Lib Dem conference 2021: G7 tax deal needs strengthening, small business needs support

24 Sep 2021

The online-only Liberal Democrat conference saw party members back tougher rules on a global minimum rate of corporation tax, extension of coronavirus economic support measures and investigation of a windfall tax on pandemic super-profits. The party has backed a stronger emissions trading scheme in preference to a carbon tax, and members are debating how to fund a Universal Basic Income.

Contents:

Corporation Tax – Lib Dems seek a higher global minimum rate
Business Taxation – Windfall profits tax should be investigated
Boosting Small Business – Extend covid-support schemes and tax breaks, say Lib Dems
Income tax not NI should take the strain
Carbon pricing – Strengthened ETS preferred to a carbon tax
Green taxes – Allow home owners to offset spending on insulation against income tax
Universal Basic Income – party ponders plan to replace income tax and NI allowances
Land value tax – could it fund a UBI?
Europe – Closer alignment and more help for businesses trying to trade
Federal UK – members back a regional approach
Social media levy proposal referred back
Conference News in Brief

Corporation Tax – Lib Dems seek a higher global minimum rate

The Lib Dems support a global minimum rate of corporation tax but think it should be higher than the proposed 15 per cent. They also want profitable subsidiaries of large groups to pay tax in their own right so the groups don’t escape the minimum rate because they fall short of the 10 per cent profit-margin threshold.

The proposals appear in a motion passed on the first day of the conference, titled ‘Towards a Fair Global Corporation Tax System’. Moving the motion the party’s Treasury spokesperson Christine Jardine MP praised the G7 agreement as “an important step towards a global tax system” and said that: “We should celebrate this deal for the huge breakthrough that it is – a once in a generation opportunity for far-reaching change”.

However Jardine – and the motion – felt that a 15 per cent global minimum rate was inadequate. She called on the UK government to back the Biden administration’s original plan for a rate of 21 per cent, which, she said, would raise an extra £6.8 billion per year for the UK Exchequer. (In the motion this estimate is attributed to the IPPR.) She contrasted the proposal to the government’s national insurance increase saying it would mean tax being paid by global corporations rather than low paid earners.

The motion passed by the party begins from the premise that business tax “shouldn’t be punitive or stifle innovation, but large profitable corporations operating in the UK should pay their fair share of tax.” It draws attention to analysis suggesting that the replacement of the Digital Services Tax (DST) with the current version of ‘pillar one’ of the G7 agreement in the UK will result in a combined tax cut of £232.5 million for Amazon, Facebook, Google and eBay and, in respect of Amazon in particular, suggests that as the agreement stands the company could be exempt from paying tax in the UK under ‘pillar one’, as its overall profit margin does not exceed 10%.

The motion calls on the government to:

  • Back President Biden’s proposal for a global minimum rate of corporation tax at 21%, and persuade other countries to do the same.
  • Listen to developing countries’ concerns and ensure that they will benefit from the new system.
  • Resist international pressure to remove the DST before the new system is fully operational.
  • Ensure that the implementation of ‘pillar one’ in the UK does not lead to a tax cut for some of large and profitable tech companies such as Amazon, Facebook, Google and eBay.
  • Ensure that profitable subsidiaries of large business groups pay tax in their own right as necessary, so that tech giants such as Amazon aren’t exempt from new rules due to the 10% profit-margin threshold.
  • Ensure that current UK Corporation Tax payments don’t count towards liabilities arising under ‘pillar one’, which would lead to a tax break for large multinationals.

Business Taxation – Windfall profits tax should be investigated

The Lib Dems are calling on the government to publish a report analysing the effect on the UK Exchequer and on competition of a Windfall Tax on the super-profits of large corporations that benefited from public health restrictions during the pandemic.

The call came in the same motion that argued for changes to the G7 corporation tax agreement. Explaining the policy, Treasury spokesperson Christine Jardine pointed to a big increase in profits made by Amazon, in particular, during the pandemic. Business spokesperson Lord Fox noted a number of companies had announced share buybacks, and suggested this should put them ‘in the spotlight’ for such a tax.

