Far reaching debate on the economy follows Spring Statement

Chancellor Philip Hammond updated Parliament on the state of the economy and the nation's finances in the Spring Statement. There were no tax announcements made, as this was not a fiscal event, but a number of consultations were launched. These ranged from reforming the corporate tax regime to address the challenges of the digital economy to whether the design of the VAT registration threshold can incentivise small businesses to grow.

The Opposition did not comment much on the announced VAT review and taxation of MNCs, but were far more vocal on the impact of austerity on public services and what they have termed the cost of living crisis, during the debate which followed the Spring Statement yesterday (13).

The background to the Spring Statement were statistics from OBR that showed the economy grew by 1.7 per cent in 2017, compared with the 1.5 per cent forecast at the Budget, and the OBR has revised up its forecast for 2018 from 1.4 per cent to 1.5 per cent. Forecast growth is then unchanged at 1.3 per cent in 2019 and 2020, before picking up to 1.4 per cent in 2021 and 1.5 per cent in 2022.

The UK was the only major economy to make hundreds of tax and spending changes twice a year. Hammond said: “In 2016, I took the decision to move to a single fiscal event in the autumn, giving greater certainty to families and businesses ahead of the new financial year and allowing more time for stakeholder and parliamentary engagement on potential fiscal changes.” In his speech, he said the Government is balancing debt reduction against the need for investment in Britain’s future, support to hard-working families through lower taxes and our commitment to our public services.

In keeping with the Spring Statement’s status as not being a fiscal event, no new tax announcements were made by the Chancellor. However a number of consultations were launched, including:

  • Further consultation through an updated Treasury policy paper on options for reforming the corporate tax regime to address the challenges of the digital economy, with government considering going it alone if there are delays in reaching international agreement.
  • A call for evidence on whether the design of the VAT registration threshold can incentivise small businesses to grow.
  • A consultation on changes to Entrepreneurs’ Relief designed to ensure that it does not discourage entrepreneurs from seeking external finance for their companies.
  • A call for evidence to explore how changes to the tax system or charges could be used to reduce the amount of single-use plastics.
  • A call for evidence to explore how the tax authority can engage with online platforms, such as eBay and Airbnb, to promote tax compliance among their users.
  • A consultation on extending the existing tax relief available for self-funded work-related training by employees and the self-employed.
  • A joint HMRC-Treasury consultation on possible options for how a split payment system could be used to combat online VAT fraud, with a standard rate split, flat rate scheme and net effective rate being put forward as possible options.
  • A call for evidence looking at the role of cash and digital payments in the new economy, including cracking down on tax evasion and money-laundering.

Chancellor Philip Hammond said the Government has closed the tax gap to one of the lowest in the developed world, raised £175 billion by 100 measures against tax evasion and avoidance and collecting 28 per cent of all income tax from the richest one per cent in our country. He added that all regions have benefited from the boom in employment. “All regions will end this Parliament with lower unemployment and higher employment.”

Shadow Chancellor John McDonnell said growth in our economy was among the lowest in the G7 last year —the slowest since 2012.  The Chancellor and his predecessor have not tackled the deficit, he said, just shifted it on to the Secretary of State for Health and the shoulders of NHS managers, doctors and nurses throughout the country and the Home Secretary and the Justice Secretary. On austerity, he said: “The Conservatives chose to cut taxes for the super-rich, the corporations and the bankers, and it was paid for by the rest of us in society. They even cut the levy on the bankers in the Finance Bill.”

Tax

Making Tax Digital

Labour's Helen Goodman wants Making Tax Digital (MTD) put back by a year because of very little progress on the roll-out of broadband in the countryside.

Hammond replied: “No. We made our decision to defer Making Tax Digital mainly because there was a need for greater awareness among businesses and more time to prepare for the relevant software and so on. We are confident that businesses will be able to roll out the programme on the current schedule. Although I readily accept that there is some disquiet among potential business users, I also confidently predict to the hon. Lady that once they have got used to it, they will find that it is hugely beneficial to them, and that it saves them a lot of time and angst in their dealings with HMRC.”

VAT

Conservative Kevin Hollinrake said the VAT threshold on business is a disincentive to growth and an incentive to avoid tax through cash deals. He wants the Chancellor to look at the ‘entire VAT regime’ to take account of the tax administrative impact.

On VAT, Hammond is minded not to lower the VAT threshold because at its current level it keeps a lot of small businesses out of the administrative burden of VAT. “However, we are keen to ensure that the cliff-edge effect, which has a damaging impact on businesses that are trying to grow, should be addressed if it is possible to do so. The consultation will pursue those ideas.” He also told DUP Sammy Wilson that there will be a consultation into air passenger duty and VAT on the hospitality industry in Northern Ireland.

‘Plastics tax’

How can Hammond say that the plastics crisis is urgent and then propose a deadline for the elimination of plastics in a quarter of a century’s time? asked Green MP Caroline Lucas. She also asked what had happened to the ‘latte levy’.

Hammond told Lucas that she should be pleased with the consultation on VED for vans but did not reply to her other remarks. The Chancellor is wary of ‘shooting ourselves in the foot’ by making a change in relation to packaging that then massively increased food waste and the energy cost of food that was wasted.

