The Government’s Tax Consultation Framework Summary of Responses and finalised Framework March 2011

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Contents

1

Introduction

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2

Responses

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3

Final draft of the Tax Consultation Framework

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4

List of stakeholders consulted

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1. Introduction

1.1 The Government published its Tax Consultation Framework in draft for comment on 9 December 2010 alongside the draft clauses for the Finance Bill 2011. This followed extensive engagement with interested parties over the summer of 2010 on a series of initiatives announced at Budget 2010 to improve the stability, predictability and simplicity of the UK tax system (Tax Policy Making: A New Approach). 1.2 The consultation period closed on 23 February 2011 and the Government is grateful for all the comments received. These have been considered carefully in finalising the Tax Consultation Framework (the Framework) which is published in Chapter 3 of this response document. The Government’s response to the comments received is highlighted throughout Chapter 2. 1.3 The Framework sets out the approach the Government will take to consultation for most tax policy changes. It replaces the existing HMRC consultation framework.

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2. Responses

Introduction

2.1 Eight responses were received offering comments on the draft Framework. These were predominantly from representative bodies (see Chapter 4 for a list of respondents). Overall, respondents welcomed the Framework and were supportive of its aims and the principles underpinning it. One respondent felt ‘that the proposals need to be strengthened and expanded, if they are to be regarded as credible evidence of change.’

2.2 The Framework has been amended in light of the helpful comments received and the changes from the draft are shown in Chapter 3. Some respondents also commented on other proposals to improve tax policy making and these comments are being considered by the teams working on those proposals and, where appropriate, covered by other response documents.

2.3 In addition, some comments were received which do not relate to the Framework or other aspects of improving tax policy making. These comments have been considered but do not form part of this response document. One respondent only raised concerns about a specific policy change (the increase in the rate of insurance premium tax) and that has been treated as a letter to HMRC rather than a response to this consultation.

Framework provenance and accountability

2.7 Three respondents suggested that the Framework should include plans for monitoring and measuring performance against the framework and accountability arrangements. One suggested that the Framework and accountability arrangements should be underpinned by legislation. The Government has considered the issue of legislative support for the Framework very carefully. On balance, it does not consider that a legislative requirement is appropriate. It does however agree the need to monitor performance against the Framework commitments and the Framework has been amended to include the role of the Tax Professionals Forum in this regard. This is in addition to the existing arrangements to bring concerns to the attention of HMRC’s Consultation Coordinator1, and the Parliamentary procedures in place through which the Government is called to account.

Informal (and confidential) consultation

2.8 One respondent sought greater clarity about what is meant in the Framework by informal consultation following the best principles of formal consultation. It was felt that the Government’s Code of Practice for formal consultation should in fact be followed for all informal tax consultation, except for the minimum 12 week consultation period. The Government has not

1 The Coordinator has responsibility for oversight of all HMRC and HMT tax consultation activity. E-mail address: hmrc-consultation.co-ordinator@hmrc.gsi.gov.uk

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amended the Framework in this respect as it considers the wording as drafted will ensure a proportionate approach to the particular circumstances of each consultation exercise. If, however, concerns arise that informal consultation is less effective as a result of not adhering to certain principles of formal consultation then this should be raised with HMRC’s Consultation Coordinator2 on a case-by-case basis, and can be raised through the Tax Professionals Forum.

2.9 Concern was also raised by one respondent about excessive use of informal consultation simply to review multiple drafts of documents. The same respondent also felt that the Framework could say more about workshops and meetings. These issues will be addressed in the guidance and training provided to policy officials.

2.10 Two of the representative bodies expressed the need for care to be taken in attributing an individual’s comments to the representative body. This point has been addressed in the revised Framework.

Timing of consultations

2.11 It was pointed out by two of the representative bodies that some of the timescales (e.g. 8 weeks for consultation on draft legislation) are not long, especially given the time of year when the consultation may fall. The Framework makes clear that the timescales are to be the normal minimum and guidance will emphasise that longer periods should be considered. In practice however even with a more considered approach to policy development the time available for consultation will be limited.

Rates allowances and threshold changes

2.12 A number of respondents emphasised the need for consultation in cases of apparently straightforward or minor changes reporting a perception that wider knock-on impacts are not always properly considered and factored into consultation decisions. One respondent saw no reason to exclude minor changes from the commitments to consult on draft legislation.