A poll carried out in May found that a windfall tax applying to online delivery companies that have reported higher profits during the pandemic was the most popular way to cover the £2.8 billion cost of lockdown to local authorities. The poll was carried out by Survation on behalf of trade union GMB, who represents workers in the NHS, local government and social care. The second most popular way of filling in the financial gap was a rise in corporation tax, and the least popular was a rise in council tax.

The motion passed by the conference also reaffirmed the party’s existing commitments to:

  • Restrict the ability of multinationals to unfairly shift profits out of the UK to low tax jurisdictions.
  • Encourage investment, with simplified capital allowances, an increase in the Annual Investment Allowance and higher Writing Down Allowances to encourage more investment by the largest businesses.
  • Introduce a General Anti-Avoidance Rule, setting a target for HM Revenue and Customs to reduce the tax gap and investing in more staff to enable them to meet it.

Boosting Small Business – Extend covid-support schemes and tax breaks, say Lib Dems

The Lib Dems are calling for the extension of the Coronavirus Job Retention Scheme (CJRS) and Self-Employed Income Support Scheme (SEISS) until at least the end of 2021, and for the extension of SEISS to cover currently excluded groups of self-employed people. They also want to quadruple the employment allowance.

A motion titled ‘Boosting Small Businesses and Jobs in the Post-Pandemic Economy’ was passed on the first day of the conference. The proposer of the motion, Business spokesperson Sarah Olney MP, said that the pandemic had devastated small businesses and quoted a ‘dire warning’ from the Federation of Small Business that 250,000 businesses could be forced to close by the end of the year.

In his leader’s speech Ed Davey promised the Lib Dems would be the champions of small business, offering them “a radical fair deal… where business rates are replaced with a land tax; where the tax-free allowance against employers’ National Insurance Contributions is raised substantially; and where the biggest businesses pay more tax.”

The second of these refers to a new policy of quadrupling the annual Employment Allowance to £16,000 for two years, allowing businesses to typically pay zero employers’ NICs on their first five employees. The party would consult on whether to increase the Employment Allowance long-term.

Additionally the Lib Dems want the government to develop a strategy to boost UK start-ups and growth-stage companies that create high-skill, high-wage jobs, with a particular focus on those that can help tackle the climate emergency, and on encouraging co-operatives, mutual and social enterprises.

Other new policy proposals in the small business motion include:

  • Extend CJRS and SEISS until at least until the end of 2021.
  • Avert a wave of insolvencies and job losses by implementing innovative debt restructuring solutions for viable small businesses struggling due to coronavirus.
  • Maintain the 5% reduced rate of VAT for hospitality and tourism until the end of the 2021–22 financial year.
  • Give struggling businesses in the retail, hospitality and live events sectors relief on their deferred VAT payments, so that cash is available as working capital as they open back up.

The motion also re-affirmed some existing policies in this area, such as:

  • Establish dedicated support schemes for the worst-affected sectors, such as hospitality, tourism, charities and the creative industries.
  • Ensure that a large proportion of new jobs created are green jobs.
  • Expand higher vocational training, including by transforming the broken Apprenticeship Levy into a wider ‘Skills and Training Levy’.
  • Fix the Self-Employed Income Support Scheme by extending it to cover the self-employed people who are currently excluded.

Income tax not NI should take the strain

The policy of putting 1p on all income tax rates to increase funding for the NHS and social care, on which the Lib Dems fought the 2019 election, was reaffirmed. The party opposes the government’s national insurance increase.

The Lib Dems debated their key policy themes and messages on Sunday morning, endorsing a motion and paper titled ‘A Fairer, Greener, More Caring Society’.

