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This article was first published in the May 2016 UK edition of Accounting and Business magazine.

Making tax law in the UK is a broadly similar process to making any type of law, but there are a number of very important differences. The main process starts with parliament, with the introduction of the finance bill shortly after the chancellor’s annual Budget speech (usually in March) setting out the government’s intended measures, tax rates and so on.

Ordinarily, any bill must be considered and passed by the elected members of parliament (MPs) in the House of Commons and the unelected peers in the House of Lords (but as we shall see, tax laws are somewhat different). Any amendments – and the vote on the bill before it passes from one stage to the other – require a simple majority of the MPs or peers who are present and who vote.

Any so-called ‘money bill’ (one that is concerned only with national taxation, public money or loans, such as the finance bill) must be introduced first of all in the House of Commons and then passed to the House of Lords. For any other type of bill (such as a company law or criminal justice bill), the process can be reversed, with the bill being introduced in the Lords and then passed to the Commons.

The normal legislative process in the Commons (and then in the Lords) is for a bill to go through the following stages (see also diagram):

  • First reading – a formality, no debate
  • Second reading – the Commons debates the aims/policies of the bill
  •  Committee stage – the Commons goes through the legislation, line by line. The finance bill (and some other constitutionally or ethically significant bills) will go through a committee of the whole house and, as its name suggests, all MPs may be involved. Next comes scrutiny and debate by a public bill committee – in the case of the main tax law, the finance bill committee – in which a representative sample of about 36 MPs pore over the legislation and debate any amendments.
  • Report stage – the bill returns to the Commons for debate. This is the government’s last opportunity to introduce any amendments.
  • Third reading – a formality, after which the bill is passed to the House of Lords, where this same process is repeated.

There is a convention that only the government can propose tax-raising legislation or make amendments to the finance bill – the opposition cannot do so. However, if the government accepts that the opposition is making a valid point on some issue, it tables its own amendment that mirrors that proposed by the other party.

The House of Lords scrutinises finance bills in the same ‘first reading, second reading’ process, as does the Commons, after which the bill receives royal assent and becomes an act of parliament.

However, under the Parliament Act 1911, the House of Lords must pass a money bill without amendment and within one month. The passage of a finance bill through the Lords is therefore a swift technical procedure. The Finance Act 2015, for example, was introduced as a bill into the Commons on 14 July 2015 and didn’t complete its third reading in the Commons until 26 October. In the Lords, the bill went through second reading, committee stage, report stage and third reading in a single day (10 November).

Secondary legislation

Acts of parliament are known as primary legislation. But such acts often also provide for secondary legislation – predominantly statutory instruments (SIs) – which typically set out more detailed rules than can be contained in an act. They are usually brought into force by government ministers without parliament’s explicit approval, although parliament can veto an SI. (In a few cases, an SI requires the approval of both chambers, though they cannot amend it.) Examples include amendments to regulations governing PAYE (pay as you earn) or ISAs (individual savings accounts).

Income tax rates, bands and personal allowances are contained in the relevant finance act and not secondary legislation. Secondary legislation can, however, be used to change some tax rates. For example, although the UK is subject to European law with regard to VAT, the UK legislation is contained in the Value Added Tax Act 1994, which set the rate of VAT at 17.5% but gave the Treasury the power to change the rate through secondary legislation. However, that process is subject to annual renewal, so the Finance (No 2) Act 2010 was used to raise the rate to 20% as from 4 January 2011.

In October last year, secondary legislation containing new tax credit regulations was considered by the House of Lords after being approved by the Commons. But neither parliamentary convention nor the Parliament Act itself prevented the Lords from voting for an amendment, which would have resulted in delaying the implementation of chancellor George Osborne’s tax credit cuts until the government produced a scheme to compensate low-paid workers. It sparked a constitutional storm, but in the end Osborne agreed to soften the blow with transitional arrangements.

Draft legislation

One important development in recent years is for the government to not only publish a consultation document but also draft legislation, typically around the time of the chancellor’s autumn statement. This gives parliamentary committees as well as the tax profession and other interested parties the opportunity to comment on the policy proposals and the precise legislative wording.

‘The professional bodies that respond have as their goal the integrity of the tax system,’ says Richard Wild, head of the tax technical team at the Chartered Institute of Taxation. ‘We’re trying to make the tax system better, easier to understand, etc. We also point out where there might be unintended consequences.’

Typically, an amended version of a draft finance bill will be presented to parliament following the chancellor’s next Budget. Anti-avoidance measures aren’t usually included in such procedures, since they have to be announced with immediate effect, with retrospective legislation enacted at a later date. Apart from that, however, Wild says, ‘The more HMRC and the Treasury consult, the better legislation you get.’

Andrew Sawers, journalist