2.13 These comments are helpful reminders of the fact, acknowledged in the Framework, that even for these apparently straightforward changes, some consultation can often be informative. This point is emphasised in training and guidance for officials and the wording of the Framework allows for a proportionate approach. A better understanding of all the impacts of a proposed change is central to the Government’s determination to improve tax policy making.

Anti-avoidance measures and revenue protection exceptions

2.14 Two representative bodies expressed concern about the use of “risk to the exchequer” as a reason for not consulting, and one expressed the view that anti-avoidance measures were often ones that needed the highest levels

2 E-mail address: hmrc-consultation.co-ordinator@hmrc.gsi.gov.uk

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of customer engagement. It was suggested that the risk to the exchequer should be quantified in some way before the exception is applied. For any significant change the Framework creates a presumption in favour of consulting and the Government will think very carefully before applying the exceptions built into the Framework. Decisions not to consult will be explained as far as possible. The Government considers that as drafted the Framework strikes the right balance but this can be reviewed if it becomes apparent that firmer commitments are required.

Involvement of Parliamentary Counsel

2.15 Both lawyers’ representative bodies commented that Parliamentary Counsel should be more actively involved in consultation exercises. While Parliamentary Counsel may engage with consultees where there is substantive discussion of the drafting, as opposed to the policy, this would not be routine practice and is not something that the Government considers needs to be covered further in the Framework.

Guidance and forms

2.15 One respondent considered that the Framework did not adequately deal with consultation on guidance and that paragraph 7 should be strengthened so that consultation on guidance takes place alongside consultation on the draft legislation. Timely consultation on guidance is recognised by HMRC, and all of Government, as best practice and the Government considers the Framework as drafted is adequate. 2.16 It was suggested that draft forms should be consulted on at the same time as guidance. The Framework has been amended to reflect this helpful suggestion.

Other issues

2.17 One respondent said it would be helpful for consultations, or aspects of consultations, to be prioritised by the Government so that representative bodies know where to focus their resources. The Government recognises the significant resource commitment that goes into responding to consultations, but believes the best way to help respondents manage their engagement on tax is through the Tax Consultation Tracker and through the summary tables at the front of consultation documents. These tables highlight the scope of the consultation and to whom it will be of interest. Suggestions for other practical ways to improve engagement are always welcome and should be directed in the first instance to HMRC’s Consultation Coordinator.

2.18 One respondent considered that the efforts of those who respond to consultations should be more explicitly acknowledged. The Government agrees and has amended paragraph 1 of the Framework accordingly.

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2.19 Respondents generally agreed with the descriptions of the 5 stages of tax policy development and implementation identified in the Framework, but there was a concern identified about running consultations for more than one stage concurrently. Consulting on more than one stage at a time will sometimes be the proportionate approach to the specific proposals being considered. The Government recognises that this will be exceptional, but considers that this is best dealt with in the guidance to officials involved in tax policy development rather than the Framework.

2.20 The online Tax Consultation Tracker was welcomed and the importance of keeping it up to date was emphasised. The Government is committed to giving greater notice of consultation events and documents so that consultation is as effective as it can be for all concerned. Flexibility is needed in consultation scheduling but the need to keep plans up to date is recognised and the Tracker will be maintained by HMRC’s Consultation Coordinator.

Next steps

The Tax Consultation Framework has now been finalised and is included at chapter 3. The Tax Professionals Forum will monitor the extent to which the commitments in the Framework are met and report to Ministers in their meetings.

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3. Tax Consultation Framework (Amendments to the draft version published on 9 December 2010 are shown in bold italics) The Government recognises the importance of engaging fully with individuals,

practitioners, businesses and other organisations in the development of tax

policy. The best public engagement allows the Government to explore,

develop and test new ideas to improve the tax system, and to ensure that

change is well targeted and its likely impacts are understood. Better scrutiny

of tax legislation, through early exposure of drafts, will help ensure that

legislation is fit for purpose.

1. The Government is committed to early and continuing engagement on tax

changes and to exploring new ways of broadening public engagement with

development of the tax system. This goes beyond formal written

consultation and includes the wide range of ways in which Government

can engage with interested parties, which will vary depending on the

nature of the proposal in question and the taxpayers that it will affect. The

Government recognises and appreciates the time taken and effort

made by interested parties in responding to consultation exercises.

This Framework sets out the Government’s approach to engaging with

taxpayers and practitioners on changes to tax policy and legislation. It

complements the Government’s wider Code of Practice on formal, written

consultation.

2. There are five stages to the development and implementation of tax

policy:

Stage 1 Setting out objectives and identifying options.

