enthusiasm, wit and passion. Of course, that doesn’t always happen, as I learnt some years later in my next real experience of discussions on tax policy…
…serving on the public bill committee of the Finance Bill.
Nonetheless, my purpose today is to communicate clearly about some of the more complex areas of tax. To set out some of the difficult judgements we’ve been grappling with as a Ministerial team, as we seek to make Britain’s tax system an asset to our economy once again, as I know everyone here would wish it to be.
I’m going to start with the context - the challenges we’re facing and the complex balances we need to strike.
The first set of these are financial, as we deal with Britain’s debts.
I can tell you it is humbling to enter the Treasury as a Minister for the first time, and face a situation where the country is borrowing a pound for every four it spends.
The excitement of that first red box, was tempered by the amount of red ink in the first briefing. And the experience inevitably stays with us as we contemplate the tax reform this country needs…
…as we consider how we reform our tax system to assist long term, sustainable economic growth.
The second challenge is public acceptability. As we face up to the difficult choices that the country needs us to take, we need to carry the British people with us.
That means leading public opinion at times, but not wilfully testing the public’s patience when it’s understandably short.
You have to pick your battles carefully when people are frustrated and angry with personal consequences that are not of their own making.
As an MP you get a clear sense of this in every surgery and constituency mailbag. There’s never a shortage of suggestions for worthy areas of additional public expenditure. And as a Treasury Minister with responsibility for tax….well, let’s just say that people are that bit keener that you factor in their views…
…I never knew there were so many colourful alternatives to signing off a letter “yours sincerely”.
And by and large, the focus of the general public is not on the broad, intellectual coherence of the tax system but, understandably, on the practical matter of how much they - as an individual or a company - pay.
Although, to be fair, I also receive a quite few representations saying why other people should pay more.
Third is the challenge of time. In our 24/7 news culture, politicians have to deliver progress, and usually the deadline is yesterday.
There’s a constant pressure for immediate announcements and rapid impact. And as a new Government you feel this pressure even more keenly - especially when the public is very much engaged in the aftermath of an election…
…while they’re still making their minds up about you, before you become the “new normal”.
Yet in tax policy, short-term impact is often in tension with fundamental long-term reform. Today’s commitments will be tomorrow’s constraints.
That’s why we’ve set ourselves against the patchwork quilt, knitted by constant change in the tax system. But at times this doesn’t sit easily with proclaiming on a daily basis that “something must be done”.
Fourth, there is the balance to be struck between genuine and open consultation and the desire for certainty. We believe firmly in the benefits of consultation, especially in tax. There are established norms about the length of time we should consult for, and it seems only polite to adhere to them.
But we also hear business demands for certainty in our tax system.
So I find myself weighing up how best to consult on tax reform without creating undue uncertainty. Above all, how can I avoid an overall sense that too much of our tax system is in flux at any one time, even as we contemplate the big reforms that businesses say they want to see.
I can tell you, it turns out there’s no magic set of scales at the Treasury to help you discover if you’re getting the balance right.
So that’s the prism of:
- The deficit;
- Public opinion;
- Balancing short term pressures against long term aims;
- And wanting to be open without creating uncertainty…
…through which I find myself looking at tax issues.
I’m not claiming that the vantage point is new, or the terrain insurmountable. Illustrious tax reformers of the past have marched these paths before.
I’m personally very attracted to the approach set out in Nigel Lawson’s 1988 Budget, where he set out his desire to:
- Reduce tax rates where they’re too high;
- Abolish unwarranted breaks and exemptions;
- Make life simpler for the tax payer;
- And remove any injustices from the system.
Yet, the Government of the time also had to operate within some of the constraints I outlined earlier. This clear philosophy - and some of the policies best remembered from that era - did not emerge until the tenth budget of Mrs Thatcher’s Government.
I promise you that is not the timeframe we are working on. But I hope that this will provide you with some context for the rest of my remarks tonight, and the questions you will pose to me in the Q and A, and in subsequent meetings.
But to get the ball rolling, I’d like to try to answer five key questions that many of you have been asking about our tax system.
First, what will be our approach to Corporation Tax?
Second, how are we going to deliver on our promise to create a simpler tax system?
Third, where is the Government going with its statements on cracking down on evasion and reducing tax avoidance?