In his keynote conference address party leader Ed Davey attacked the Conservatives for “their unfair National Insurance tax hike, and their heartless Universal Credit cuts.” The themes paper reaffirms the Lib Dem alternative proposal: raising £7 billion a year in additional revenue by putting 1p on Income Tax, with this money to be ringfenced for spending on the NHS (focusing on mental health services) and social care.

The themes paper promises to make the £1000 pa uplift to Universal Credit permanent and scrap the sanctions system, to introduce a 20% higher minimum wage for people on zero-hour contracts, and a clearer ‘dependent contractor’ status with basic protections, between employment and self-employment.

The paper criticizes the Conservatives for raising taxes on working people by freezing the income tax personal allowance. Increasing the personal allowance was of course a significant Lib Dem achievement during the coalition years (2010-15).

The paper also summarises the party’s plans “to make Britain the best place in the world to start and to grow a business”. These were set out in the Small Business section above.

Carbon pricing – Strengthened ETS preferred to a carbon tax

The Lib Dems have adopted policy to reform the UK Emissions Trading System (ETS), raising the price of allowances, and linking it to the EU ETS. This marks a decisive break from the party’s former support for a single, economy-wide, carbon tax.

A carbon pricing paper endorsed by the conference proposes to accelerate the decarbonisation of power and industry by:

  • Raising the price of allowances in the UK Emissions Trading System (ETS) by reducing their number and increasing the auction reserve price.
  • Extending emissions trading to cover suppliers of fossil fuels currently outside the ETS.
  • Linking the UK ETS to the EU ETS, creating a larger market for trading allowances and thereby improving its effectiveness.
  • Introducing, in collaboration with the EU, a carbon border adjustment mechanism (CBAM) for high-emission products such as metals or chemicals, protecting UK businesses from competition from imports not facing similar costs.
  • Simplifying the existing system of energy taxes by abolishing the Carbon Support Price and the Climate Change Levy, which will be no longer needed once the UK ETS is more effective.

An amendment to the motion, put forward by Green Liberal Democrats, proposed the exploration of a `carbon fee and dividend` structure, to accompany the proposals set out in the paper, but this was not selected for debate. One speaker in the debate argued against the motion on the ground that it is wrong to allocate a precious resource by price, and rationing is the only fair approach. The chair of the working group who produced the paper, Duncan Brack, said this would be impractical.

In his wind-up speech to the debate Brack explained why the group had come down in favour of an ETS-based approach rather than a carbon tax. He said ETS targets the biggest producers of emissions, and a CBAM would end the need for free allowances; that an ETS is more precise than a tax, where the government would have to set the rate and then guess what the effect would be; and that it enables a phased approach, with ETS not extended to domestic gas until an emergency programme of home insulation has been carried out.

The motion is founded on the principle that while “increasing the cost of using fossil fuels through carbon taxes, emissions trading schemes or other pricing instruments must play an important part in decarbonising the British economy as fast as possible… there are dangers in applying too blunt an approach.” It states that the burdens of decarbonisation must be shared equitably.

Expanding upon this, the paper offers the view that replacing existing taxes with a single economy-wide carbon tax would raise the cost of domestic heating very significantly, while probably not affecting road transport costs at all. “Recycling the revenue through flat-rate payments to households could compensate them for the additional costs of the carbon tax, but would have distributional consequences which could be unfair,” it states. “Although it would be possible in theory to target the compensation more precisely, this would require far more information on every household’s energy use than government currently possesses (which, in any case, can change frequently, with factors such as health, disability and employment) and significantly complicate the measure. For all these reasons we do not support the idea of a single economy-wide carbon tax.”

Carbon pricing was last debated by the party in 2005 and a simple carbon tax applied upstream to ‘primary fuels’ was endorsed then. However a carbon tax has not featured in the party’s manifestos for any of the four general elections since then. The party’s last comprehensive tax policy paper, in 2013, did not address this issue. A member of the working group who produced the paper said that a carbon tax had been looked at by the group but left unresolved. The newly adopted paper supplements broader proposals for emissions reduction which were adopted in 2019.

