CTA Address 2022: What does a responsible tax system look like?

You can watch a recording of the Address and the responses to it here.

A responsible tax regime can restore public trust in a system worn down by accusations of avoidance and evasion and a lack of confidence in its guardians.

That was the view of Dame Margaret Hodge, who was invited to give the 2022 Chartered Tax Advisers (CTA) Address in central London earlier this week (7 June).

The Labour MP – who will stand down at the next General Election after a nearly 30-year parliamentary career – will be remembered by tax professionals as chair of the House of Commons Public Accounts Committee between 2010 and 2015, at a time when it took a heightened interest in the work of HMRC and the tax affairs of multinational companies.

Responding to Dame Margaret’s remarks were John Whiting CBE, the first tax director of the Office of Tax Simplification and current chair of the GAAR panel, and Dan Neidle, founder of Tax Policy Associates, a think-tank dedicated to promoting better understanding of tax.

Tax is everyone’s issue

Opening her remarks, Hodge described tax as “an issue for everybody” and called on the tax profession to rise to the challenge of helping the public to understand and engage with it.

Acknowledging that the last Labour government (of which she was a member) had failed to tackle tax reform seriously, Hodge described the current tax system as complex, opaque and unequal.

She argued that the present tax system was imbalanced – helping incentivise the accumulation of wealth over the generation of income – and littered with inefficient reliefs, many of which were either uncosted or their benefits unmeasured.

Acknowledging that starting from scratch and rebuilding the tax regime was neither likely nor achievable, Hodge said that work needed to begin to restore trust and confidence in the system through the creation of a smarter and fairer regime that is:

• Simple to understand
• Transparent
• Easy to collect and hard to avoid
• Fair between generations, regions and income sources

She was hopeful that cross-party consensus could be achieved, citing the work of think tanks from across the political spectrum from the IPPR on the left to Bright Blue on the right.

To emphasise this, she pointed out that one of her favoured proposals – equalising the tax of wealth and income – was originally proposed by Nigel Lawson in 1988 and had recently received the backing of Bright Blue.

We need to tip the tax balance back towards wealth

She told the audience that she found it “grossly unfair” that wealth was taxed disproportionally less compared to income, and at a time when the UK’s wealth had risen from three to seven times the nation’s GDP, fueled by an explosion in house prices that benefitted the old over the young.

Hodge said this was evident in the chancellor’s decision to increase National Insurance Contributions (NICs) by 1.25 percentage points. She said while it was hard to avoid the fact that NICs could deliver a steady stream of income for the Treasury, the increase would have a disproportionate impact on younger income earners and less on older taxpayers and those with wealth.

As an alternative to the NICs increase, she told the audience that she would like to see the equalisation of income and capital gains tax rates so that income from a range of sources, like rent, property and share gains, was taxed equally.

Hodge argued that not only would this be a fairer approach to the one taken by the chancellor, it had the potential to raise even more revenue for the Exchequer.

But she conceded that a focus on taxing wealth would be fraught with political peril. Nevertheless, she described it as a long-overdue debate.

Hodge was also critical of a range of tax reliefs. Among these were pension relief (which she described as being highly regressive); R&D relief (costs twice as much as the investment it supports); Entrepreneurs’ Relief (now known as Business Asset Disposal Relief, which she said rewarded success) and the Patent Box relief (the design of which she said had been outsourced, to the benefit of firms whose advisers had been involved in its design).

Tackling the enablers of avoidance

Hodge was also scathing of the tax affairs of some multinational corporations and about enablers of tax avoidance.

Warning of the threat posed by illicit money entering the country, she expressed worry that the UK was losing its reputation as a trusted tax jurisdiction and accused bad actors within the tax and accountancy professions of enabling economic crime.

She also expressed frustration at the UK’s anti-money laundering supervisors, labelling the Office for Professional Body Anti-Money Laundering, or OPBAS, “totally ineffective”.

To address this, Hodge recommended reform of the corporate liability law and proposed the establishment of a joint House of Commons and Lords committee, modelled on the Joint Intelligence and Security Committee (JISC) of Parliament, to hold HMRC to account. This would be able to look at HMRC papers relating to particular taxpayers in confidence, as the JISC does with security-sensitive papers.

