Checked & unbalanced

10th December, 2021

I’m often educated by my law trained business partner as to the doctrine of separation of powers. My understanding is that the Executive, the Judiciary and the legislative body have a system for reviewing and if necessary checking the actions and powers of one element if the others consider such action to create unfairness or an imbalance. In short, no one body can have unfettered power over the other.

Leaving aside for the moment the current attempt by the Government to introduce an annual “Interpretation Bill” which would allow them to ignore or defy decisions in Judicial Review cases, this principle seems sensible and importantly, successful. It speaks to those essential British qualities of fairness and transparency.

Whilst I don’t know for sure, it’s seems clear that the introduction by H M Treasury some years ago of a process that new tax legislation should follow, owes much to separation of powers. In short, if new tax law was to be introduced then there should be a consultation followed by a consideration of responses, adjustment if required to meet the evidence and finally consideration by Parliament of the final words used. The last being critical as the tax doctrine of “purposive interpretation” relies upon fitting the facts to the law “as written and intended”.

In theory a good system that should produce good law.

In practice, I fear that it has been undermined so much that it is in danger of collapse.

Let’s look at two examples. The loan charge and IR35 reform.

The loan charge was born in late 2015. Rushed into legislation in March 2016 with very little time for consultation and was a purely policy driven device to save HMRC blushes over their failure to properly investigate and analyse contractor schemes that by then were approaching 14 years old. Subsequent withdrawal and reinstatement in late 2017 (due to a general election) did not allow more time to make it effective.

IR35 reform was apparently needed because the original introduction in 2000 had failed to achieve its objective. Fair enough but HMRC has never been clear as to what that objective was. It might have been to ensure that taxpayers paid the correct amount of tax as determined by their employed/self employed status. It might have been to collect more tax from that group at lower cost. Either way, the reform in April 2017 and again in 2021 has forced many end client engagers to apply a blanket ban on the use of PSC’s by contractors. In doing so, the second objective above has been achieved.

In both instances, the consultation was perfunctory and largely ignored by HMRC and HM Treasury who clearly decided that “policy” should take precedence. The legislation was hastily and poorly constructed and will create more problems than it solves. The Judiciary is already engaged in both areas and has found both good and fault. HMRC has not helped itself by relaying inconsistent answers to various Parliamentary committees. It was particularly telling that the admission that the loan charge was “to draw a line under disguised remuneration” only came out under questioning from MPs. In one answer, the whole “consultation leading to better law” and the principle of following separation of powers, was shown to be false.

We have subsequently seen Parliamentary committees take evidence and produce reports as to the effect and consequences of such actions. The House of Lords Economic Affairs Committee has been most active and has asked some searching questions, eliciting less than convincing answers. The House of Commons committees, (Treasury Select and PAC) have given HMRC an easier time but when a vote in Parliament decides that the loan charge is “not the will of Parliament” just how does HMRC continue to think that the “intent” of Parliament is clear?

Their Lordships may well prefer HMRC’s version of events to those who work in the front line every day. That is their prerogative. My own experience is that their Lordships are rather more discerning.

This latest episode of HMRC seeking to reinvent the past and to paint a picture that is out of focus is frustrating. WTT has in the past sought to find the checks and balances provided in our system of making laws. At every turn we ran into a brick wall. Who created the policy behind the loan charge – was it an HMRC suggestion to HMT or was it HMT cherry picking ideas from HMRC about how to “solve” the problem? Who created the policy behind IR35 reform? Why was consultation with experts ignored? MPs are very reluctant to move against HMT. What does that say about the hegemony of Treasury?

We have to accept that some Government policy is necessary, regardless of harm done to ‘small’ groups of taxpayers. There should however be an outlet for subsequent adjustment where it is evident that the policy is not achieving its stated aims or is based on a false premise. There is not.

Many contractors therefore are faced with law being made that ignores a system designed to make it better (and more acceptable) and then HMRC interpreting the consequences in a manner that is unique and foreign to those experts in the field in an effort to retrospectively justify it.

I’m sure many advisers in this space are equally frustrated by an inability to get to the heart of policy here and have any effect – or even be listened to in any meaningful or sincere manner. Given that HMRC is now driving a campaign to “improve the quality” of tax advisers, now is the opportunity to press for this to be a two way street.

WTT supports HMRC in trying to ensure tax advisers can advise correctly but equally HMRC has to be more honest and open and less dogmatic.

WTT would be interested in views from its peers in this space, either publicly or more discretely.