Green taxes – Allow home owners to offset spending on insulation against income tax

The Lib Dems may no longer want a carbon tax, but the party has plenty of ideas for greening existing taxes, including VAT and stamp duty land tax (SDLT). The party also wants to adapt air passenger duty into a frequent flyer levy.

Measures in the carbon pricing paper to decarbonise homes include:

  • Widening the list of energy and emissions-saving products enjoying the 5 per cent rate of VAT, and extending this lower rate to all household solar PV and battery systems.
  • Allowing owners to offset spending on insulation, low-carbon heat sources, EV charging points and climate adaptation measures against their income tax bills.
  • Graduating SDLT by the energy rating of the property being sold, and offering refunds to house purchasers if they improve the rating within one year of purchase.
  • Protecting households from sudden price increases by delaying by ten years the extension of emissions trading to suppliers of fossil fuels to homes.
  • Keeping electricity bills stable by transferring some levy funding for renewables from electricity to gas bills and to general taxation.

Measures in the paper to decarbonise transport include:

  • Reinstating the indexation of road fuel duty, graduating VED by fuel efficiency and increasing rates for fossil fuel vehicles overall, reducing company car tax for electric vehicles and increasing it for fossil fuel vehicles.
  • Replacing the limited electric vehicle purchase grant with a 5 per cent VAT rate (up to a ceiling), to be phased out as the market expands, and introducing a zero-emission-vehicle mandate for manufacturers.
  • Limit demand for flying by reforming Air Passenger Duty to target the most frequent flyers, and introducing VAT on first-class and business travel.
  • Introducing a charge on airlines for each take-off, and on flights by private jets.
  • Collaborating with the EU in extending the UK ETS to non-EEA flights and in placing a specific excise tax on airline fuel.
  • Including shipping emissions in the UK ETS.

NB. These are selective lists focused on the measures relating to tax.

Universal Basic Income – party ponders plan to replace income tax and NI allowances

Last year’s Lib Dem conference backed the principle of a Universal Basic Income (UBI) but charged a policy group with working up a detailed proposal. At a consultative session this year party members discussed a proposal to turn the tax-free personal allowance into an equivalently valued UBI.

Specifically, the proposal put forward for discussion by the working group (set out in a consultation paper) is to abolish the current income tax free personal allowance and national insurance primary threshold for working age adults, and set an introductory basic income rate equivalent to the full value gained from these allowances (around £71pw at the time of writing), with the intention of raising it thereafter.

The UBI would not be taxable but would be classified as income for the purpose of means-testing Universal Credit (UC). So, for example, someone with no taxable income currently receiving £94 UC per week at the single person’s standard allowance would receive £71 income from the UBI. They would then have £44.73 of their Universal Credit tapered out and so would be left with a new total income of £120.27 per week: a 28% increase.

The basic rate tax band would be expanded so that the point at which individuals start to pay higher-rate income tax would not change as a result of the withdrawal of the personal allowance. Noting that those earning over £100,000 currently have a reduced or zero personal allowance the working group propose that UBI should be phased out or recouped with suitable changes to the uppermost income tax thresholds for these taxpayers.

The working group note that, for individuals with very small incomes, it would be arduous for individuals, and financially of little benefit to the state, to collect taxes. They therefore suggest reporting thresholds below which incomes do not need to be reported to HMRC for tax purposes, of at least £1000 per year for income tax purposes and for incomes under £20pw for National Insurance.

While the removal of the personal allowance covers the cost of UBI for most taxpayers, the proposal requires additional funding to cover basic incomes for those not currently getting the full benefit from the tax-free personal allowance. The working group estimate this cost to be around £30bn per year. They suggest meeting this cost with four major tax changes: a three per cent corporation tax rise (£10 billion) and capital gains tax reforms (£5.6 billion) which appeared in the Lib Dems’ 2019 manifesto, and additionally eliminating CGT uprating at death (£1.2 billion) and reducing pension relief to the basic rate of tax (£13 billion).

