What should succeed the Office for Tax Simplification?

There was not much in Kwasi Kwarteng’s Growth Plan that was left intact after his summary replacement by Jeremy Hunt. But one proposal that did survive was to get rid of the Office for Tax Simplification (OTS), established by George Osborne in 2010.

In a new guest paper for the Institute for Government, former top tax official Edward Troup, who watched the OTS at work from both the Treasury and then HMRC, argues that its remit of pursuing “simplification” was always troubled. He argues that while there is value in an organisation with a focus on tax administration, as a way to improve taxpayers’ experience of the tax system, no chancellor will ever contract out the design of tax policy to an independent body.

The OTS was hamstrung from the start but its best work was on improving tax administration

From its establishment the OTS was never given the roles envisaged for it in the reports that led to its establishment in scrutinising tax legislation, and most of its policy recommendations – whether on tax reliefs, national insurance or capital gains tax – fell on deaf ears (of successive chancellors). But it had a greater impact when working on tax administration.

Tax administration is rarely the focus of much ministerial or Treasury attention but it is important to taxpayers and to ensuring that the tax system imposes the lowest possible burdens on the private sector. The OTS benefited from the willingness of taxpayers to engage with it on how tax system affected them where they might have been reluctant to engage with “the taxman”.

There are other ways to improve the wider tax system that could learn from the OTS’s experience

Within government, post-legislative scrutiny, particularly of many tax reliefs, has improved but there is still a long way to go to match the relative rigour applied to public spending (this was the idea behind the OTS being given a ‘NAO-style remit’, something Osborne declined). Pre-legislative scrutiny, too, could be improved. Parliament struggles to get to grips with the mass of tax legislation that comes its way every year in the finance bill – it would be much better to ensure legislation works in the first place rather than task a body with clearing up the mess created afterwards.

To counter these factors Troup’s proposals centre on:

• 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.
• An external body, to undertake consultation on specific pressure points in the tax system, again primarily focussing on administration but with the potential to engage on more specialised policy areas.
• A greater degree of post-legislative scrutiny of tax legislation, including evaluation of the wider costs and burdens of tax policies.
• A parliamentary body with an advisory role to scrutinise and comment publicly on legislation during its passage through parliament.

These would all improve the functioning of the tax system, making it easier for taxpayers, officials and parliamentarians and, ultimately, this would make for better tax policy.

The UK still needs a better public debate about future tax policy

The UK still has a set of tax problems: the gap between successive government’s public spending aspirations and their ability to persuade the public to pay for them; the inefficiencies and inequities in the tax system that act as a drag on growth and productivity, as pointed out in the IFS’s Mirrlees review in 2010; and future threats to tax revenues, such as the loss of fuel duty in the switch to electric cars. These are all thorny areas, where public understanding is limited and the ‘losers’ from any potential reform are likely to be far more vocal than any ‘winners’.

The Treasury has a very proprietorial attitude to tax reform, regarding it as the sole province of the chancellor – one reason why the OTS failed when it ventured into policy areas. It has been unwilling to learn from other policy areas where independent reviews have opened up new possibilities – as other countries, such as Ireland, have done recently. The chancellor may be reluctant to replace the OTS with an ‘Office for Tax Reform’ designed to help develop acceptable options for tax policy change. But periodic independent reviews of specific areas of the tax system could help to increase public knowledge, improve public debate and open up space for change.

Perhaps most urgent is the need to address the emerging gap on fuel duties as drivers switch to electric vehicles. Neither Jeremy Hunt nor his Labour counterpart Rachel Reeves have been willing to tackle this question – and no chancellor since 2010 has even been willing to implement planned inflationary increases. An early proof of concept of the idea of an independent review could be one to look at this question, commissioned jointly and tasked with reporting straight after the next election, to develop options for Treasury ministers, of whichever party, to consider for fuel duty replacement.

This is a knotty question that successive past chancellors have ducked and threatens the fiscal plans of future ones, but no chancellor has yet felt able to act. Whoever wins the next election would likely be grateful to be handed a set of options that already commanded a degree of public and cross-party understanding and support.