Stage 2 Determining the best option and developing a framework for

implementation including detailed policy design.

Stage 3 Drafting legislation to effect the proposed change.

Stage 4 Implementing and monitoring the change.

Stage 5 Reviewing and evaluating the change.

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3. Where possible, the Government will3:

engage interested parties on changes to tax policy and legislation at

each key stage of developing and implementing the policy;

make clear at what stage (or stages) the engagement is taking place so

that its scope is clear;

carry out at least one formal, written, public consultation in areas of

significant reform;

set out, as the policy develops, its strategy for stakeholder engagement

including planned formal consultation periods, informal discussions,

working groups and workshops;

consult, where it can, on the policy design, draft legislation and

implementation of anti-avoidance and other revenue protection

measures, provided this does not present additional risk to the

Exchequer;

minimise the occasions on which it consults only on a confidential

basis. Where confidential consultation has been necessary the

Government will be as transparent as possible about its outcome and

consult openly if pursuing the policy change further4; and

provide feedback which sets out the Government’s response to the

views received and makes clear what changes, if any, have been made

to the planned approach as a result of those views.

4. At each stage of consultation, the Government will set out clearly:

the policy objectives and any relevant broader policy context;

the scope of the consultation, in particular what is already decided and

where there is still scope to influence the outcome;

its current assessment of the impacts of the proposed change and seek

to engage with interested parties on this analysis. A final assessment of

3 Subject to the exceptions set out at 8 and 9. 4 Subject to the exceptions set out at 8 and 9

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impacts will be published once the final policy design has been

confirmed; and

which department and official is leading on the consultation (or specific

elements for joint HMT and HMRC consultations).

5. Informal consultation will be as transparent as possible, consistent with the

need to protect revenue. The best principles of formal consultation will be

applied to informal consultation to ensure clarity of scope, impact,

accessibility, and meaningful feedback. Comments will only be

attributed to a representative body when it is clear that the individual

consulted is commenting on behalf of that representative body. It is

recognised that individuals need time to consult others before they

can provide comments on behalf of a representative body. Informal

consultation can run alongside formal consultation but will often be most

appropriate at the earliest and latest stages of tax policy development to

identify options and then to fine-tune the detailed legislation and

implementation of change.

6. The Government recognises that improving the quality of tax law in the UK

requires consultation on policy and scrutiny of legislation. In most cases,

the Government will publish draft tax legislation in the following way5:

Draft clauses for the Finance Bill will be published for scrutiny at least 3

months before the Bill is introduced to Parliament. The period for

comments to be made will be at least 8 weeks.

Where secondary legislation gives substantive effect to a Finance Bill

clause, the secondary legislation will be published in draft alongside

that Finance Bill clause.

Other secondary legislation implementing a significant change or

imposing significant new obligations and responsibilities will be

published (for comment for 8 weeks) at least 3 months before that

secondary legislation is laid before Parliament.

5Subject to the exceptions set out at 8 and 9

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Any other secondary legislation will be published in draft for a 4 week

consultation period unless it falls within the exceptions at paragraph 8

below or otherwise gives rise to no potential technical drafting issues.

7. Guidance on tax policy changes will normally be written in consultation

with interested parties and published alongside the legislation: it will

always be published in good time for orderly implementation. New or

revised forms relating to the tax policy change will normally be

published in draft for comment before or alongside the draft

guidance or draft legislation.

Exceptions 8. The Government will generally not consult on straightforward rates,

allowances and threshold changes, or other minor measures; recognising,

however, that even in these cases some level of consultation can often be

informative. It may also adopt a different approach for revenue protection

or anti-avoidance measures where following this Framework could present

a risk to the Exchequer. In other circumstances where the Government

decides not to consult during tax policy development it will explain the

reasons for that decision.

9. There will be times when it will be necessary to deviate from this

Framework. In these circumstances the Government will be as open as

possible about the reasons for such deviations.

Monitoring

10. The Tax Professionals Forum will consider the Government’s performance

against this Framework and report on this in their regular meetings with

Ministers.

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4. List of respondents

Written responses commenting on the Framework were received from the following:

o Chartered Institute of Taxation (CIOT) o Institute of Chartered Accountants in England and Wales (ICAEW) o Institute of Chartered Accountants of Scotland (ICAS) o City of London Law Society o The Law Society o Low Incomes Tax Reform Group (LITRG) o PricewaterhouseCoopers LLP o Society of Trust and Estate Practitioners (STEP)