Budget March 2017: Taxation of self-employment causes uproar in the Common
The CIOT has produced a summary of last week's debates on the March 2017 Budget, in the House of Commons. The Budget will continue to be debated this week.
On Wednesday afternoon, the Chancellor, Philip Hammond outlined his Budget, the last to take place in the spring following his announcement last November of a move towards a single fiscal event. The full transcript can be read here. It was Hammond’s decision to raise Class 4 National Insurance (paid by the self-employed) by one per cent in 2018 and a further one per cent in 2019 that proved most controversial among MPs and in the media.
Political reaction to the Budget
Financial Secretary to the Treasury Jane Ellison defended the NIC increase in the Commons, saying that if people do a similar job, get a similar wage and receive similar benefits, they should pay a similar tax. But plenty of Conservatives were willing to criticise it. Tom Tugendhat said we should be encouraging the self-employed, start-ups and people who are taking risks and carrying those risks themselves. Guto Bebb, Wales minister, said the party should apologise for breaking its triple lock promise. Iain Duncan Smith, the former Tory leader, also called for a rethink. Dominic Raab, a former minister, said: “I struggle with the changes to national insurance for the self-employed. I am in the business of cutting taxes, not raising them, particularly for the entrepreneurial classes.” But Charlie Elphicke said the NIC changes were needed because the playing field is so skewed that social justice, fairness and doing the right thing must come first ahead of controversy over a manifesto pledge.
Andrew Tyrie, Chair of the Treasury Select Committee, explained that the Chancellor is ‘pretty heavily boxed’ because he has inherited the tax [triple] lock and a commitment to reduce corporation tax and has his fuel duty freeze. “That puts over 80 per cent of revenue beyond his reach should he need to raise more money. All those tax and spending pledges are the fallout of an electoral bidding war.” On making tax digital, he asked the Chancellor to consider phasing in the lower threshold over a run of three or four years. He doubted the £2 billion of uncollected tax HMRC estimates from MTD. If Hammond is ‘brutal’ about introducing MTD some businesses will go into the grey economy, and some will cease trading altogether, ‘so the pot of gold might not be there at all’.
John Redwood said The Budget was ‘mercifully’ short of measures on the tax side but the Chancellor should not go out of his way to tax work, enterprise and success. Kit Malthouse welcomed the ‘crucial’ simplification of research and development tax credits.
In his speech directly after the Chancellor’s statement, Labour Leader Jeremy Corbyn criticised the Tories for ‘cutting services and living standards of the many to fund the tax cuts of the few’. He said that the chief executives of big companies are now paid 180 times more than the average worker and taxed less; that the big corporations making higher profits are taxed less; that speculators making more are taxed less; and that the wealthiest families are taxed less due to cuts in inheritance tax. Despite generous tax giveaways at the top end, there was no money either for the 160,000 people with disabilities that a court has ruled deserve a higher rate of Personal Independence Payments, he said. Corbyn criticised the Government for ducking ‘really tough choices, like asking corporations to pay a little bit more in tax’. “We have long argued for a clampdown on bogus self-employment but today the Chancellor seems to have put the burden on self-employed workers instead”, he said. (His full speech can be read here.)
Shadow Chancellor John McDonnell said Labour will oppose this ‘unfair £2 billion sole traders tax on the self-employed low and middle earners’. McDonnell said the Budget announcements have failed the fairness test for women who will be hit by a cuts in public services, and the national living wage. He said: “The Tory rigged economy continues for households in our country, who face being £1,800 worse off by the end of the forecast period, and if you are on the National Living Wage by the end of this parliament you face a 25 pence per hour cut.”
Later in the week, McDonnell responded to PM May’s announcement that legislation to implemented the planned rise in class 4 NICs would not be introduced until the autumn. He said it was “alarming… is that the Government didn’t stop and think before announcing such a tax hike. It should have been obvious that they would need to consult first, or at least wait until after their review on self-employment had finish, before announcing such drastic changes.” He called on the PM to “simply show some leadership, rather than this partial U-turn, and just scrap these tax rises for low and middle earners altogether.”
