Tax director questions decision to close Office of Tax Simplification

Speaking to MPs at Wednesday’s evidence session, Bill Dodwell said “I still don’t know why” former Chancellor Kwasi Kwarteng announced in the “mini-Budget” in September that the office would be shut down, and that he feels it still has a lot to offer.

Dodwell was joined at the session by Kathryn Cearns, chair of the OTS, with the pair answering questions on tax reliefs, future tax priorities and the proposed global minimum tax.

Abolition of the OTS

Dodwell said he was pleased with the work the OTS had done during its 13 years, focusing on a select number of tax issues. However, he said while it had been commissioned to compile reports on areas including inheritance tax and capital gains tax, only a “small number” of the measures were taken up.

Asked by Angela Eagle (Labour) if he was “frustrated” that more of its recommendations were not followed, he said: “I think the country would have been better off if it could have adopted more of our suggestions.”

Dodwell added while the overall tax system remains complex, “the areas that the office has worked on have been improved”, and the decision to close it was unexpected.

Asking members of the committee to vote against the motion when it is formally put to the House of Commons, he said:

“I still don’t know why Kwasi Kwarteng made that announcement, it contained no reason why the office should be closed and I think the Government, and future governments, will miss some of the attributes of the office.

“They will lose a champion for simplification, they will miss having a dedicated team that can look in depth at a range of issues and they will miss the candid and frank comments you get externally that you won’t get to HMRC.

“I think the Government and the country would be better off if it retains us than if it abolishes us. We are not an expensive body and we have done good work.”

Dodwell said there were “six to seven” areas the office would have focused on going forward, including Self-Assessment, tax certainty, the savings tax system and the pension system.

Cearns added that, given more time, she would have liked to have done more work around the digitisation of the tax system, telling MPs:

“My broader frustration is around the digital side of things and how much ought to be invested to get a really good system in place that taxpayers can use effectively”.

Asked by committee chair Harriet Baldwin about whether the OTS had succeeded in simplifying the tax system, Cearns continued:

“When we look at how effective we have been, it’s not necessarily been about whether the tax code itself has been simplified, we don’t look at that as the primary measure of simplification.

“We have looked at the administrative side of things, where they have fallen down and there have been problems. The whole focus was on quality of output. Simplification is not an end in itself but should be part of the overall process.”

Baldwin questioned why the UK tax code has “mushroomed” and become more complicated in the last decade.

Dodwell said the length of the tax code was not “the best way to assess complexity”, and that the main reason for the increase in length was the number of new taxes introduced by the Government since 2010.

He added that the Chartered Institute of Taxation had calculated that, on average, one new tax had been introduced each year over the last 20 years.

Andrea Leadsom (Conservative) said she had not “seen much” from the OTS and asked why it had not focused on “some really eye-catching things” to simplify the tax system.

Dodwell said “substantial work” had been carried out on areas including the alignment of income tax and National Insurance contributions. In that case, he said there were “6 to 7 million winners and 6 to 7 million losers”, which he believed had discouraged then-Chancellor Phillip Hammond from taking it any further.

He said: “It would be simplification but it wouldn’t be simple to implement.”

Tax reliefs

MPs also criticised the large number of reliefs in the tax system, with Leadsom saying recent figures suggested there were 1,042 and Labour’s Siobhan McDonagh adding that data from the Office for Budget Responsibility said it could be higher, at 1,171. Dodwell himself said he “saw 1,190” from the National Audit Office.

Leadsom said the amount of reliefs was “ridiculous”, while Rushanara Ali (Labour) called for greater accountability in government over their effectiveness, saying:

“The CIOT said it’s vital that accountability for value for money of tax reliefs is confirmed in practice as well as in principle. Who in the Government should be accountable?”

Dodwell said while governments regularly introduce reliefs , they rarely remove them, and even though “looking back” at their effectiveness had increased during the time the OTS was in place, he believed they should be subject to more periodic reviews.

He continued:

“Reliefs shouldn’t just sit there forever, they should be looked at in terms of amount and whether we need them at all. Every time you introduce a new tax we are bound to have reliefs in the system.

“It’s always possible that people benefit from a relief who you didn’t fully intend to do so.”

Using the Higher Child Benefit Charge as an example,  Cearns added: “Sometimes things come out where there’s not been enough thought put in to what the consequences will be.”

Global minimum tax

With global economies including the UK, US and EU working together on a proposed global minimum tax of 15 per cent on multinational companies, also known as Pillar 2, the committee asked if there would be any  advantages to the UK if it became the  e first country to introduce  it, with Baldwin suggesting that while other nations may be experiencing difficulties with its introduction, the UK was preparing to legislate for its introduction in the upcoming Finance Bill

Dodwell told the committee he expected the UK and EU to “ go at the same time”, but that the US, despite being one of the leading nations in developing the tax, “almost certainly won’t” implement it at all.

He said:

“They (the USA) have different provisions. The US has its own tax system and so finds it immensely difficult to change its tax system.”

Other topics

Former Shadow Chief Secretary to the Treasury Angela Eagle (Labour) said the erosion of traditional tax bases by technological developments such as electric vehicles, meant the UK now has a “unique chance to revise the tax system with new taxes for the future”, with different taxes taking on the role of “heavy lifters” to raise revenue.

Dodwell said the office had been “keen” to explore the impact of electric vehicles, but the majority of the work it did looking to the future was based around digitilisation.

Cearns also said a lack of public understanding of tax affects how people approach their tax liabilities. She used the recent “nudge” letters sent by HMRC to social media influencers as an example of a situation where people aren’t aware they may be liable to pay tax.

She said:

“I think there’s a broader issue around the general population understanding our tax system and the way things work. In an ideal world everybody would be taught a lot more about the tax system throughout school and university.

“The more people that understand the tax implications of what they are doing, the better informed they are, the more likely they are to do things the right way.”

Ending the session, Baldwin said she felt both witnesses felt the OTS had  an “unfinished agenda” and that the committee would write to current Chancellor Jeremy Hunt to “find out the justifications” for not reversing Mr Kwarteng’s decision.

You can watch the full session here.