The response

John Whiting said confidence in the tax system was two-way. Not only did it require taxpayers to meet their responsibilities, it also required a tax system accountable to those who use it.

That would require the input of all of those involved in its design and implementation – authorities, politicians, policymakers, professionals and the public.

Whiting (who is coming to the end of a term as a board member at Revenue Scotland) argued that the Scottish Government’s approach to taxation, underpinned by Adam Smith’s principles of fairness, certainty, convenience and efficiency offered a useful model because it provided a good guiding focus for a devolved tax regime that is embryonic but evolving.

Whiting argued that a responsible UK tax system should conform to seven principles. It should:

• Exist to raise revenues, not engineer social objectives
• Provide clear objectives that are regularly reviewed to ensure the system is working as effectively as it should
• Be up to date and responsive to societal change
• Lack opportunities to incentivise avoidance
• Promote certainty (simplification)
• Be stable, consistent and easy to plan
• Promote trust and compliance

Dan Neidle warned of the perils of an irresponsible tax system. Recent events and perceptions of the tax system had damaged public faith and trust in the system, making it harder to change perceptions and promote the benefits of change.

Neidle pointed to the challenges associated with international efforts to tax multinational companies more fairly, and to perceptions of unfairness within the Inheritance Tax regime that in turn may fuel political desires to abolish the levy. He said the IHT exemptions used by the rich make sense for small holdings and small businesses, but need to be capped. More broadly he described imbalances in the taxation of wealth and income as “hateful and indefensible”.

Neidle was also uncomfortable with HMRC’s approach to enforcement, suggesting that a fear of failure may have led to a reduction in the number of high profile prosecutions for evasion. HMRC had to be given “permission to fail” if justice was to be seen to be done.

Q&A

Topics covered during the question and answer session that followed included:

• Why should tax reform penalise those who have played (and planned) by the rules? This question focused on possible future changes to pension tax relief and the extension of NICs contributions to those of pensionable age.  Dame Margaret Hodge acknowledged that political reforms to the tax system would inevitably create losers, but failing to act would retain the status quo. She lamented the failure of the last Labour government to link the debate on public service reform to tax reform and urged the tax profession to help “democratise the debate” and make tax understandable to all.
• Responsibility. The panel agreed that a responsible tax system required government to set the rules and HMRC to enact them fairly. Hodge called for greater transparency and accountability to support this, arguing that FTSE 100 firms should be compelled to publish their tax bills. Dan Neidle criticised HMRC’s approach to penalties, particularly their use of automatic penalties, believing this fueled distrust among the wider public..
• Promoting a positive narrative on the role of tax in society. Should we show greater pride in paying tax? Hodge agreed, reminding the audience that the tax system belongs to us all and is part of our social contract. She again urged tax professionals to stop hiding behind tax technical jargon and help the public to understand the system better.
• Building tax expertise in politics. Neidle said that better scrutiny of tax in parliament is needed, with the existing structures unfit for purpose. MPs need to be able to tap into a bigger reservoir of tax expertise. Whiting spoke of the imbalance in resources between MPs in government and those in opposition, describing the current mechanisms as “absolutely hopeless”. He proposed a new parliamentary body, similar to the United States Congressional Budget Office, to help democratise access to information, which in turn could promote better understanding and scrutiny of tax affairs. (NB. CIOT published a paper, ‘The Making of Tax Law’, in June 2010 putting this idea forward.)
• Impact assessments. One questioner called for all tax measures to have gender and intergenerational impacts assessed. Whiting said that this was achieved to a certain extent by the publication of Tax Information and Impact Notes (TINNs), but a wider assessment of their effectiveness should consider whether they remain fit for purpose a few years after they have been introduced.
• Tackling avoidance. Citing the loan charge as an example, Neidle argued that greater use of retrospective legislation, while unpopular in many quarters, may provide an effective tool against those engaged in avoidance activities, provided the government makes clear in advance what is ‘off limits’. Hodge spoke about the abuse of the Film Tax Relief, a measure she was responsible for implementing in government. While it was designed with clear objectives in mind, it had been exploited counter to its intended aims. Whiting proposed the MPs consider purposive legislation, where politicians focus on the principles underpinning proposed legislation and tax experts refine the technical detail. Hodge expressed some concern that this could be exploited to the detriment of the tax base.