Replace abolished OTS to allow scrutiny of tax legislation

The Office of Tax Simplification: What do 12 years of the OTS tell us about the role for an independent body in tax policy making?, a guest paper written for the Institute for Government, sees Troup offer a downbeat take on the OTS, saying that a lack of clarity over its remit and reluctance from chancellors to adopt its recommendations meant the office “was doomed to failure”. However, the former chair and first permanent secretary at HMRC says there are important lessons to learn on how tax policy can be effectively scrutinised in the future.

History of the OTS

In his paper Troup says that while Kwasi Kwarteng’s abolition of the OTS was “arguably a symbolic act”, so was its creation in 2010 by George Osborne, who did so “to fulfil a manifesto commitment and to distance himself from Gordon Brown”.

However, its limited powers and position as simply an advisory unit of the Treasury meant the OTS was “hamstrung from the outset”, Troup argues. “The creation of the OTS was qualitatively different from the superficially similar moves made by Gordon Brown in giving independent rate-setting powers to the Bank of England in 1997, or in Osborne’s 2010 creation of the Office for Budget Responsibility. In both [those] cases the bodies’ independence was expressly intended to move decisions and judgment away from ministers and to create some distance from political responsibility and interference.”

Between 2010 and 2022, the OTS published more than 60 reports covering around three dozen areas, including digitalisation, inheritance tax, savings income and other taxes.

However, Troup says that it was “striking” how few OTS recommendations were actually implemented, with most successes achieved via administrative rather than policy changes. Of the 1,042 tax reliefs identified by the OTS, it recommended only 47 for repeal, most of which were already obsolete or practically redundant. Other recommendations were dropped after lobbying by business, with Troup claiming the “net effective reduction in complexity from the exercise was close to zero”.

He adds: “Any recommendations not focused on a self-contained and relatively uncontentious part of the system or confined to administrative improvements were likely to fail.”

The OTS itself addressed its low “hit rate” for recommendations in a self-review of its work in 2017. However, Troup says the review largely recognised its compromised position, adding: “A body that had been created for largely political reasons was beginning to understand the inherent limitations on its ability to effect real change.”

After the review, the OTS began to tackle some “big” policy areas such as the taxation of savings, capital gains tax reform and the simplification of inheritance tax. However, there was, he says, a lack of conviction that recommendations in this area would be adopted.

Troup adds: “Indeed, on inheritance tax it explicitly did not make firm recommendations but offered ministers choices that included both revenue-raising and revenue-reducing options. The proposals on the alignment of income tax and capital gains tax rates in particular received a very boilerplate brush-off. The substantive recommendations of both reports were duly rejected.”

Troup suggests that the limited impact of the OTS was well-known within the Treasury, which undertook its own review in 2021. The review “reads as little more than a lukewarm endorsement of the OTS,” says Troup, adding: “Although the review did not quite go so far as saying that the OTS was contributing to the problem of complexity, a flavour of that emerges.”

Defining simplification

In his paper, Troup says that many of the problems with the operation of the OTS came from difficulty pinpointing exactly was meant by “simplification”. “Conceptually, it is simply a poor rephrasing of Adam Smith’s principles of good taxation – fairness, certainty, convenience and efficiency. Rephrasing and compressing those principles into a single word loses sight of the complexities, and necessary trade-offs, involved in designing a good tax system. The conflation of many different issues into a single word resulted in an organisation with no clear remit.”

He says tax simplification had become a phrase used to describe a range of issues including the length of tax legislation, structural complexities, an excessive number of tax reliefs and exemptions, efforts to make the tax system more competitive and a mode of maintaining public trust in the tax system.

Even early on, the signs were there that the responsibility of the office was unclear, with Troup adding: “the lack of agreement about what tax simplification was and why it was needed were apparent.”

Troup offers the view that the creation of the OTS was “a category error by ministers”, with simplification considered purely the “identification and elimination of complexity”, rather than a part of the overall objectives, be they fiscal or political. He says that all taxes have an “irreducible core” of unavoidable complexity that makes them work, adding: “As the OTS found, acceptable simplification needs to leave other objectives untouched or find ways of delivering the same objectives in a way that reduces the cost of complexity. This was, and is, not easy.”

