Financial Secretary to the Treasury Jesse Norman and Treasury officials gave evidence to the Treasury Committee on Monday 18 January on topics including the tax policymaking process, business and personal tax after the pandemic and how the tax system can raise revenue without hindering growth.
House of Commons Treasury Committee Inquiry - Tax after Coronavirus
Rt Hon Jesse Norman MP, Financial Secretary to the Treasury at HM Treasury
Beth Russell, Director General, Tax and Welfare at HM Treasury
Mike Williams, Director Business and International Tax at HM Treasury
You can watch the session live here.
You can find out more about the Tax after Coronavirus inquiry here.
The session began at 3.30pm. The liveblog of the session, prepared by the External Relations team, can be found below:
Mel Stride, chair of the Treasury Select Committee, began by asking how the Treasury would address the deficit and the UK's COVID-19 debt.
Jesse Norman said that the UK was experiencing a period of unprecedented change in the economy, meaning that this was not a moment when the Treasury could undertake long-term planning. He added that the Treasury was making investments in infrastructure to keep the economy going during the crisis. But he warned that the Office for Budget Responsibility (OBR) was struggling to come up with consistent forecasts. The FST said that Chancellor wanted to deliver a strong and sustainable economy in the long-term. He said that this didn't necessarily entail the need for tax rises, specially if the economy responds better from COVID-19 than predicted.
Stride asked if the Conservatives' 'Triple Lock' manifesto commitment remained realistic? Norman did not want to be drawn on this, saying it was a matter for the Chancellor.
Are any current tax rates not at the ideal rate for the Laffer Curve, asked Stride. Norman said the trouble with Laffer Curve is that even if you think you have a peak for a tax, you may not have taken into account interactions with other taxes. Norman did not have any specific taxes in mind in his response.
Steve Baker (Conservative) said the current state of public finances and the government's long term spending committments were unsustainable and this had been the case for the past decade. Norman said the 2010 Conservative government had tried to take control of the deficit and added that today's Treasury was focused on stabilising the economy before considering wider policies. Norman said that the UK's debt was sustainable. Baker said any commitments made in relation to pensions and healthcare were politically infeasible. Norman disagreed, saying it is hard to predict, Some of the levers that get pressed have powerful effects. No minister wants inflationary get out of the position we are in, however, he said.
Is there a case for longer set of fiscal rules to bring down debt predictions? Norman replied that now was not the time to bring in new fiscal rules. No Parliament can bind its successor, he said.
Baker asked about Alan Greenspan's essay which warned of ever more unaffordable spending pledges by government funded by inflation. Norman said it was important to have strong institutions and checks and balances on governments.
Baker asked if the UK was at its limit of taxation?. Norman said all ministers understand the damage of excessive taxation. At different points in UK history we have had low taxation. There is little direct link between economic growth and levels of taxation.
Dame Angela Eagle (Labour) asked if Norman worried about erosion of the tax base because of globalisation, such as through the rise of online platform companies. She asked what the Treasury could do with new taxes to capture their value? The UK led on BEPS, replied Norman, adding the Government has not been shy about innovating with tax, such as with DST. There is a very active debate that taxes should be levied as widely as possible. He said the government had consulted on plans for an online sales tax and was still considering the responses.
Eagle asked about land taxes. Norman said the problem was being able to properly value for all the assets under concern. He described it as a theoretically interesting case. Norman also said council tax was just one form of property tax which is under 'live' political review.
Is the best way to deal with COVID economic crisis to stimulate demand? asked Eagle. Norman said the Chancellor wants to revert to a strong and stable economy.
Eagle asked about the proposed cut to Universal Credit in April, which she said would take 4 per cent of income away from some of the poorest in our society.
Norman said that this discussion was miles away from his tax policy responsibilities here. But he said this debate was not about cutting the benefit, rather that it had been a response to the pandemic that had been justified in the circumstances.
Mike Hill (Labour) thenasked what Parliament could do to improve its role in tax policy making?
Mike Williams from HM Treasury emphasised the role that consultation increasingly plays. In areas where you can consult, e.g. Structures and Buildings Allowance, you are going to get a better product. He said that one of the main challenges lay in building in time for consultation.
Hill then asked if the government had high level objectives for the tax system.
Norman said Williams was right about the importance of consultation. He had tried to push longer-term strategic approach over his areas of responsibility such as HMRC. All tax policy starts with Adam Smith, starts with ambition for tax system to be deficit-neutral, to be fair and efficient in its operation. Charlotte Barbour (ICAS) had said in evidence that there had been far more constructive working together between the profession and HMRC. Looking at whether we might publish more of these documents in a separate (from the Budget) tax day in order to give them more profile. Sometimes suggested the Budget is like Mount Etna - it throws everything else into shadow. We're experimenting with that in our own minds at the moment. I want to reassure you we are thinking about that - whether we could have a 'tax day' after the Budget where we might give some of these ancillary measures more profile.
