Chancellor plays straight bat to committee probing on tax reform

The House of Commons Treasury Committee took oral evidence from the Chancellor, Rishi Sunak, officially as part of its inquiry into the economic impact of coronavirus, though other issues were also covered. Also attending was Dan York-Smith, Director of Strategy, Planning and Budget, at the Treasury.

The committee pressed the Chancellor on the broad question of whether taxes would rise after the pandemic, and a number of particular taxes which might be reformed, including stamp duty land tax and capital gains tax, but Sunak played a straight bat, saying he was not going to comment on future fiscal policy.

Brexit

Sunak told Steve Baker, Conservative, that we will have a fully functioning border on 1 January 2021 but will implement a brand-new border in phases because it is ‘pragmatic’ and it is only going to take a few months to do it. He said: “It is right that we ease people into the new set of arrangements. That is something that will be helpful for business. It will help us adjust. The key thing is that no one should be under any illusions that we are fully committed, prepared and ready to transition to a new set of trading relationships.” Accelerating the CDS system is one of his areas of focus over the summer.

Baker pressed Sunak to look at the obligations on the EU, in the withdrawal agreement, to adopt reasonable exemptions to the Union Customs Code proposed by the UK.

Business rates

The Government remains committed to a fundamental review of business rates. The Government will publish the next stage of that relatively shortly, and remains committed to that timetable, said Sunak. Dan York-Smith said the Government are about to publish a call for evidence that will go into a bit more detail about the areas on which they are seeking input from businesses and others.

CJRS/SEISS

The Chancellor declined to agree with the statement of Chair Mel Stride (Conservative) that the overall level of taxation must rise to lessen the national debt. Sunak added that the Government will meet the ‘priorities’ set out in the manifesto.

In excess of one million people have not qualified for the SEISS or furlough schemes because the Government say it is too complicated to administer especially for them, said Stride. Sunak replied that he could ‘appreciate and sympathise with that, and I can only apologise for it’. He said there would not now be the opportunity or intention to introduce new schemes. In a latter answer, he said the £50,000 threshold was reasonable because it means that 94 per cent or so of those who were majority self-employed were covered. Stride raised specifically the 700,000 individuals working through their own companies and receiving self-employed income by way of dividends. Sunak replied, slightly tetchily: “If it was straightforward, given that we have managed to do lots of other things, there is no reason why we would not have done it.”

Angela Eagle, Labour, asked about criticisms that the job retention bonus scheme is a huge dead weight, and that the ‘eat out to help out’ scheme has been launched too early. Sunak said bonus scheme will serve as a significant incentive to protect employment, especially for SMEs, and particularly for those who are lower paid. It is easy to say that the job retention bonus should be targeted, but no one is able to say which sectors they think should be excluded from it, he complained. On the furlough scheme, he said it was not practical or feasible to figure out which companies and industries should or should not be eligible, across one million businesses and nine million employees. On the eat out to help out scheme, he said HMRC said that there was a sound policy rationale for it, but it was difficult to model the impact precisely in an environment of uncertainty, given the speed and novelty. He accepted Eagle’s concerns that women have been impacted by the lockdown, saying that is why he has put various interventions in place to help protect the two million jobs in the hospitality sector. This will also help young people, those from ethnic monitories, and some of our more deprived coastal and rural communities, he claimed.

Alison Thewliss, SNP, highlighted the Committee’s report, published last month, which highlighted that over one million people have not been eligible for support through either the job retention scheme or SEISS.  Sunak took some comfort in the results and analysis that the Government published alongside the statement last week, which showed a distribution analysis of how household incomes have fared during this crisis. That analysis very clearly shows that those in the lowest income deciles of household income have had their incomes protected the most on average.

Rushanara Ali, Labour, complained about the job retention bonus saying it will lead to perverse incentives, with businesses bringing back people they might have made redundant so that they can benefit from the furlough scheme, and getting rid of people who might have put their lives at risk to do their jobs during the pandemic. Sunak said in an ideal world, everything would be completely targeted, but it is not an ideal world that we live in. We are dealing with something happening at a scale, speed and severity that requires a different response. If you are a small business with five employees whom you have furloughed and brought back, £5,000 will make a lot of difference, said Sunak, adding that all the labour market evidence we have from previous hiring subsidies or apprentice incentives, which are typically set at around 11 per cent, has shown positive labour market outcomes.

