Treasury Committee report: 'Tax after Coronavirus'
By Charlotte Barbour, Director of Taxation
8 March 2021
Charlotte Barbour outlines the report ‘Tax after coronavirus’ issued by the Treasury Committee just before the UK Spring 2021 Budget.
Introduction
The Treasury Committee has recently published a wide-ranging report ‘Tax after coronavirus’. This inquiry was set in motion in July 2020 and ICAS submitted written evidence. ICAS was also invited to give oral evidence and we are very pleased to see some of this reflected in the final report.
This inquiry could have been enormous; however, to its credit the Committee has managed to produce a report of less than 90 pages. It focused on elements of the tax system it considered to be in need of reform, such as reform of existing taxes, whether there should be new taxes on wealth and business, and the need for a tax strategy.
It is both interesting and most encouraging to see a considered political analysis of UK taxes which commanded cross party support within the Treasury Committee. ICAS hopes that the Treasury Committee will keep tax within its sights and conduct further inquiries into some of the specific areas noted below.
The impact of coronavirus
As the report notes, the coronavirus crisis has generated one of the greatest shocks to the UK’s economy in the past 300 years and has accelerated the UK’s public debt at the fastest rate ever seen in peacetime. The pandemic has exacerbated a number of long-term pressures on the public finances and on tax revenues.
The public finances challenge
There is an analysis of the scale of the long-term public finance challenge, the extent of the fiscal legacy of the pandemic, and the taxable capacity of the UK economy. The Committee notes that significant fiscal measures, including revenue raising, will probably be needed in future. It also notes that its expert witnesses said that now is not the time for tax rises or fiscal consolidation, which could undermine the economic recovery.
The recommendation that follows from this is that the Chancellor should set out an initial roadmap of how he intends to place Government finances on a sustainable footing. The Committee would also like reassurance that the Government intends to take steps to ensure fiscal sustainability in future to underpin market confidence and reduce uncertainty for households and businesses that may fear immediate tax rises.
The Budget on 3 March partially addressed this in terms of the Chancellor setting out his aims, although we await 23 March to see what prospective tax changes may be put forward for consultation.
Windfall and wealth taxes
The next area addressed in the report has been much flagged and debated in recent months – can either a windfall tax or wealth taxes help pay for coronavirus?
Should those companies that have prospered be charged a windfall tax? The Committee concludes that introducing such a tax would be problematic, although not impossible.
The Committee also considered whether taxes should be levied on personal wealth, either annually or as a one-off. It concludes that the development and administration of an annual wealth tax would be extremely challenging, and it does not recommend it. However, it recognises that were the wealth to income ratio to increase considerably, the political arguments for some form of wealth tax would become stronger.
It was also noted that although those who gave evidence were sceptical of an annual wealth tax, there was more support for a one-off wealth tax. (Two Commissioners from the Wealth Tax Commission attended one of the oral evidence sessions and this reflects their conclusions.)
The Committee also considered the existing capital taxes and said that there is a compelling case for their reform – many have since asked whether a consultation may be issued on 23 March to consider options for IHT and CGT reform.
The major contributors to tax revenues
Another key area of discussion is the main sources of revenue available to the Government; income tax (in England and Northern Ireland), national insurance and VAT, and if large amounts of tax revenues are required whether these taxes need to be raised. However, the report notes that any increases in the rates of these taxes were ruled out in this Parliament by the Government’s “tax lock” manifesto commitment. The Chancellor partially addressed this need for funds on Budget Day through fiscal drag by freezing allowances and thresholds.
The report also touches on the subject of whether to recommend a wholescale merger of national insurance contributions and income tax - but says that the Government should consider what can be done to remove the distortions gradually over time.
The Committee does not recommend any significant changes to the scope of VAT. However, it suggests that the Government should, following consultation, set out principles and objectives for the VAT system, now that the UK is free from some of the constraints of EU law.
Corporation tax
In terms of corporation tax, the Committee said that a moderate increase in the corporation tax rate could raise revenue without damaging growth, especially if balanced with fiscally appropriate measures to help business, such as enhanced loss relief and capital allowances. Perhaps the Chancellor had sight of the report whilst preparing his budget – although the Committee’s view of what might be a ‘moderate increase’ is not pinned down in the report.
Taxes and pensions
Comments on pensions tax relief are sweeping: the report says that given the regressive nature of the benefits accruing to individuals from the current arrangements on pension tax relief, especially those in the top earnings decile, the Chancellor should urgently reform the entire approach to pension tax relief.
Taxation of different forms of work
A recognised problem is the differing tax treatment of the self-employed and employees, which the Committee considered to be confused, unfair and unsustainable. The Committee says that major reform is long overdue, and the Government should try to eliminate the so-called ‘three person problem’ altogether – it is a priority for reform.
Stamp duty land tax
Clearly, stamp duty land tax has become a politically sensitive matter. The Committee says that SDLT should be a priority for reform - the tax should be set at a level that optimises revenue while encouraging home ownership.
In Scotland and Wales this could prove difficult given that LBTT and LTT are the primary source of fully devolved tax in each jurisdiction. For instance even with short term measures, the Budget on 3 March announced an extension of the SDLT ‘holiday’ in England and Northern Ireland but it is understood that this will not be replicated in Scotland.
Tax strategy
Last but not least, the report notes that the Government should draw up a draft tax strategy for consultation, setting out what it wants to achieve from the tax system and identifying high level objectives. Any such strategy should include principles for:
- The role of the tax system in meeting fiscal goals
- Securing a neutral tax system which treats similar activities in similar ways, including fair taxation of different structures of work
- Ensuring that taxation is progressive and fair to future generations
- Meeting climate change goals for net zero and other environmental objectives whilst giving consideration to those who are on lower incomes
- Ensuring growth of business and employment, including a new business tax roadmap to provide investment certainty for business and a five to ten-year strategy for corporation tax rates
- Reducing the tax gap
- Indirect taxes such as VAT which were previously covered by EU law which no longer applies
- Reducing compliance costs, especially through appropriate tax simplification.
We believe there is much in the Committee’s report that chimes with the paper that ICAS issued in 2020 – ‘The Future of tax in the UK’.
ICAS would like your views
ICAS will continue to input to public policy and to represent member views - please send us your feedback and comments by emailing tax@icas.com.