Back in Parliament, Wes Streeting, who sits on the Treasury Select Committee, said the changes would hit 10,000 of his constituents. He said: “If you’re earning £20,000 a year - not a lot in London to make ends meet – your national insurance bill will go up by £20 a month… with the cost of living rising, housing costs, energy bills – that is a lot of money and the Tories are clobbering the wrong people.” Dawn Butler, who has 14,700 self-employed people living in her constituency, said: “It’s a real worry for me. [Residents] will be thinking today I’m going to have to pay more but I don’t get sickness pay, I don’t get holiday pay and yet I am going to have to pay more in contributions. I don’t know what that’s going to do my local economy in Brent.” Rachel Reeves said it is the wrong priority to increase taxes on the self-employed by £2 billion but press ahead with cuts to corporation tax worth £3.8 billion that will primarily benefit the largest businesses. On the new tax avoidance measures, Reeves said there was a “huge discrepancy: we are taking £810 million from tax avoidance, but asking the self-employed to pay an extra £2 billion [National Insurance changes].”
Chris Leslie said the self-employed do not have the same security, which is why we have had the discrepancy in the levels of taxation historically. Meg Hillier, Chair of the Public Accounts Committee, said employers do not create full-time jobs for people in low-paid, part-time jobs because of disincentives in the tax system. Rob Marris said If they wanted to be really inventive, the Chancellor could even do away with employer’s NICs - a tax on job creation - and have a turnover tax, which is much fairer and taxes virtual companies. He also said the UK should align the rate of tax on dividends with that on capital gains tax and income tax. Angela Eagle said Hammond tax-locked himself out of all his options and end up having to plug the gap in social care by taxing the self-employed. Seema Malhotra said the biggest difference in tax take between self-employment and employment lies in the 13.8 per cent employer national insurance, not the national insurance paid by individuals. Sarah Champion, Labour’s Shadow Secretary of State for Women and Equalities, called on the Government to urgently publish analysis of the true impact of their budgets and spending announcements on women and to explain how they intend to reverse this disproportionate impact. Under a Labour Government, all economic policies will be gender audited, she said.
Responding to the Budget, SNP economic spokesman Stewart Hosie said: “We had very much hoped to welcome a concrete package of measures for the oil and gas sector, and particularly for end-of-life fields; instead, we have been offered an options paper. One of my sharp-eyed assistants told me that that is exactly the same promise as the one made in 2016, so perhaps at some point the Chancellor will actually deliver the paper and set out some concrete measures.” He said child poverty will increase by 30 per cent by 2021-22 as a direct result of tax and benefit reforms. But he welcomed the Chancellor having ‘put some flesh on the bone’ for additional support for capital investment and research and development.
Hosie claimed the Government cannot fund their policies because of yield from taxes. The corporation tax yield has flatlined and fallen in real terms for the past four years of the forecast period, he said. “In order to make amends today, or to make the numbers stack up, we have seen a scandalous attack on aspiration and on the self-employed”, he said.
The SNP has published an article on its website titled what was missing from Hammond’s speech. This claims:
In the ten year period to 2019-20 the UK government will have cut Scotland’s budget, in real terms, by £2.9 billion Even according to the Treasury’s own analysis, ‘Tory tax and benefit changes’ will make the poorest households worse off by 2019-20 A ‘hard Tory Brexit’ could cost up to 80,000 Scottish jobs and cost Scotland’s economy up to £11 billion a year by 2030. Hosie criticised the Chancellor for a Budget speech that had ‘barely a mention of Brexit, the most momentous challenge’ and said Hammond had failed to outline what he would do to ‘mitigate the damage which we would expect’. The Government is showing an ‘alarming lack of urgency’ over supporting the oil and gas industry; the SNP and the industry have been calling for specific support for over a year
Lib Dem Leader Tim Farron accused the Chancellor of launching ‘an attack on business’, claiming he had merely offered ‘a sticking plaster’ of relief to those who are going to be hit by business rate increases, adding that the impact of National Insurance rises on self-employed people would be ‘Immense’. Farron said: “This is an OmNICshambles. This slimmed down budget is only 64 pages long but shows the slimmed down ambition of this government. This government is giving tax cuts to the richest and tax hikes for hard-working entrepreneurs. Targeting the self-employed by hitting white van man with a tax hike betrays Theresa May’s pledge to help the just about managing.”