Corporate debt

Stride said hundreds of thousands of SMEs will be saddled up with debt as they come through the crisis. We will want them to invest in growing jobs, but they will presumably be worrying about de-leveraging and shoring up their balance sheets, he continued. Sunak was not completely persuaded of the scale of the problem now, partly because corporate debt levels in the UK were in a relatively healthy place coming into this crisis. (Capital gearing and net debt as a percentage of GDP have close to halved, from circa the 70s to circa the mid-30s to 40s, from the crisis to now.) The Chancellor added that it is not necessarily sensible for the Government to have individual equity stakes in millions of very small businesses.

Free ports

Sunak said free ports are an example of something that he believes in, and it is probably a good test case for his broader ambitions, because free ports use private enterprise to encourage growth and productivity. They are firmly part of our levelling-up agenda, he added, saying it was something that makes us look outwards to the world, grows our exports and keeps us connected to places around the world.

Parental leave

Thewliss asked if the Chancellor would consider extending parental leave for three months, to which Sunak replied, with regard to the maternity side of things, we did make a change to the self-employment scheme, after engaging with stakeholders to make sure that those whose eligibility was threatened by them not qualifying in the relevant year had the ability to use previous years to qualify for the scheme. That was fixed and accommodated reasonably recently.

OTS CGT review

The Chancellor said it is a reasonably business-as-usual practice for the Treasury to ask the Office of Tax Simplification (OTS) to examine various parts of our tax system to make sure they are up to date. In the last year or two, the OTS has looked at inheritance tax. Before that it has looked at capital reliefs, VAT, stamp duty, income tax and national insurance. Capital gains tax (CGT) is the only one it has not looked at, if you look back at everything it has done over the last few years. It is just a matter of annual administration that it picks a new area of tax policy, or we jointly pick an area for it to look at. CGT is just the ‘next one on the block to look at’, he asserted.

Pensions

Mike Hill, Labour, asked if the Chancellor is planning to revisit the pensions triple lock in the next Budget. Sunak replied that he cannot comment on future fiscal policy now. When pushed, Sunak said on the triple lock, the committee has had evidence from others that has pointed out the anomaly in the way that it might work, depending on the very particular trajectory of declines in earnings and then rapid rises over the next few years.

Social Care

Sunak said where the implications are for many years into the future, if we can find a broad cross-party consensus on a sustainable solution, that would be preferable, so that people have confidence that it will be a ‘sustainable solution’.

Stamp duty land tax

Felicity Buchan, Conservative, called for a root and branch review of SDLT because it is a tax on social mobility. Sunak said there were predictions that transaction volumes would not recover for a few years, which was worrying because housing movement catalyses lots of other economic activity. He claimed the big improvement the Government have made over time is “to move to a progressive ‘slab’ system, versus the ‘slice’ model that we had before” (possibly the Chancellor had his ‘slab’ and ‘slice’ muddled up?). Dan York-Smith added that most countries have a form of transaction tax and a form of current property tax, like the council tax that we have.

Tax rises

Harriett Baldwin, Conservative, asked what taxes are being looking at to possibly go up? Sunak said there are some tough choices to come, but it is difficult for him to go into more detail than that. Steve Baker, Conservative, worried that we are at the ‘taxable capacity’ of the UK economy and that, were Sunak to raise the main rates of taxation, the Government would not raise more money. Sunak said we do not tax our way to prosperity. “We can debate where the exact line one draws for that is and where we are on the Laffer curve, but that broad view is one I share. We want people to keep more of their own money. We think that is good for growth. I believe all of that, as you know.”

VAT

Buchan is worried the changes to VAT will not be passed on to consumers. Last time around, when we had a generalised VAT cut in 2008-09, about four out of five businesses passed that VAT cut on to consumers, replied Sunak. The changes to VAT are due to end on 12 January. Is there an argument that that is exactly when you need to encourage people to go out to restaurants and bars? asked Buchan. Sunak said it is a fair point and there are four or five countries that have done targeted VAT cuts in these sectors and almost all of them end in October, December and January. He added that alcoholic drinks are not part of the VAT reduction in the UK because we want to be mindful of the public health.

The full session is here.

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