David Gauke – 2011 Speech to the Financial Executive Network Group

Below is the text of the speech by David Gauke, the Exchequer Secretary to the Treasury, at the Financial Executive Network Group, on 27th January 2011.

Introduction

Thank you.

It’s a pleasure to be here this morning and to talk a little about the Government’s approach to taxation.

As the Minister responsible for tax policy making, I’m well aware of the issues that have detracted from our tax system.

That businesses require more certainty if they’re to make plans for the future.

That there’s a pressing need to ease the burdens placed on the individual taxpayer.

And that taxation in Britain is far too complex.

In short, we need a simpler, more stable tax system, and this is what I’d like to focus on today.

How the tax system is not simple

Because under the previous Government, simplicity took a backseat to other objectives and constant tinkering.

Whatever the motivation, the lack of strategic direction and the willingness to use taxation in an attempt to meet a range of goals led to increased complexity and further instability…

…dare I mention the almost yearly changes to the small companies’ rate?

And one would only need to look at the evolution of the tax code to get a flavour of the problem.

Since the turn of the century it has almost exploded… more than doubling in size in just ten short years.

In fact, almost amusingly, it got to the stage where Tolley’s began using a smaller font in a fraught bid to keep down the number of pages.

We also witnessed the introduction of two fiscal events for every financial year.

A Pre-Budget Report that carried just as much weight as the Budget.

Each one jam-packed with tax amendments.

Amendments that were almost always made under the veneer of consultation.

While in reality, businesses often had little or no say in tax policy, let alone the frequency of these changes.

During my time in Opposition, I remember having a conversation with one company director who said he’d resorted to hiring staff just to monitor HMRC’s website… as this was the only way his firm could keep track of the spiralling myriad of complexity coming out of Whitehall.

And all too often, this desire for constant change led to ill-thought-out proposals.

All this served to show that policymakers needed to think again about the way tax law is made in this country.

Reform was needed.

And it’s reform that this Government has promised.

With stability and certainty being at the heart of our approach.

But as a Ministerial Team, we’re also mindful of the constraints we face as when trying to grapple with these issues.

The challenges we need to address.

And the complex balances we have to strike.

The first set of these are financial, as we deal with Britain’s debts.

I can tell you it is humbling to enter the Treasury as a Minister for the first time, and face a situation where the country is borrowing a pound for every four it spends.

The excitement of that first red box, was tempered by the amount of red ink in the first briefing. And the experience inevitably stays with us as we contemplate the tax reform this country needs…

…as we consider how we reform our tax system to assist long term, sustainable economic growth.

The second challenge is that of time.

In our 24/7 news culture, politicians have to deliver progress, and usually the deadline is yesterday.

There’s a constant pressure for immediate announcements and rapid impact.

This is something to which the previous Government too often succumbed.

Yet in tax policy, short-term gains are often in tension with fundamental long-term reform.

So we’re setting ourselves against the patchwork quilt, knitted by constant change in the tax system. But at times this doesn’t sit easily with proclaiming on a regular basis that “something must be done”.

And third, there is the balance to be struck between genuine and open consultation and the desire for certainty.

We believe firmly in the benefits of consultation, especially in tax. There are well-established norms about the length of time we should consult for, and it seems only polite to adhere to them.

But we also hear business demands for certainty in our tax system.

So we find ourselves weighing up how best to consult on tax reform without creating undue uncertainty.

Above all, how can we avoid an overall sense that too much of our tax system is in flux at any one time, even as we contemplate the big reforms that businesses say they want to see.

These are challenges we face.

So the question is: how can we create a simpler, more stable, tax system in the wake of:

Fiscal consolidation.

Short term pressures coupled with calls for reform.

And wanting to be open, without causing undue uncertainty.

And our answer has been to adopt a new approach to tax policy.

One that is more focussed on the longer-term.

More transparent, more inclusive, and far less prone to the vagaries that plagued the previous regime.

Our approach to simplification

It’s about accepting that changes to the tax system are inevitable.

But the way you make these changes is not.

So we will be a Government of fewer, better thought out reforms; one that engages business throughout policy development; and one that places a greater emphasis on simplification.

This strategy has two separate elements.

The first being to look at the current stock of tax legislation, and eliminating any unnecessary complexities.

The second is about the way you introduce new tax law; the manner it’s communicated; and how it evolves from idea, to proposal, to statute.

In short, our plan to promote simplicity is shared equally between what already exists… and what’s yet to come.

So let me address each in turn.

Starting with the current stock of British tax law.

Improving current stock

Looking at where improvements can be made to current legislation is nothing new.

Prominent members of the Conservative party have been calling for this for a number of years.

