Did the 2005 reforms lead to better tax policy?

Twenty years ago the O’Donnell review created HMRC from a merger of the two departments (Inland Revenue and Customs & Excise) that had administered taxes separately for centuries. At the same time the policy making machinery and the centre of tax policy expertise was unified within the Treasury. The aim was to provide a stronger and more coherent centre and to reflect the realities that, since at least 1965, ministerial ambitions for tax policy had been as much – or more – about political and economic goals as about the raw business of raising revenue.

I had spent a brief spell in the Treasury as a special adviser on tax in the 1990s – the glory days of Ken Clarke as chancellor and the dying years of the Tory government. I had seen, and was somewhat surprised by, the lack of tax expertise in the department. In 2005 I was recruited back to help oversee and lead the establishment of tax policy teams in the Treasury.

Gus O’Donnell has written separately on his review offering a positive view on the outcome of the merger. Can the same be said for the reform of the policy process?

Tested against the counter-factual question – should HMRC be demerged and the tax policy advice function returned to the revenue departments – the answer is clear. There is no case for reversing these reforms. But how well did the policy function transfer work and what lessons should be learned?

The ‘big bang’ of 2025

The reforms were kicked of by moving 150 tax policy staff to the Treasury and bolstering their numbers with the department’s own and private sector expertise. This delivered immediate and material improvements: the overall quality of advice was enhanced by additional resource and by the advantage of being firmly located within the wider economic and fiscal context of the Treasury. That advice was better grounded in and better informed by the other elements of the Treasury agenda – which in 2005 under Gordon Brown encompassed a large part of the government’s priorities.

The activist budgets of 2006 and 2007 marked early high points in the quality of the outcome of the O’Donnell reforms. Often criticised as epitomising Brown’s maximalist style of governing, they illustrate well the melding of tax and non-tax policy into single fiscal events: combining productivity measures on investment reliefs and corporation tax with employment measures delivered through tax credits and incentives for specific categories of workers (for example lone parents and carers); and making corporation tax changes linked to both productivity and environmental measures.

But the effectiveness of the transfer of the policy process drew heavily on the decades of accumulated wisdom transferred from the revenue departments. Maintaining an adequate level of tax skills within the Treasury has been an ongoing challenge without a continuing internal demand for such expertise within HMRC – where tax skills can be most easily generated. Those who work in tax understand the breadth and fascination of the subject and its centrality to the functioning of government. Persuading individuals from outside the world of tax of its merits has proved harder and the Treasury leadership has had to devote disproportionate effort to maintaining dedicated specialised tax expertise.

What constitutes 'good advice'?

There have been policy mistakes – and some of them can be seen as unforced errors – the 2012 Pastygate debacle for one as part of the ‘omnishambles’ budget into which my own hands were firmly dipped. But what constitutes good policy advice? It is decidedly not to be judged simply by good policy outcomes. Officials advise and ministers decide. A long list of poor policies can be cited where the official advice was impeccable but the political judgement poor – or at least excessively concerned with immediate headlines.

Officials may not make policy decisions, but they do choose what to include or omit from their advice. The transfer of the policy function to the Treasury expanded the information available to inform tax policy advice, but by distancing the teams from the coalface of tax collections, potentially reduced the depth and weight of input on tax administration issues – any of which have the potential to trip up an otherwise sound policy.

Twenty years of success for tax policy teams

Good policy advice ensures that the worst mistakes are avoided and that policy initiatives properly balance the policy objectives with the practicalities of tax collection and administration. Above all, advice must ensure that ministers make policy choices with their eyes fully opened to the consequences of their decision.

Against that benchmark, the last 20 years have been remarkably successful for the policy teams. For better or worse they have handled policy demands far beyond anything of the previous decades and maintained both the skills and the esprit de corps which makes for the very best teams of civil servants. If mistakes have been made they have as often been down to pressures of timing or the naïve belief by ministers that the tax system should be used for objectives well beyond its core function of raising revenue for public services.