In an article on the Lib Dem website in response to the Budget, the party said the Government’s decision to take the UK out of the Single Market will cost the average UK household over £700 a year. These calculations are based on OBR figures by taking the average household disposable income (£26,300) and multiplying it by the officially projected percentage change in average earnings.
Lib Dem Treasury Spokesperson (Baroness) Susan Kramer analysed the Budget for a video piece on the party’s website. She said the Chancellor had broken a manifesto pledge by introducing a tax on entrepreneurs. Meanwhile cuts in corporation tax will still go ahead and wealthy pensioners will not be ask to pay a greater share.
Green Caroline Lucas had ‘deep concern’ that there was ‘nothing at all in Hammond’s statement about the climate crisis; nothing about investing in green energy; nothing about energy efficiency; nothing about reversing the solar tax hike; and nothing about the public health emergency caused by air pollution’.
DUP’s Sammy Wilson hopes the delay to MTD for some businesses will apply in future years because, ‘as has been pointed out, many businesses do not have the necessary facilities or even access to the internet’. He said many self-employed people are struggling at the margins because they are trying to get businesses up and running.
Scottish reaction to UK Budget
For Scotland, the headline March 2017 Budget announcements were the news that a further £350 million will be allocated to the Scottish Government as a result of the Barnett Formula and that a taskforce will be established to consider options for supporting the North Sea oil and gas industry.
Following the Chancellor’s statement, Scottish Secretary David Mundell (Con) said that the extra £350 million, coupled with £800 million announced in November’s Autumn Statement, meant that Scotland had benefitted to the tune of over £1bn in additional investment from the UK Government. On the back of the Scottish Government’s “historic” new tax powers, he said that it was “now up to Holyrood to use this money, along with their raft of newly devolved powers, to make the right decisions to grow Scotland's economy."
Derek Mackay MSP, the Cabinet Secretary for Finance and Constitution (SNP), welcomed the extra money, but said that the measures contained in the Budget would result in nearly £3bn of cuts over the next ten years. Murdo Fraser MSP, finance spokesperson for the Scottish Conservatives, said the extra £350 million of funding meant the Scottish Government should cancel its plans to freeze the higher rate threshold for income tax at £43,000. Willie Rennie MSP (Lib Dem) said that the extra money meant the Scottish Government had “no more excuses” when it came to extra investment in health and education while Kezia Dudgale MSP (Labour) said the budget provided “insight into the devastating impact a chaotic Tory Brexit will have on families across the UK.”
At First Minister’s Question Time on Thursday, Deputy First Minister John Swinney (standing in for the First Minister), said that the budget did little to support the Scottish Government’s overall objective of delivering sustainable economic growth and ending austerity.
Philip Hammond’s decision to move the Budget to November will leave the Scottish Parliament little time to prepare its own budget. Bruce Crawford, Convener of the Scottish Parliament’s Finance and Constitution Committee made the remarks in a speech to the Chartered Institute of Taxation and Association of Taxation Technicians Joint President’s luncheon, held at the Signet Library in Edinburgh last Friday. He said little time was being allowed for the Scottish Parliament to scrutinise the implications of UK budget statements on Scotland’s financial affairs. (Reported in Moving budget ‘lacks consideration’ for Scotland, Daily Business)