That’s why, as one of our first acts in Government, we followed the advice of Lord Howe and announced the formation of the independent Office of Tax Simplification….

…drawing together individuals from across the business, tax and legal professions to provide the much needed institutional ballast, and expert advice that Government has previously lacked.

The OTS has, under the leadership of Michael Jack and John Whiting, the unenviable task of unravelling the tangled wool that is our tax system.

And as a starting point, the OTS is taking forward two reviews: one on simplifying small business taxation, and the other on tax reliefs.

Both of which will be reporting in time for the Budget… identifying options for simplification across each area.

Indeed, this work has already begun.

I’m sure you’re all aware that the OTS has already published a comprehensive list of all the reliefs and exemptions that exist within our tax system.

For me it’s striking that when they began this process in the summer, the general view was that we had no more than perhaps 400 reliefs.

Their assessment shows that we actually have more than a thousand.

Now many of these serve a useful role in our tax system, but it’s not unreasonable to ask if at least some of these reliefs are truly justified.

For example, as I’ve said, I’m all for taking a long term view of the tax system, but do we really need a ‘millennium gift aid tax relief’ when the next one’s not for another 989 years?

But we also know that abolishing reliefs is not as simple as it sounds.

That it’s far easier to give tax breaks, than to take them away.

And that behind every relief, and every exemption, is an interested party who’ll be championing its cause.

We understand all of this.

And in many cases, there may well be good evidence to support a specific relief.

But if we’re serious about simplification, we’ll have to make tough choices.

Yes, there’ll be some losers… this is inevitable.

But there will be far more winners.

Because this is no zero sum game.

The work of the OTS is looking to improve the tax system as a whole.

Reducing complexity.

And ensuring that our tax system works in everyone’s interests.

So that as we get rid of reliefs.

And level the playing field.

We will create a tax system with a broader base, and lower rates.

With overall impact that will be beneficial for the both taxpayer and the British economy.

Tax Policy Making

While the OTS is playing a valuable role in improving the stock of UK tax law…

… we also recognise we’ve got to watch the flow of new measures.

Yes, we need a simpler tax system, one with fewer exemptions and fewer reliefs.

And this means change.

But a little paradoxically, I know that businesses need greater certainty.

As a Government, we’ve taken this as a call to create a more transparent framework within which tax policy is developed…

…a framework that will improve the quality of tax law and the way tax policy is made.

It’s our intention to put simplicity and stability first.

This means setting out our long-term ideas for reform.

Allowing ample time for the scrutiny of Government proposals.

And giving businesses the opportunity to help develop major tax changes.

We kicked off this process in November by outlining our plans for Britain’s Corporate Tax regime.

This reiterated our commitment to lower the headline rate in each of the next four years…

…but also, for the first time, put in place a clear timeline for when changes will be considered to the tax treatment of foreign profits controlled foreign companies; and intellectual property.

This is all part of a more deliberate approach to tax policy-making.

One that is simpler, more comprehensive, and ought to mean far fewer surprises.

In support of these objectives, we’re also allowing for greater scrutiny of our proposals through the publication of draft Finance Bills.

This convention will avoid many of the problems we saw under the previous administration… where badly constructed policies – produced in the absence of consultation – were rushed through Parliament with little consideration of their overall impact.

Last July, we released the first ever draft of the Finance Bill.

In response we received over 60 comments.

And this led to changes being made to 9 of the Bill’s clauses.

On the 9th December, we repeated this process for the 2011 Finance Bill.

Because at every stage of the tax policy-making, we want to involve businesses in our decisions.

To help improve the quality of our legislation, and avoid any unforeseen complexities.

So while I’ll freely admit that life as a Government Minister in the Treasury is very different from my time in Opposition.

That there can sometimes be a temptation to conduct less external engagement – and merely rely on the experience that resides within Whitehall.

We’ve deliberately opted against this approach.

As I understand the value that’s to be had from collecting the thoughts of those who are directly employed in the tax profession.

Who, through their own experience, have ideas about where improvements can be made… that Whitehall doesn’t have all the answers.

As a Government, we’re making engagement with external experts a real priority.

And we’ll continue to seek feedback on the way we make tax policy…

…to ensure that our choices have your backing; that you know the direction we’re heading, and feel confident enough to make long-term decisions about the future.

Conclusion

This is my promise.

And the promise of Government:

That stability and simplicity are at the top of our agenda. That they’re not simply words used for dramatic effect. But are, in fact, firmly ingrained in our approach to tax policy. That through the work of the OTS.

External engagement.

And the publication of draft legislation…

…we’re making the fundamental changes needed to create a better British tax system.

One that is simple, stable, and that is an asset to our economy.

Thank you.