Intergenerational fairness

Conservative Ken Clarke wants Hammond to look at ‘anomalies’ relating to justice between the generations, which include the ‘absurd’ circumstance that older employees pay less tax on their income than their younger colleagues because they do not pay national insurance. “It cannot be right that people in large houses enjoying capital gains from the housing market have those disregarded for means test purposes if they ever need certain types of social care.”

Hammond replied that he is a ‘great fan of the concept of intergenerational fairness’. He added that all Chancellors look at all options in the run-up to every Budget. He undertook to do that with Clarke's suggestion in the run-up to Budget 2018.

Other tax

Conservative Stephen Hammond urged Chancellor Hammond to do nothing to hinder the UK’s internationally competitive corporate tax rates. Party collegaue Mark Harper pointed to recent research published by the International Monetary Fund, ‘which shows that the choice made in 2010 to deal with the deficit primarily by controlling spending rather than raising taxes, as the Opposition would have done, was the right choice’.

Labour's Chuka Umunna spoke in favour of a ‘proper, hypothecated NHS tax’ to help to give the NHS the funding that it needs.

Lib Dem Alistair Carmichael said that money is not there for our hospitals, our schools and our police because of previous decisions to make premature cuts to capital gains tax and inheritance tax.

Hammond replied that since the rate of corporate tax was cut to 19 per cent, the yield has gone up 54 per cent. Hammond was non-committal on a hypothecated tax for the NHS, other than to say ‘we are looking at that issue’ and hopes it can be done in a ‘serious, cross-party basis’.

Pay/Apprenticeship levy

SNP's Alison Thewliss said the Chancellor continues to ignore the fact that his ‘pretendy living wage’ is not for under-25s, as 21 to 24-year-olds will earn 45p less an hour; 18 to 20-year-olds £1.93 less; 16 and 17-year-olds £3.63 less; and apprentices a full £4.13 less. The number of apprenticeship starts plummeted after the ‘botched’ introduction of the apprenticeship levy last year, said Labour’s Stephen Timms. He wants the Chancellor to recognise that to get anywhere near the three million apprenticeships target by 2020 will require much more ‘radical’ action, and for him to return to that at the time of the Autumn Budget.

SNP’s Ian Blackford pointed out that the OBR book is very clear that real earnings growth will ‘remain subdued’ for the next five years. ”Slow earnings growth, higher inflation and cuts to the benefit system are resulting in falling incomes for the poorest households and in rising inequality.”

Hammond said that as a result of the introduction of the national living wage and its subsequent increase to £7.83 an hour, income inequality in this country is now lower than at any point under the last Labour Government. “It is falling in this country while it is rising in all other G7 countries.” On the apprenticeship levy, Hammond said the additional £80 million announced today is targeted specifically at small, non-levy-paying businesses to help them to take on apprentices. He also explained that in a couple of weeks, at the beginning of April, large businesses that pay the levy will be allowed to transfer 10 per cent of their levy funds to small businesses in their supply chain to support their engagement and training of apprentices.

Scotland

SNP Westminster Leader Ian Blackford said over the decade from 2010-11 to 2019-20, Scotland’s block grant has been cut by £2.6 billion in real terms, which is an 8.1 per cent cut. He cited the Fraser of Allander Institute, which has noted: “By 2019/20 the resource block grant will be around £500 million lower than in 17/18”. He called on the Chancellor to bring forward plans to return the £175 million that has already been paid in VAT by Police Scotland and Scottish Fire and Rescue Service.

He closed his speech by saying: “Scotland’s new taxation powers should not exist simply to mitigate UK Government austerity. In Scotland, the SNP Government have gone further to support those on low incomes. In the recent budget at Holyrood, a package was secured that raises the threshold of a guaranteed three per cent increase for those earning up to £36,500, benefiting up to three quarters of Scottish public service workers—a Scottish Government on the side of hard-working public sector workers.”

Conservative Luke Graham said that given that Scotland’s GDP growth is forecast to be less than one per cent, he wants the Chancellor to drive economic activity across all Scotland’s constituencies through initiatives such as the Stirling and Clackmannanshire city deal

Hammond replied that in the Autumn Budget in 2017, Scotland received an additional £2 billion of funding as a result of the measures announced then. “As for the VAT on police and fire services measures being vindictive, the Scottish National Party Government were told explicitly that it would not be possible to refund VAT if they went ahead with the police reorganisation, and they decided to do so anyway.”

Brexit

Conservative: Iain Duncan Smith asked Hammond to consider setting out in the Red Book what he plans to do with the money that we will no longer have to pay in contributions to the European Union. Jacob Rees-Mogg highlighted the OBR’s report (table B.7 and chart B.4) that assumes that the Brexit dividend will be recycled into ordinary expenditure and asked what the Chancellor intends to spend money on (This is the assumption that the OBR has adopted at the last three fiscal events. It has assumed that any saving from a lower contribution to the European Union will be recycled to fund things that would have been funded by the EU, but will no longer be so).

Hammond replied that in the forthcoming Budget the Treasury will look at taxation and spending over the future period. He told Mogg that the Government has already made certain commitments—to the agricultural community, for example—to maintain spending at EU levels until the end of this Parliament.

The full debate can be read here.

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