Tax institute says rushed consultation left IR35 complex and costly
The Chartered Institute of Taxation (CIOT) has accused the Government of taking shortcuts during the consultation process when introducing new regulation, including IR35, which it says has resulted in complex legislation that has wasted both time and money.
The accusation was made following the recent release of a CIOT survey entitled, 'The Good, The Bad and The Complex', which studied a selection of 73 tax consultations from May 1997 to January 2001.
The survey's section on the consultation of IR35 says...
'On 9 March 1999 the Chancellor announced that: "Changes are to be introduced to counter avoidance in the area of personal service provision" and that, "the Inland Revenue will, over the next few months, be working with representative bodies on aspects of the practical application of the new rules and on the production of guidance. Any groups interested in contributing to this process should write to [address supplied]."
Respondents were supplied with, inter alia, a document entitled: 'Summary of a possible approach' which was described as being, "for use as a basis for discussion, but is not a consultation document." The accompanying letter encouraged them, "to take this opportunity to provide additional written input on the practical application of the proposed new rules in response to the documentation attached." The letter indicated that, "issues with respect to the policy decisions underlying the Chancellor’s announcement, "were not on the agenda." A summary of the new rules published on 23 September 1999 stated that they had been "developed following extensive consultation."
The CIOT's report found that: 'It is simply unsatisfactory to refuse to discuss 'whether' a highly contentious proposal should proceed, to require interested parties to make written requests in order to obtain a hearing and to deny that papers inviting comments were consultation documents.
'Thus, although the respondent to our questionnaire acknowledged that there were 'major changes' from the original summary, the process was described as a 'failure to consult properly' and the lowest possible mark was awarded to the question: 'Were the issues treated fairly?'
Anne Redston, Chair of the Personal Tax Committee of the CIOT, confirmed that the IR35 consultation process had been considered by the Institute as part of the background work on the paper.
Anne Redston said, "The original IR35 proposals were launched without any consultation at all, and although sustained pressure from many bodies, including the CIOT and the PCG, caused the Government to make changes, there remain many areas which are unduly complex, unfair and burdensome. A proper consultation process would have allowed the legislation to focus on the areas of abuse. It would also have been much easier to apply. The current IR35 regime is enormously complex and wholly unsuitable for a one-person company. Ultimately, the Institute's clear conclusion is that the process was flawed."
John Whiting, President of the Chartered Institute of Taxation, said:
"We are asking the Government to avoid mistakes by taking more time to follow every stage of the consultation process. We would also like a full report back which explains what is going to happen and why particular options have/ haven't been chosen. This emphasises that changing the tax system should be seen as a partnership between all sides - not just something to be imposed. Proper consultation produces better tax law and practice.
"We think there are three broad stages to a good consultation - consult on whether to make a change, then on how to make the change, then finally on the detail of the new rules. Recent problems over subjects such as Capital Gains Taper Relief, Double Taxation Relief and IR35 can be traced to one of the stages being omitted.
"If a consultation takes place, it is something of a puzzle why consultation sometimes shuts down part way through the process. In cases where there is a dramatic shift in departmental thinking after the consultation, the resulting legislation can bear little resemblance to the original proposals. If new options emerge then there should be further consultation rather than changes being shoehorned into the Budget/ Finance Bill process. Publishing draft Finance Bill clauses on Budget day with a time limit for responses of a few days adds insult to injury."
The Institute's report, generally found that tax consultation should extend more widely on the stance taken by the UK in relation to proposed EU legislation. It also requested that members of the public should have access to all consultations.
The report was prompted by the Consultations Code which was published in early 2000. It found that once a proposal is agreed there is often no consultation on the principles of implementation.
'Once implementation moves to the detail stage, the survey shows that there is proper consultation in only about 50 per cent of cases. Given the complexity of most tax issues, more time should be allowed for responses so that the 12-week 'standard minimum period’ can be followed,' it advises.
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Richard Powell, UKTECH