Hill then asked how Parliament might can improve scrutiny. Williams said that hearings like this are part of that process. He also suggested that a separate tax day might help Parliament's scrutiny function. Russell added that government was trying to publish more to help Parliament, such as earlier consultations, tax impact notes, and more costings on tax reliefs.
Hill acknowledged that difficult decisions are going to have to be made, including on tax and asked how government envisaged Parliament's role in this?
Norman said it was important not to overstate the issue, saying that he didn't feel underscrutinised by Parliament. He suggested that Parliament doesn't always use all the time it has, noting that some of the sessions, including debates on the floor of the House, ran short of their alloted time. He said this could mean that Parliament thinks this is a sufficient level of scrutiny. He cited the Institute for Government, who have suggested that the Treasury Committee might want to do more on tax, saying that he would welcome this and expressing a desire to see such 'zeal' being more widely shared.
Mike Hill also asked whether the Finance Bill committee should take oral evidence.
Jesse Norman said that Parliament had the opportunity to take a variety of different forms of advice and input. He said that the public bill committee stage of the Finance Bill involved a range of stakeholders who were invited to get involved in the process. He said that opposition parties in particular had been able to be very heavily briefed by stakeholders, so in that sense, there wasn't any absence of input. He said that it would be for Parliament to decide whether it wanted to adopt measures of this kind.
Stride concurred with Norman that there was plenty of scrutiny of his role. He picked up on the suggestion of a 'tax day' suggestion and asked the FST for an update on HMT's view on this. Norman suggested that this was a longer-term ambition and he agreed to a request from Stride to update the committee via a follow-up letter setting out some suggested timescales.
Julie Marson (Conservative) asked about tax policy consultation and announcements, beginning with statements that had been made outside the usual Budget timetable.
Norman said the preferred approach was for Parliament not be subject to 'an unstructured dribble of announcements'. But the pandemic had meant that Parliament was not operating in a perfect environment in terms of obeying 'the perfections of the consultative process. Norman said that he was keen to have a structure which allowed consultation on a scheduled basis, so people know what to expect and prepare for. A tax day would help with this, as it would add structure and allow the government could publish consultations when these are ready.
Norman said he had been staggered by how much ancillary work officials had been able to do while also rolling large scale interventions to support the UK's Covid response. He said this had been remarkable. In some areas, the FST said government had been able to use the virus to accelerate reform, for example in its tax administration strategy and digitalisation process. He said it was possible not appreciated just how much HMRC had had to evolve, not just as a traditional tax authority, but as a resilience and economic support agency. He said these latter aspects should continue to be considered after the pandemic, with the authority possibly stepping up to provide a productivity enhancement agency function.
Marson then asked whether criticisms of the consultation framework, particularly in relation to changes to duty free, had been fair.
Norman said that he thought the VAT RES consultation was a very rare case where there had been consultation, High Court dismissed a claim. So not fair to criticise the process. He added that people had expectations but the basis of the decision was a different one. But in general, he said the government wanted predictability.
Siobhain McDonagh (Labour) asked about international taxation and what had changed in respect of BEPS issues since 2012. Norman said an important constraint had been placed on the ability of multi-national companies (MNCs) to move profits out of jurisdictions and that a framework had been laid for longer term work. He said he was hopeful that more tax has been paid as a result of these reforms.
McDonagh asked if companies could have done more, especially those who have received Coronavirus support.
Norman defended the changes made by the government, through country by country reporting, corporate interest restriction rules and hybrid mismatch rules, which have raised billions for the Exchequer.
Williams added that the BEPS project (which finished in 2015) had led large businesses to be more concerned about the substance of their activities. He said this had been a significant shift, with some businesses now more attuned to such developments.
McDonagh then referenced the Digital Services Tax (DST) and forecasts that it was only due to raise £400 million. She said that many of the biggest brands were finding ways to avoid it and asked when Britain wouild take a more forceful approach to ensuring it collected more tax from these companies.
Norman defended the DST, saying it was a well-designed instrument that was not intended to raise a huge amount of tax. He said its purpose was to raise tax in a new area of the economy as part of a wider settlement. He said that the OECD's efforts to find a global solution would help the UK moves towards a more interational approach that would, over time, render the DST obsolete.
McDonagh then focused on UK offshore financial centres. She welcomed a U-turn on CDOTs public register of beneficial ownership and asked when would it come into effect?
