Should lawyers write tax legislation?

Ian Barlow, head of tax at KPMG, believes that the user community could help to simplify the law

The Chancellor announced in February an experiment to involve the private sector in drafting tax legislation. The Treasury then invited law firms and others with experience of tax law or parliamentary procedure to express an interest in drafting parts of the 1996 Finance Bill. The outcome of this process is awaited.

One reason why KPMG did not express an interest was that the tender documentation appeared to envisage an unchanged approach to the drafting of tax legislation, the only difference being the substitution of private-sector lawyers for public-sector parliamentary draftsmen. In my view we will not achieve simplification of our increasingly complex legislation if the instructions by the Revenue departments are the same as usual and the new draftsmen have the same legal background as the existing ones.

A more promising initiative was announced by Sir George Young the same month. He asked the Inland Revenue to report to ministers as to whether the simplification of our existing legislation is a practical proposition. This exercise has been reinforced by a section in the 1995 Finance Act, introduced by Tim Smith MP, at committee stage. This requires the Inland Revenue to prepare and present to Treasury ministers a report on tax simplification. It specifies that the report should include both a review of recent tax legislation and a summary of recent criticisms of tax legislation complexity and parliamentary procedure. The report must also consider the advantages and disadvantages of possible solutions, including a Royal Commission and a tax law commission. Publication is due by 31 December 1995.

This is a welcome exercise, which the Inland Revenue appears to be tackling with enthusiasm and commitment. In my view, one of the points the report should address is whether lawyers are the best people to write tax legislation unaided. Any attempt at simplification is likely to fail if the process by which legislation is drafted remains entirely with those who have produced our existing increasingly complex legislation.

The Revenue has already moved in the direction of consultation without any striking improvement in the resulting provisions. This probably reflects the fact that lawyers who draft legislation are inevitably influenced and constrained by existing legal and judicial methods. They focus on producing amendments and new clauses that fit within the existing framework, instead of addressing the need for a fundamental change of approach.

One of the reasons usually given for the complexity of legislation is the need to prevent avoidance. New legislation generally includes extremely complicated anti-avoidance provisions, which attempt to detect as many avoidance devices as possible. Unfortunately, it also often catches transactions that were not meant to be caught, leading to further clauses to make exceptions. If loopholes emerge, more clauses will be required to close them.

One possible solution would be to abandon the traditional method of interpreting tax legislation by detailed analysis of every word, in favour of a system that takes account of the purpose of the legislation. Avoidance could then be tackled through more widely-drawn anti-avoidance provisions, with appropriate advance clearance procedures permitting bona fide and commercial transactions. Such an approach would use simpler language appropriate to its principal users - for example, tax directors, finance managers and human resources specialists.

Lawyers obviously have a key role to play in this process. After all, the end result will have legal effect. But will we break the mould unless the process is controlled and monitored by representatives of the user community, which extends much more widely than the legal profession?

The Inland Revenue has already had considerable success in rewriting its explanatory leaflets in plain English. Customs and Excise notices and leaflets are similarly prepared. The same approach could be adopted for legislation, placing the emphasis on simplicity and clarity.

Andrew Smith MP, Shadow Chief Secretary to the Treasury, gave a speech recently on corporate tax policy which also appears to advocate such an approach.

There is a growing demand for simpler tax legislation and considerable efforts are being made to achieve this. Given the cross-party support, let us ensure the opportunity is seized.