Fourth, what are we going to do to improve the quality of tax law as we make changes in these areas?
And fifth, what does the Spending Review mean for HMRC?
These may seem like disparate questions, but they’re united by our ambition to create a competitive, simpler, fairer and more stable tax system. So I’ll answer each in turn, even if it sacrifices a bit of rhetorical elegance.
So let me turn first to Corporation Tax.
We are a pro-business, pro-growth Government.
We recognise that the world is becoming an ever more global marketplace, and it’s therefore essential for us to look at new ways to attract business from abroad.
And in Britain, the tax system has an important role to play.
If we look back to 1997, the UK had the tenth lowest main rate of Corporation Tax among the current EU27 countries.
By the time we came to office, we’d slipped to 20th.
Other countries had cut their rates further and faster than we had, and today it would be complacent not to follow suit.
That is why we’re cutting Corporation Tax to 27 per cent in the next year, with a one per cent reduction in each of the following three years…
…taking us down to 24 per cent.
This will be the lowest rate of any major Western economy, one of the most competitive rates in the G20, and the lowest rate this country has ever seen.
And we’ve done this in the context of many, many difficult decisions elsewhere…
…when others would have been tempted to balance the books on the back of British business.
But if we’re going to be serious about encouraging strong growth in the years ahead, we need to pull up the shutters and send out a clear message that Britain is open for business.
That is an important first step.
But of course, we’re not so naive as to think that the competitiveness of our tax system is about reducing rates in isolation.
It’s also about how we tax, the rules that are in place, and what this means for different types of enterprise.
For years businesses have complained about the tax treatment of overseas subsidiaries.
Saying that our rules on foreign profits are archaic - dating back to the early 1980s - and bear little or no resemblance to the modern business environment.
So we’ve launched two separate consultations to be completed by next year’s Finance Bill - one on interim improvements to the Controlled Foreign Company Rules and the other on the tax treatment of foreign branches.
This is ahead of the full reform of the CFC regime, which will be completed in Finance Bill 2012.
It’s our intention to adopt a more territorial approach to taxation, one that properly reflects the times we live in and how businesses now operate.
We know how important these reforms are to business and I know you’re all waiting for details.
But this is one area where we ask for your patience, so we can come forward with thoroughly worked up proposals that don’t create uncertainty. I know it’s been 20 years since the last set of substantive reforms, so I’m hoping you won’t begrudge me a few more days.
It’s my aim to publish further details on these reforms by the end of the month, to give you a sense of the direction we’re heading…
…to show how we will create the most competitive Corporation Tax system in the G20.
Now, moving to simplification.
It’s our view that we need to do something about the spaghetti bowl of reliefs and exemptions that is our tax system. It’s become an incredibly complicated dish, that is pretty much indigestible for the majority of people.
Yes, rewriting the recipe book on tax is no easy task, and, at the same time, it’s unlikely to capture many headlines.
But this is important, fundamental even, to improving the way our tax system works.
This was the motivation behind the Office of Tax Simplification…
…drawing together individuals from across the business, tax and legal professions. Who in turn will provide the much needed institutional ballast, and expert advice.
The OTS is taking forward two reviews: one on simplifying small business taxation and the other focussing on tax reliefs. And they’ve already published a comprehensive list of all the reliefs and exemptions that exist within our tax system.
It is striking that when they began this process in the summer, the general view was that our tax system contained around 400 reliefs.
Their assessment shows that we actually have more than a thousand.
Now many of these serve a useful role in our tax system, but it’s not unreasonable to ask if at least some of these reliefs are truly justified. For example, I’m all for taking a long term view of the tax system, but do we really need a ‘millennium gift tax relief’ when the next one’s not for another 990 years?
And while the OTS is playing a valuable role in improving the stock of UK tax law…
…we recognise we’ve also got to watch the flow of new measures.
We have to be careful with proposals that deliberately use the tax system to distort choices or try to manage business investment decisions…
…to avoid a situation where tax policy becomes a bidding war, as various sectors seek preferential treatment at the expense of wider business interests.
As a general rule, it’s our preference to have fewer reliefs, but lower headline rates, in order to create a simpler, flatter system of taxation.