Norman was unable to give a precise date for its introduction and said that it would deliver more transparency and less avoidance and evasion.
Felicity Buchan (Conservative) asked questions around employment tax and the 'three person problem', asking if it was fair that people who could be doing the same job end up paying different amounts of taxes depending on their employment status. Norman said that people doing same work should be taxed in similar way.
When asked if the Chancellor had implied in earlier remarks that this would constitue an alignment of rates, Norman said that he would let the Chancellor's words speak for themselves. He pointed out the divergence in tax and the consensus is that there was no principled basis for this. He said that thi was not just the view of the Treasury, but that of academic experts.
Buchan cited the Taylor Review of Working Practices, which had recommended alignment, and asked what had happened to that review?
Norman said that it was important to recognise that the Taylor review was an area that the government took seriously. He described it as a long term process, which had been delayed by the pandemic. But he added there had been a series of recommendations that had been quickly implemented. He said that the wider agenda was extremely complex and required a series of actions that are the responsibility of BEIS. The government had said in its manifesto that it would bring forward an employment framework that is fit for purpose.
Russell said that the Treasury had been working with BEIS. He said that aligning tax statuses was a very complex process, moving from case law to statutory test. He said it would be important to think in terms of who will be affected and the costs to employers as a result. But he cautioned that the government's priorities in recent months had been on its Coronavirus response.
Norman added that BEIS was considering the question of worker's rights issue and that it would not be right to say they were working towards an alignment. He said the government's priorities were to make workplaces fairer, more flexible, and more supportive.
Rushanara Ali (Labour) asked the FST about the government’s strategy to tackle tax avoidance and asked about the decision not to stay within the DAC-6 rules. She said this had ‘weakened’ HMRC’s ability to tackle tax avoidance.
Jesse Norman said ‘nothing had changed’ in the government’s approach to avoidance. He said DAC-6 is an EU directive and with the UK having left the EU, it no longer applied. Instead, he said the government had adopted the OECD’s rules, which had been agreed as part of the UK-EU trade deal. He said this was a global agreement and that there was no reason to think that it was a less stringent agreement. This global approach, Norman said, fitted well with the government’s DOTAS scheme. He added that the government was committed to a ‘Continued, resolute focus on avoidance and evasion.’
Next, Ali asked about money laundering by shell companies in the UK and asked if there was a need for tougher action. She noted a recent Fincen report suggesting that 3,267 shell companies based in the UK and its overseas dependencies had been identified as engaging in money laundering activities. Norman acknowledged that there was more governments could do to deal with an ‘evolving’ situation.
Rushanara Ali then focused on COVID support schemes and asked the FST how much of the £3.5bn of fraud and error in payments identified by HMRC had been recovered? Norman said HMRC continued to publish regular updates on the level of fraud estimated in the system and the level of recoveries made. He stressed that some of this could be legitimate errors, as opposed to fraud. He said he would ask HMRC to provide the committee with updates. Beth Russell of HMRC said that the figure was not indicative of the actual amount of fraud within the system and that this was more likely to be a planning assumption.
Anthony Browne (Conservative) focused on tax simplification and the role of the Office for Tax Simplification. Jesse Norman described the OTS as a ‘very helpful and useful institution’.
Browne then asked how the tax system could be simplified and why the UK’s tax system was so complicated. The FST said that while it was relatively straightforward to support the principle of simplification, ‘very few people can actually come up with a simplification that isn’t highly inequitable.’
He said that the government was working hard to consolidate the system. He said that the tax system evolved over time, that it gradually became more complicated over time and that each generation there was a ‘clear out’ of the more complicated aspects of the regime. He suggested that the UK was currently at the end of one of these cycles, dating back to the tax reforms undertaken by Nigel Lawson in the 1988 Budget.
Asked by Browne how the OTS could be made to work more effectively, Norman said that the 5-year review cycle for the OTS was forthcoming and that this would provide an opportunity to consider how it is functioning. He refused to be drawn on what this review would entail, but noted in general terms that its work had been ‘effective and helpful’ to Ministers.
On the simplification of the tax system, Beth Russell said that the principle of a single fiscal event was an important factor in maintaining simplicity within the tax system. Mike Williams added that a measured, proportionate approach to enforcement by HMRC was also an important factor to consider.
In his final question, Browne asked whether the government should revisit plans floated by former Chancellor George Osborne to merge Income Tax and National insurance. Norman noted that this was ‘a perennial topic of discussion’ but refused to be drawn any further, except to note that identifying the issues involved in such a policy change – and addressing them – were two very different tasks.
