Taxation – Analysis – Th targeting principles of policies.

In the past few months, the government has published several batches of draft legislation. This is brilliant. Making draft legislation available for comment allows technical wrinkles to be ironed out. We may not get all the policy changes that we ask for, but we still get an improved product. And when the Finance Bill goes through parliament, the government and backbenchers do not have to waste time on technical amendments. So this trend towards publication is one of the best developments in the process of refining tax policy. But the experience of going through two recent publications prompts me to go further back in the policy development process. I want to question one of the principles that underlie the formulation of new policies: the principle of targeting. The two publications are the draft legislation for the new all-employee share plan and for corporate venturing relief, and both are long. A leading reason for their length is the government’s desire to target its new tax reliefs precisely. For example, the all-employee share plan aims to get employees financially involved in their companies. The closest involvement is likely to come from getting employees to buy shares with their own money. Many employees, however, will not wish to do that: so to get them involved, the plan has to allow for £3,000 worth of free shares a year. To encourage employees to buy shares, it allows for up to a further £3,000 worth of free shares to be given to employees who spend up to £1,500 of their own money. So by a three-stage process we finally reach £7,500 a year in shares. The legislation could have been a lot shorter if the policy were a little less targeted. If the government did not care about the mix of free and purchased shares, it could have halved the bulk of the legislation by simply allowing £7,500 a year for employees. Within that overall limit, an employer could have been left to decide how many shares to give an employee and how many to invite them to buy. As well as being simpler, this would have left decisions on the precise targeting of the policy in the hands of employers. That is the best place for those decisions: employers know how their businesses work and how to motivate their staff. The draft legislation on corporate venturing relief also shows how over-precise targeting generates complexity. The main relief is that a trading company investing in certain other trading companies will get 20% knocked off the cost of its investment through a cut in its corporation tax. But to get this, the investing company has to be very careful about which companies it invests in. Of course the companies have to be engaged in the types of trade that the government wishes to encourage. The new relief is very similar to enterprise investment scheme relief for individuals, and the list of qualifying trades is borrowed from there. But the government wants to encourage investment in companies which have individual shareholders: so at least 30% of the shares have to be in the hands of individuals. The government also wants to encourage patterns of shareholding in smaller companies. That may be a nice idea, but it cannot really be crucial to the main aim of getting large trading companies to buy shares in smaller trading companies. If the requirement were dropped, the objective of getting funds into smaller companies would still be achieved. Keeping it in adds complication to an already tangled legislation. It is also going to lead to practical difficulties. Will the directors of an investor company lie awake worrying that an individual shareholder might sell shares to an unconnected company, taking the shares held by individuals below the 30% threshold? Or will investee companies have to impose restrictions on share transfers, telling individuals that they need permission to sell shares? That would simply deter individuals from buying shares in the first place. My message is this. State in one simple sentence what you want to achieve and then, when working out how to achieve it, do not add anything that is not essential. – Richard Baron is deputy head of the policy unit at the Institute of Directors.

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