And as we moderate tax breaks, we will reduce the opportunity for tax avoidance - an issue that this Government takes very seriously.
Evasion and avoidance
Let me say upfront that I understand people in this audience get frustrated when they hear politicians apparently conflate tax planning, tax avoidance, and tax evasion.
I, and my colleagues in the Treasury, certainly know the difference, and can make these distinctions.
We recognise that the law legitimately gives scope for tax planning.
But we will also give no quarter to those who squarely break the rules and evade their responsibilities as taxpayers.
Over the next four years we’ll be investing £900 million in HMRC, much of it to tackle criminal behaviour and evasion.
At the same time, we also want to improve HMRC’s operational capacity to identify and discourage tax avoidance.
I know there’s times when Parliament’s intentions can be ambiguous, and that it is not always possible to divine the spirit of the law. And yes, better tax policy making will help us here.
But there’s also times when it’s perfectly clear what the law intends - where reliefs and exemptions are then used in a highly artificial way. In these instances, people use their resources - and their talents - to twist the law and create results that everyone knows are simply too good to be true.
The fact is - in these testing times - the public won’t wear it. They just don’t see it as fair.
And if we’re to carry them with us as we make other difficult choices, neither can we.
Of course, in tackling avoidance, we must do so in a way that doesn’t undermine certainty for business. That’s part of the reason why we’re extending HMRC’s large business service to more firms.
Similarly, it’s only right that during difficult times steps are taken to ensure that banks make a full and fair contribution.
We can’t pretend that the financial crisis never happened, or ignore the possibility of it happening again. But equally, we don’t want to drive our financial institutions abroad.
The Bank Levy gets this balance right - by charging a premium that reflects the risks the sector as a whole poses to the wider economy.
And achieving the right balance is a requirement that a responsible government must meet - even if others have the luxury of ignoring such matters and can play to the gallery.
But in broad terms, our actions will give greater clarification of what’s acceptable; but also ensure that our tax system is fair, simpler and more efficient.
Which brings me to tax law - or more specifically, how tax policy is made.
We need a more competitive tax system, a simpler tax system, fewer exemptions, fewer reliefs. And this means change.
But a little paradoxically, businesses also tell me they want a more stable tax system.
As a Government, we’ve taken this as a call to create a more transparent framework within which tax policy is developed…
…a framework that will improve the quality of tax law and the way tax policy is made.
So it’s our intention to introduce a system that puts predictability and stability first; a framework for making tax policy that is:
- Not haphazard, but predictable - based upon a clear strategy that produces greater certainty about the future;
- Not disorderly, but stable - focusing on fewer, better developed proposals; getting legislation right the first time round through proper consultation and allowing time for better scrutiny;
- Not opaque, but transparent - explaining our rationale, sharing our analysis and our assumptions;
Building this will take some time, but we’ve already made good progress.
We published in July a draft of the Finance Bill, which was later debated in Parliament this autumn. And on the 9th December we’ll publish most of the contents of the 2011 Finance Bill.
This is all part of a more deliberate approach to making tax law. And at every stage of the process we want to involve tax professionals in the decision-making.
Life as a Government Minister in the Treasury is very different from my time as a Member of the Opposition.
Having a small army of civil servants at your beck and call is a far cry from the days in Opposition - where it was often an operation consisting of three men and a dog.
The temptation now is to conduct less external engagement - to rely on the experience that resides within Whitehall.
This, however, is not my approach.
I understand the value that’s to be had from collecting the thoughts of those who are directly employed in the tax profession.
Who, through their own experience, recognise the frailties of our current tax system, and have ideas for reforming the processes that guide Government decision-making.
I remember the first Finance Bill in which I sat, back in 2006, where the previous administration was making changes to the tax treatment of trusts for IHT purposes.
This wasn’t the most glamorous of issues, but what struck me was how much of the information relevant to making these changes came from outside HMT and HMRC.
It showed me that those in Government, and the Civil Service, don’t have a monopoly on tax knowledge…
…that Whitehall doesn’t have all the answers.
So, as a Government, we’re putting engagement with external experts at the heart of our strategy for reform.
This was part of the approach we set out in our discussion document - Tax Policy Making: a New Approach - published alongside the June Budget.
