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The Treasury needs to engage earlier and more widely on tax reform

Jeremy Hunt's budget was not a case study in good tax policy making.

The chancellor Jeremy Hunt on his way to announce the budget in early March. Little in the announcement was new, having been widely pre-briefed in the days prior.
The chancellor Jeremy Hunt on his way to announce the budget in early March. Little in the announcement was new, having been widely pre-briefed in the days prior.

If the Treasury is going to pre-brief most budget measures then it should embrace genuine consultation about tax reform – inside and outside government, say Jill Rutter and Gemma Tetlow

The days of “budget purdah”, when letting slip a budget measure was a resigning matter, are long gone. What was notable about Jeremy Hunt’s March budget was that almost every measure appeared in advance. The chancellor said that his press office did not want to mislead journalists ringing for confirmation about planned measures – but the days of no comment (and internal panic) when speculation looked accurate are long gone.

Now we can ditch the pretence that budget secrecy matters, the Treasury should make tax policy better

While the rabbits were let out of the hutch a bit earlier than usual, the government did not use the opportunity to improve the quality of tax policy making.  

First up we had the confusion over national insurance. There is good reason, if direct taxes are going to be cut, to focus on national insurance rather than income tax. Earned income bears two taxes, unearned income just one. Popular misconceptions about national insurance, not least that it is directly linked to funding the NHS and/or the state pension, have allowed cynical politicians to get people to accept NI increases when they might have balked at income taxes rises of the same amount.  16  The prime minister, as chancellor, had a go at an adapted NI increase when he forced Boris Johnson to accept the need to pay for extra funding through the health and social care levy, whose abolition was one of two measures to survive from the Liz Truss mini-budget.

But if there really is an ambition to get rid of national insurance then it would be good to see how the government plans to get there – and ten days after the budget we are left unclear as to whether the government really harbours a long-run ambition not just to cut taxes but to focus all those cuts on employee national insurance. The chancellor hinted at this in the budget speech, and the volume turned up in the aftermath as Treasury ministers suggested that the government was planning to get rid of employee national insurance altogether. 

It would be interesting to know if the cabinet shared any of the Treasury’s thinking – after all, in the run-up to the budget many Conservatives were arguing that income tax was much more politically potent to cut than national insurance. Just days after the budget, two ministers made clear their priority was to boost defence spending.  

If the government really did have a long-term objective to merge  17  income tax and national insurance, it could start setting out how it would get there – drawing on work by the now abolished Office for Tax Simplification – and make clear whether it really intended a big reduction in the relative tax advantages the current system offers savers, investors and, most difficult of all, people over pension age.  

On other taxes Treasury consultation is coming too late – or not at all

There was some more tax reform in the Budget.  

Jeremy Hunt created a new “vaping products duty”. The UK – under previous prime ministers – had seen vaping, with a fraction of the health risk of smoking, as a good way of reducing harm. Rishi Sunak has changed tack, worrying about teen vaping and acting to ban disposable vapes. The new tax was trailed before the budget but has potentially big public health consequences, but the government is now consulting on the design of the tax and not whether it will contribute to the its public health goals. While the chief medical officers were consulted, it is far from clear how far experts inside the health department were involved in drawing up the consultation document (which was issued by the Treasury and HMRC). External experts (and those who have used vaping to move away from smoking) were not engaged at all. The revenue from the new tax is already in the scorecard.

On the change in non-domiciled tax status, where the government finally moved after years of resistance, the government consulted very narrowly. It is clear from the detail of the policy announced that the Treasury and HMRC consulted some trusted practitioners with deep knowledge of the operation of the system. While this is welcome to ensure that the policy works in practice, consultation could and should have been wider to ensure a range of perspectives was reflected.

First, the announced policy will allow current non-doms (but not new arrivals) to put their assets into trusts to avoid inheritance tax. This carve out can only be due  18  to politics or lobbying: if policymakers believe that subjecting offshore assets to UK inheritance tax will significantly discourage people from coming to or remaining in the UK, then the carve out should apply to all future arrivals (as well as current non-doms); if policymakers do not think it will be a discouragement, then how can the carve out be justified?  

Second, the proposed regime for new arrivals addresses a major gripe from practitioners by allowing their clients to bring money into the UK to spend without incurring tax. But it does not address a related concern  19  raised by economists: the new regime will still discourage new arrivals from bringing assets into the UK to invest, since doing so will make them liable for tax. This is bad policy design if one of Hunt’s major aims – as he claimed in his budget speech – is to deliver “more investment”.

As we noted in a report last year, it is important for officials to consult a range of experts when developing policies. If Treasury and HMRC officials feel able to consult some trusted practitioners on a confidential basis during the policy development process, it should be possible also to consult others who can bring a different, well-informed perspective.

There was also one rabbit from the chancellor: a change in the thresholds for the High Income Child Benefit Charge. This was an interim measure until he could move in two years to a household rather than individual income assessment of child benefit eligibility. While that seems much fairer – and indeed the single/dual income unfairness was long a criticism of George Osborne’s initial move to impose a tax charge on higher income earners – it also, at a stroke, reverses one of the fundamental tenets of independent taxation, a tax reform of the Thatcher government. We are promised a consultation  20  on how to do this, but there is no hint that the Treasury is at all interested in the “whether” despite a move which runs so counter to the government’s professed aim of simplification.

The next chancellor needs to adopt a longer-term, more strategic approach to tax reform

The Treasury now consults more than it used to on tax measures. But in almost all cases it consults after it has made the basic policy decision and locked it into the budget arithmetic. A new chancellor can engage earlier – and make better tax policy.  

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