Where complexity was not unavoidable, it was often the result of political choices, which again made it difficult to remove. The third area of complexity, and the one where the OTS had the most success, was unintentional or accidental complexity, which could be the result of out-of-date legislation or “inattention” during the legislative process.

Troup says: “Tax simplification has proved an unhelpfully ill-defined aim. It is a term so capable of different meanings that it carries little value without much explanation and additional detail. Simplification is a goal difficult to argue with, but difficult to apply to the living tax system.”

Looking to the future

Troup is sceptical of the overall impact of the OTS, adding: “Few of its major policy recommendations have been adopted and its substantive value has been primarily in improving tax administration.”

However, despite its abolition, Troup says that the operation of the OTS exposed weaknesses in three broad areas of the tax system that should be addressed:

1. Evaluating and improving existing tax law

Troup says existing tax policy will not be made simpler by an independent body, and strong political support and ownership is needed to achieve substantive policy change. He says there are some areas, including self-employed, income tax and NICs, where tax experts and economists already broadly agree that policy change could achieve significant simplification.

He suggests more ad-hoc reviews to achieve simplification of existing tax law, along with regular evaluation of all tax policy against its wider objectives.

      2. Improving tax administration

Troup says such successes as the OTS had were in the area of tax administration, where it achieved “real improvements”. He suggests a replacement body could be formed to, on an ad hoc basis, review specific areas of tax legislation, “where improvement to legislative provisions is possible without making substantive changes to policy”. However, he warns that work in this area may overlap with the existing role of the Administrative Burdens Advisory Board (ABAB).

Troup adds that the OTS’s role as an external body encouraged more honest feedback from parties than would often be provided directly to the Treasury. “There is therefore a good case for an external body, visibly independent from HMRC and the Treasury, to undertake consultation on specific pressure points in the tax system, primarily focusing on administration, but with the potential to engage on more specialised policy areas.”

     3. Managing the parliamentary process

Oversight on annual finance bills is inadequate, says Troup, with this lack of scrutiny contributing to “the ease and willingness with which successive chancellors continue to add to the complexity and costs of the tax system”. He refers to the paper Better Budgets, co-published by the IFG, Chartered Institute of Taxation and Institute for Fiscal Studies in 2017, which argued for “routine post-legislative review of whether measures are achieving their objectives at an acceptable cost, and parliament should hold government to account for this”.

Troup also considers the formation of a body which could hold an “NAO-type” role to review the parliamentary progress of tax legislation, judging finance bills for consistency with tax principles and their contribution to simplification. While he concedes there could be “constitutional issues” with a body like this wielding any real powers, the body would be judged on its effectiveness scrutinising legislation.

He adds: “The constitutionally sound and more straightforward route would be simply to give such a body an advisory role to scrutinise and comment publicly on legislation during its passage through parliament. This sort of scrutiny would improve the quality of tax law passed. A strong chancellor, with the ability to ignore any recommendations, should welcome the transparency and critical examination that such a body could provide.”

Summary of recommendations

In summary, Troup concludes that, following the abolition of the OTS, there is a case for:

1. A new independent body to bring external focus on improvements in tax administration, which could also be asked, on an ad hoc basis, to review specific areas of tax legislation, where improvement to legislative provisions is possible without making substantive changes to policy.
2. The same (or possibly separate) external body, visibly independent from HMRC and the Treasury, to undertake consultation on specific pressure points in the tax system, primarily focusing on administration, but with the potential to engage on more specialised policy areas.
3. A greater degree of post-legislative scrutiny of tax legislation, including evaluation of the wider costs and burdens of tax policies.
4. A parliamentary body with an advisory role to scrutinise and comment publicly on legislation during its passage through parliament – identifying and addressing issues of drafting and administration and consistency with the principles of good tax policy.

Read the full paper here.