Following the publication of the document, we’ve undertaken an extensive programme of engagement on the way we make tax policy.
We’ve met with over 40 representative bodies and tax practitioners - including lawyers, accountants, and tax managers.
And between now and the end of the year, we’ll be looking at all the advice we’ve received, and considering how it can help inform our approach to making tax policy in the future.
This is not a one-off exercise.
Last month was the first meeting of the Forum of Tax Professionals - a group of Tax Professionals who I’ll be meeting twice a year to provide external input.
And we will continue to seek feedback on the way we make tax policy, to give businesses greater certainty.
Which brings me to the last of my questions…
…what does the Spending Review mean for HMRC?
I’m sure you’ve all seen the headline figures - 25% savings, 15% after reinvestment - but this only tells part of the story.
Even before we came to power, it was always clear that departments would have to reduce their budgets…
…and that HMRC could not be immune from these pressures.
As part of the normal discussions that go on before any general election - I met with senior HMRC staff to discuss where they thought the department’s priorities should lie.
I asked them to come up with a set of proposals for possible savings; to look at where efficiencies could be made; and identify the areas that generate the most error and unnecessary work.
The emphasis was never on making cuts at any price.
As I’ve said throughout, we want to create a better, more competitive tax system.
And the way we administer tax policy; the services HMRC provides; and our relationship with business are all a part of this…
…and that’s what I asked HMRC to focus on.
So we’re investing in improvements to PAYE.
There’s no hiding from the fact that we need to modernise the system. It has to be more stable and more accurate - with greater use of real time information.
This will undoubtedly improve compliance…
…which is also why we’re extending HMRC’s Large Business Service.
We know that building better relationships with business is the most effective way to improve tax compliance - it helps bring swift resolutions to enquiries; enables both parties to identify tax risks; and reduces the potential for error.
Not only this, but it costs very little, while the benefits can be substantial.
And lastly, we’ve recognised the dual role that HMRC has in paying down the deficit. Not just through savings, but also through increasing revenues.
HMRC is unique in that, of all departments, it’s the only one that actually makes money, as opposed to just spending it.
And when faced with the circumstances we’re in today, this has never been more important, and something I’ve long recognised.
So I was pleased when my Ministerial colleagues agreed to reinvest £900 million of savings to tackle evasion, fraud and other criminal activity and tax avoidance.
I see this as a vote of confidence in HMRC.
I know some of you may be slightly sceptical that we can deliver on this settlement, while simultaneously improving the services we provide.
Yes, this will be hard - but I assure you, our plan is deliverable.
I accept that in many ways HMRC faces more of a challenge than other departments - having to deliver on reinvestment, as well as making savings.
But I hope you agree that it’s the right challenge for HMRC to take forward. One that balances its core objectives of maximising revenues, greater efficiency, and delivering a good service.
So to conclude.
I’d like to reiterate that these are difficult times for our country, and it is humbling to be part of the Government team trying to grapple with the challenges this poses.
We’ve already had to make tough choices - but these have been the right decisions for the longer term.
In tax, we’ve faced a number of significant constraints, and found ourselves balancing the needs of the public with the needs of business and, of course, the need to tackle the deficit.
I hope that today I’ve given you a useful insight into how we’ve looked to juggle these sometimes conflicting interests.
And that you see how, over time, we want to make very substantial progress. In fact, we’re determined to do so.
I feel we’ve already achieved a great deal in our first few months;
- Setting out how we’re going to reduce Corporation Tax;
- Establishing the Office of Tax Simplification;
- Publishing our plans on improving the making of tax law;
- And publishing our first Finance Bill in draft, months in advance of it being debated in Parliament.
But we’re under no illusions…
…we still have some way to go.
Only recently, Richard Lambert, Chief Executive of the CBI, described our tax system as a “ball and chain round the ankle of the UK economy”
We need to break these shackles.
Our tax system was once viewed as an asset. And it needs to be an asset again.
As a Government, we want to invest in it, and maintain it over time.
And as we do so, with your help over the months and years ahead, I hope that you’ll bang the drum for Britain with your clients.
That you’ll tell them that this Government “gets it” - that we know what we’re doing, and have the interests of business at heart.
And that the UK is headed for a fairer, more competitive, simpler, and more stable tax system in the future.