Under this proposal significant net gainers would include those who fall through the cracks of the current benefits system and have no income from other sources, students with no income or benefits, those currently receiving UC and households with some adults paying income tax, but some adults not currently earning enough to do so.  Households where all adults are basic rate taxpayers would see little effect. Higher rate taxpayers who are currently making contributions to pension schemes would be net losers. Pensioners and children would be excluded from the proposal.

A lively consultative session saw party members probe members of the working group about other options for funding the UBI, including Land Value Tax (see below). Based on responses to the paper, and on the further deliberations of the working group, a full policy paper will in due course be drawn up and presented to Conference for debate.

Land value tax – could it fund a UBI?

A policy motion reaffirmed the party’s commitment to a Land Value Tax (LVT). Meanwhile a fringe meeting debated the particular question of whether a Universal Basic Income (UBI) could be funded with LVT.

The policy motion, titled ‘Rebuilding Communities’, recommits the party “to a Land Value Tax collected by local authorities as a replacement for Business Rates, to disincentivize land banking by developers.”

The following day Nikhil Woodruff of the UBI Center presented to a fringe meeting. He said a 1% annual LVT (while preserving all existing taxes and benefits) would fund a UBI of £16 per person per week. If you just have a LVT by itself it is slightly regressive, said Woodruff. But if you use the proceeds for a UBI it is very progressive – the Gini index of income inequality falls 3.9%. A UBI funded by a 1% LVT would cut poverty by 20%, he said. (This modelling does not include UBI in the means test for benefits.)

The idea of using LVT to fund a UBI got a prickly reaction from some land tax advocates. Supporters of LVT tend to see the tax as a replacement for other taxes - property taxes such as council tax, but also often enabling cuts to bigger taxes such as income tax. It was noted that the UBI Center’s calculations assumed the continued existence at current levels of taxes such as council tax.

The UBI Center’s modelling has been carried out using the PolicyEngine tool created by Woodruff and a colleague at the Center. This publicly available tool allows anyone to design a reform to the UK tax and benefit system (including but not limited to UBI), and to explore the impact of that reform both on society and their own household.

Europe – Closer alignment and more help for businesses trying to trade

The Lib Dems reaffirmed that they are seeking the closest possible alignment between the UK and the EU towards customs union, single market and freedom of movement, including minimising tariff and non-tariff trade barriers.

This position was set out in a motion passed at the conference. The motion also calls on the government to do more to support small businesses struggling to trade with Europe, including by significantly increasing the £20 million SME Brexit Support Fund and broadening its eligibility criteria, and by unifying all the information on UK-EU trade on a single platform where it is easily accessible. They also want the government to appoint a new Minister for SME Trade.

The spring 2021 party conference instructed the party’s policy committee to “carry out a programme of work, including consulting widely within the party, to determine the best possible future framework for the UK–EU relationship across all policy areas, with the aims of: (a) demonstrating the benefits to UK citizens and businesses of a much closer relationship compared to the government’s inadequate measures; (b) recommending roadmaps for the UK to rejoin the Customs Union, Single Market and other EU agencies and programmes as appropriate; and (c) maximising public support for eventual UK membership of the EU.”

The policy committee has set up a small group to take this forward. They held a consultative session at the conference and put forward – through the policy committee – a motion at this conference on strengthening cultural, artistic and educational ties between the UK and EU. For next year’s spring conference they are planning a motion and short paper on Single Market and Customs Union membership.

Federal UK – members back a regional approach

Party members backed greater powers for the English regions in a series of votes on Sunday, and a target of at least 50% of public spending to be controlled by state, regional and local government, in line with other successful federal states.

This is the second time in as many years that the party has debated the place of England in a federal UK, following a motion which was ‘referred back’ for more work at last year’s conference. This time the policy committee offered members a series of options to choose from.

