The last Treasury questions before the summer recess saw Labour MPs attacking corporation tax cuts and Conservatives defending them. Avoidance, Brexit, fiscal risks and the case for merging income tax and national insurance were also on the agenda.
Conservative Bob Stewart said that if we raise corporation tax, it is normally passed on by business to customers, and that if we lower it, ‘we hope that prices will come down’. Financial Secretary to the Treasury Mel Stride agreed, saying the burden of corporation tax does not only fall on shareholders. He argued that Labour’s policy of increasing corporation tax would see less investment, lower growth, lower productivity, lower wages and higher prices.
Labour’s Adrian Bailey asked why business rates have not been cut rather than corporation tax. His argument is that when manufacturing businesses invest, they often lose any benefits of corporation tax reduction because of higher business rates. The Financial Secretary responded that the government have already done a great deal in terms of providing business rate reliefs. “There will be more to come on that in the Finance Bill”, he added.
Philip Hollobone (Conservative) asked how much the corporation tax take had gone up since the rate was cut. The Financial Secretary replied that as the corporation tax rate has decreased to 19 per cent, ‘we have seen a 50 per cent increase in the take, which is an amount in the order of £18 billion’.
Annaliese Dodds, a new addition to the Labour Treasury team, claimed that “Most economists prioritise building business confidence and improving infrastructure and skills over cutting corporate tax rates. Is the Minister aware that lowering corporate tax rates now presents the appearance of Britain trying to undercut countries with which we need to agree a decent Brexit deal - at a time when businesses are not confident in the Government’s leadership, but are instead “aghast” and “confused” at their approach to Brexit?” The Financial Secretary responded that ‘a huge increase in employment’ and a ‘record drop in unemployment’ which was largely driven by business. “If the hon. Lady is seriously suggesting that the recipe for increasing the confidence of business is putting up its corporation tax to 26%, she has, I am afraid, missed the point,” he retorted.
In response to a different question on corporation tax receipts, the Financial Secretary told Jeremy Quin (Conservative) that the OECD had made it clear that corporation tax increases are the most harmful tax increases for economic growth. “By keeping business taxes down, in 2015-16 we saw a record number of inward investment projects creating more than 1,600 jobs per week,” he said.
The new chair of the Treasury Select Committee, Nicky Morgan (Conservative), drew attention to the ‘Fiscal Risks Report’ published recently by the Office for Budget Responsibility which had warned that governments should expect ‘nasty fiscal surprises from time to time’. Given this, and the uncertainties posed by Brexit, “should not a responsible government not worsen uncertainties and risks by the decisions that they take?” she asked. The Chancellor responded that the way to build resilience into the economy was to have strong public finances, and the only way to have a sustainably growing standard of living is to have rising productivity over the medium and long term.
The DUP’s Sammy Wilson encouraged the government to reduce the deficit by encouraging economic growth, rather than increasing taxes or reducing spending. He also launched a broadside against those who ‘predict dire effects from Brexit, even though their predictions to date have been proved wrong’. The Chancellor agreed, saying that the government’s aim is to enable the economy to grow faster and increase productivity so that ‘we can have sustainable jobs and economic growth that produces the taxation to support our public services as well as rising living standards for our population’.
Tax Avoidance and Evasion
Labour’s Catherine West asked the FST Mel Stride if enough is being done to tackle companies that promote tax-avoidance schemes, or whether there is still a tendency for the big four accountancy firms to ‘regulate the big four, via the big four, in order to protect the big four’. The Financial Secretary said that, since 2010, the government ‘have raised £160 billion by way of clamping down on exactly those behaviours’. He added: “In the forthcoming Finance Bill there will be further measures to make sure that over the ‘scorecard period’ we are bringing in between £7 billion and £8 billion in addition, in corporate tax avoidance measures.”
The FST confirmed to fellow Conservative Robert Courts that the top one per cent pay over 27 per cent of tax, and the wealthiest 3,000 people in our country pay as much as the poorest nine million. “Under Labour, the poor paid more tax relative to the wealthy, not less”, he added.
Income Tax/National Insurance merger
Neil Parish (Conservative) asked the Financial Secretary to make an assessment of the potential merits of merging income tax and national insurance. The minister replied that: “The Government are committed to simplifying the tax system. In 2015, we asked the Office of Tax Simplification to provide an independent assessment of the alignment of income tax and national insurance contributions. We have already taken action in a number of places highlighted by the report. However, alignment now would cause significant upheaval for millions. Now is not the right time for further reform in this area.”
Parish pressed his point, arguing that, as national insurance and income tax revenues go into the same pot, it would be simpler and clearer to merge the two and have one single income tax. The minister responded that the government “recognise the value of merging national insurance and income tax where that is practical and achievable, and there are some measures coming up in the Bills in the autumn that will address that in certain circumstances, but to do it right across the piece at this stage is perhaps a long-term aspiration rather than one we will be addressing in the short term.”
Labour’s Geraint Davies said that as people go into the higher tax threshold they stop paying more national insurance. An impact of merging the two would be to reveal that the British tax system is ‘not as progressive as people think’, and make the case for those with the broadest shoulders to pay more. The Financial Secretary responded that national insurance and income tax function in different ways and have different roles in the tax system. He said the government had been progressive on income tax. For those earning over £100,000, the Conservatives have removed the personal allowance, ‘that, plus national insurance, means that the marginal rates are up to 62 per cent at that level of income’.
The Chancellor told Conservative William Wragg that the UK will have increased the tax-free personal allowance by over 90 per cent compared with 2010, completing a decade of sustained tax cuts for working people. Tom Tugendhat was told that technology such as Fintech is driving transparency to show the hidden taxes imposed by many companies on investment. Paul Masterton called for the Scottish Government to reverse its decision to double the large business supplement, restore rates parity on both sides of the border and ‘allow Scottish businesses to compete on a level playing field’. Bob Stewart was told by the Financial Secretary that the Government has no plans to tax the winter fuel allowance. Craig Tracey said lowering corporation tax to 19 per cent has incentivised business investment in North Warwickshire and Bedworth by companies such as Aldi, which has its headquarters there, In response to pressure from Edward Leigh the Chancellor confirmed “that when we leave the European Union on 29 March 2019, we will also leave the single market and the customs union. Those are matters of legal necessity.”
Economic Secretary to the Treasury Stephen Barclay tried to calm Rachel Reeves’ concerns that personal contract purchase plans for financing cars have gone up by 394 per cent in the past five year. Barclay said the Financial Policy Committee noted in its recent report that consumer credit is growing at a lower rate than it was under the previous Labour Government, but loss rates on lending remain low, as they are at present. Rachel Maskell was told that no date has been fixed for the DCLG consultation on business rates. Heidi Alexander said the UK must stay in the EEA because a Canadian-type deal, which is 'what the Government are now aiming for' is a hit to GDP of £16 billion, which is equivalent to a four pence rise in the basic rate of income tax.
The full session can be read here.