Harriett Baldwin (Conservative) focused her questions on Brexit and issues relating to VAT and rules of origins. She first asked if VAT on female sanitary products had been abolished in Northern Ireland. Mike Williams confirmed that the zero rate of VAT is applied in Northern Ireland, the same as in the rest of Britain.
Baldwin then asked if the impact of rules of origin meant that an international border now existed between Northern Ireland and Great Britain. Jesse Norman refuted this suggestion. Despite some initial problems, the FST said that the arrangements for goods moving into Northern Ireland had been going ‘remarkably smoother than anticipated’, praised HMRC for an ‘astonishing job’, adding that it might take some time for the new system to fully bed in.
Baldwin asked if the government had been aware that some businesses moving goods from Great Britain to Northern Ireland could face tariffs as a result of the rules of origin being moved from GB to NI. Norman agreed to follow-up with the committee in writing, noting that the situation was ’fantastically technical and complex’. If issues have arisen, Norman said that these would have unexpected and that the government has committed to mitigating these as far as possible.
Baldwin then asked why HMRC decided not to apply its existing rules for non-EU mail orders to EU countries which require VAT to be added when goods enter into the UK.
Mike Williams said that this was best looked at in the context of changes already underway and the difficulties involved with low value consignments being moved into the UK, such as those involving the Channel Islands.
He said that from the perspective of small businesses operating in the UK, they may question why they have to apply VAT when they sell products, compared with goods bought from abroad where VAT is not applied.
Williams noted that Low Value Consignment Relief was due to be abolished in the EU from July 2021. He was asked if HMRC was sufficiently resourced to deal with the huge volume of parcels that will now enter the UK and require checks to ensure that they are VAT compliant. He expressed optimism that the rules in place would help to make it harder to evade VAT and that the Treasury had been in extensive discussions with the parcel industry to help ensure compliance and ensure a level playing field. He also said that the role of internet platform providers was an important part of this process as they can provide businesses sellers with support to ensure their compliance. Williams also said that the National Audit Office would likely have an interest in ensuring that the government was meeting its objectives.
Alison Thewliss (SNP) focused her questioning on business support schemes and support for those excluded from the government’s Coronavirus support measures. She began by asking if the government had any plans to provide businesses with greater certainty about their tax affairs, citing the 2010 Corporation Tax roadmap as an example. The FST said that he couldn’t comment on specific measures but that there was a recognition that businesses benefited from the ‘tremendous value’ of being provided with an indication of the government’s direction of travel in relation to tax policy.
Thewliss then asked about the merits of introducing a three year loss carry back for otherwise profitable businesses that have suffered because of the pandemic and windfall taxes on businesses that have profited during the pandemic. Jesse Norman said it would not be appropriate for him to comment on the merits or otherwise of such policies in advance of the Budget.
On Coronavirus support schemes, Thewliss asked if people submitting tax returns from the 2019/20 tax year would be able to access the Self-employment support scheme from 31 January. The FST said that the government was being ‘pressed’ on the issue and that it continued to keep the matter under review. Asked if there was a timescale for this, Norman recognised the seriousness of the issue but would only say that it would take place ‘in the fullness of time’.
Noting that the Scottish Government has attempted to provide support for some self-employed workers through a grants scheme administered by local authorities, Alison Thewliss asked the FST if this was a measure that could be replicated by the UK Government. Norman said he would be interested in seeing how the scheme works in practice and its associated costs.
Thewliss then asked if the government would consider the proposal for a Directorate Income Support Scheme that has been suggested for directors of limited companies. Norman said that the government had been engaging with the group that had put forward the proposal, which he described as a constructive and clear contribution. Some issues had been identified with how the proposal would operate in practice, but the FST said that he hoped those involved in the proposal would continue to engage to ensure a solution could be found.
Jesse Norman was also asked whether the existing Coronavirus support measures would be continued beyond their current expiration dates or recalibrated to help businesses unlikely to return to full capacity in the short-term. The FST said that he wouldn’t go beyond the deadlines currently committed to, but noted that the chancellor would reflect on the future of these schemes as the pandemic progresses. He remained hopeful that the vaccination roll-out would ensure that the government could begin to plan more optimistically for the future.
Finally, Norman was asked about the fate of those that will have gone without government support for almost a year by the time of the March Budget. He acknowledged these concerns and gave a robust defence of the government’s approach to providing pandemic support. He said that Ministers had not indented to deliberately exclude groups from people from support and that the government had had to work quickly to deliver schemes that reached those in the greatest need, without risking high levels of fraud within the system. He added that these measures were continually kept under review and that Ministers and officials were learning from their implementation.