Faced with a choice between England as a single federal state, with a constitutional standing equivalent to that of Scotland, Wales and Northern Ireland, but with significant powers exercised at regional level, and individual regions within England being federal states, with a constitutional standing equivalent to that of Scotland, Wales and Northern Ireland, with England remaining as a single legal jurisdiction and some common functions being managed at an all-England level, members chose the latter.

They also voted for an English National Chamber with representatives appointed by the English Regions, to exercise England-level powers, in preference to a directly elected English Assembly/Parliament or the UK Parliament holding responsibility for England-wide matters.

The conference also called for the creation of a UK Constitutional Convention, with the aim of drafting a new Federal Constitution that sets out the powers of the government at each tier, founded on the principles of democratic engagement, liberal values and respect for diverse identities, underpinned by a fair distribution of resources based on respective needs.

The House of Lords would be replaced with an elected Senate of the federal UK Parliament which will represent the federal states of the UK.

Under the proposals the UK government would have responsibility for matters including overall fiscal policy, pensions and core social security benefits. Directly elected English regional government (not necessarily based on the current English regions) would have responsibility for a range of significant areas including regional economic development, NHS and social care services and education. A smaller range of functions would be exercised at the all-England level, including the legal system and universities. The powers and standing of local government would be enhanced in the new federal constitutional settlement.

Social media levy proposal referred back

A policy paper on the nature of public debate included a proposal for a levy on social media companies, to fund policies to combat societal harms which occur on their platforms.

This levy was described as analogous to the gambling levy paid by betting companies. “The additional money will fund a variety of mechanisms to redress harms, including lifelong education, public awareness campaigns and counter-disinformation activities,” the paper stated.

The levy would be based on a percentage of advertising revenue raised in the UK. To give an illustrative example, a 0.5% tax on forecast UK social media advertising revenue in 2024 could raise £100m, the party says.

However the paper was ‘referred back’ for further work after criticism that parts of it were not fully thought through. A revised paper will be brought back to a future conference.

Conference News in Brief

Ed Davey was asked about merging income tax and national insurance during a question and answer session. He said it had some merits: it would bring unearned income into NI; if you did it in a fair way it would take some low paid people out of NI. But he also saw pitfalls: pension income doesn’t have NI on it and you wouldn’t want to ‘clobber poorer pensioners’. He said he favoured a debate about it.

Members passed a policy motion on international trade calling for the extension of full parliamentary sovereignty to trade agreements, requiring a parliamentary vote before any trade agreement can receive Royal Assent. The motion also calls for increased transparency on trade deals and a multilateral judicial process instead of ISDS (investor-state dispute settlement).

An emergency motion on ‘Solving the Supply Chain Crisis’ proposes scrapping ‘the arbitrary salary threshold for work visas, which prevents British businesses from recruiting the workers they need’. It also proposes ending the categorisation of workers into “skilled” and “unskilled” for visa purposes.

Conference passed a motion calling on the Government to tackle fraud and scams more aggressively, including by naming and shaming the banks with the worst records on preventing fraud and reimbursing victims, to help consumers make an informed choice and drive improvements across the industry. The motion also calls on the government to explicitly include a duty on social media companies and search engines to prevent fraud in the forthcoming Online Safety Bill, including a requirement to ensure that any adverts for financial services they host are from genuine, regulated firms.

Speakers at a fringe meeting on the future of high streets thought that the pandemic might normalise not just 'working from home' but 'working from local' – with workspace hubs and working cafes revitalising local high streets.

Lib Dems are sceptical about the significance of any fiscal rule adopted by the Chancellor. Commenting on media reports that Rishi Sunak will adopt a new rule committing him to stop borrowing to fund day-to-day spending within three years, Lib Dem business spokesperson Lord Fox suggested that whatever Sunak announces will be designed to make him look like a fiscal hawk to the Tory Party, while remaining flexible enough to let him do what he wants in practice.

Conference report by George Crozier, CIOT's External Relations Manager