The House of Commons Treasury Committee has launched a new inquiry called ‘Tax after coronavirus’. The inquiry was launched by commitee chair Mel Stride and his fellow committee member Angela Eagle at an online event hosted by CIOT earlier today.
The launch event
Participants in the launch were:
Glyn Fullelove, President, Chartered Institute of Taxation (chair)
Rt Hon Mel Stride MP, Chair, Treasury Committee
Angela Eagle MP, Member, Treasury Committee
Gemma Tetlow, Chief Economist, Institute for Government
Sam Mitha CBE, former Head of HMRC’s Central Tax Policy Group; Trustee, Tax Help for Older People
Heather Self, Partner, Blick Rothenberg
Glyn Fullelove - opening remarks
Hello and welcome to the launch of this House of Commons Treasury Committee inquiry into tax reform after the pandemic.
My name is Glyn Fullelove. I’m the President of the Chartered Institute of Taxation, and we are delighted to be hosting this launch.
CIOT have been, in the words of the committee’s previous chair, Nicky Morgan, ‘frequent flyers’ before the committee, and we are pleased to be so.
We are an educational charity. Part of that is about educating tax professionals to the highest level. But it is also about working to increase public understanding of tax and bringing the experience and knowledge of tax professionals to the table, to help government, and others involved in developing tax policy.
The Treasury Committee plays a crucial role in scrutinising tax policy and administration.
In the last Parliament, under Nicky Morgan, the committee published an important report on Tax Enquiries and Disputes. In particular we welcomed the recommendations, based in part on evidence from our own Low Incomes Tax Reform Group, on how HMRC could improve its guidance and other support for unrepresented taxpayers – recommendations we are very pleased the government accepted.
In the previous Parliament, under Andrew Tyrie, the committee published a report specifically on Making Tax Digital. That report recommended that MTD for income tax be deferred beyond the planned start date in 2018, as CIOT and many others in the tax profession were calling for. This recommendation, and others, were implemented six months later by the new tax minister… a certain Mr Mel Stride.
It is clear that select committees, and the Treasury Committee in particular, matter hugely in terms of influencing both the direction of government policy and how it is administered.
So I am delighted that the committee is launching this exciting new inquiry today. And without any further ado I am going to ask the committee chair, the Right Honourable Mel Stride MP, to introduce the inquiry.
Mel Stride’s opening remarks
Glyn, thank you very much indeed for that introduction. You mentioned the kind words that Nicky Morgan had for CIOT and I would certainly echo those. You were frequent flyers with me when I was Financial Secretary to the Treasury and we have always valued your input. Thank you very much for hosting today.
The inquiry launches with a call for evidence, and one important date that I just wanted to stress up front is the 28th of August – that’s the deadline for submissions to the inquiry, and anybody who wants to do that can do so through the Treasury Select Committee website.
I thought by way of introduction I might answer an initial question which is: why are we holding this inquiry at this particular time?
And I think there are at least three reasons for that. One is that in terms of a fundamental… the tax system, this is not something which has been done for a very long time – one thinks of the 1960s-70s and the Lawson reforms of the 80s in that context.
The second thing is that tax is always centre-stage but is now going to become very central to what the Government does going forward. And what we know – there is a lot that we don’t know about this crisis – but what we do know is we are going to come through it with a very elevated structural deficit that will need to be dealt with
Now the Government can lean on… the headwinds to that. They can look at cutting spending but there seems to be limited political appetite for that and probably also not just within government but also amongst the public at large, particularly given the role that public services and frontline workers have played in helping us through this crisis.
Which really leaves taxation. And so there are going to be some huge decisions to be taken. And if the central plank of government strategy going forward, which is to be able to borrow lots of money at historically low interest rates for some time to come, is going to be met then tax is going to have to do quite a lot of the work I think, in terms of bringing down the deficit.
And the third thing is really, the groups that have been most impacted by the virus itself, so young people, the low paid in particular, I think there will be big questions for the tax system now to answer…
The inquiry is going to be fairly wide ranging – we are going to cover what level of tax is appropriate. We know from OECD data, that as a percentage of GDP our tax take is kind of ‘mid-pack’. If you want to pay a lot of tax you can move to France. If you want to pay very little you can go and live in Mexico, though you might find the public services in France are perhaps better than those available in Mexico.
But there’s a question to be asked about the level of tax that we should be paying as a country overall.
And then I think there are lots of questions around where the future pressure on the tax base lies
Where the areas of erosion of the tax base reside. Lots of big questions around the global corporate tax scene and also questions around the way in which people structure the way in which they work in order to accommodate taxation as well.
But I thought I might just, in the few moments I have left, just touch on three themes or areas I think the committee will certainly be interested in. And I don’t by way of doing that in any way suggest that that means we are going to be embracing these as areas with lots of recommendations, or indeed that I am suggesting we increase taxes in any of these areas, bet nonetheless they are important areas.
The first one is the changing terrain across which taxation is applied. And I’d split that into two parts – one is the international aspect, and this is where obviously the Government has brought in a digital services tax. And this is there really to address the recognition that the international tax regime is not fit for purpose for the 21st century, in the sense that the international tax regime has hitherto apportioned taxation rights to tax jurisdictions where typically the bricks and mortar are, the management is… the intellectual property rests. We need to catch up with companies like your Googles and Facebooks and Amazons, etc, who have a different model and create value through interaction with UK users and that currently hasn’t been taxed.
So I think we will want to have a very close look at how that is going.
The second is the way in which people structure themselves in terms of their own employments. This is the interplay between those that are employed by employers, those who are self-employed, and those who choose to operate through their own business.
There has been a rapid expansion in the number of people operating on their own, through their own company, as opposed to, for example, the numbers that are operating through their own company and employing other people – that’s been fairly static. And all that is fairly suggestive of this being done largely for reasons of tax benefits.
And the Chancellor actually when he brought in the Self-Employed Income Support Scheme did make a nod in this direction. He kind of said: ‘look I’m going to help out the self-employed at the moment but there will come a point where I will be looking to you for something’. I think that paraphrases the approach he took. I wonder whether that will be something around these tax differentials which of course in turn have not only in a sense contributed to the erosion of the tax base, but also mean that things like IR35 have been necessary, which of course have caused their own problems in turn.
The second area is one of young people and in particular this issue of the accumulation of wealth and who has accumulated it. So we saw very high levels of wealth accumulation in the 50s and 60s. It tailed down for a number of decades but it has recently been bumping up again.
There is a concentration of wealth in the hands of a relatively dwindling number of individuals, many of whom are of an older demographic, and there is no doubt in my mind at least – not that I am advocating wealth taxes but we will look at them – that young people will need some kind of break in terms of the tax changes that we look at going forward.
And the final area I would refer to are reliefs. We instinctively, when we talk about raising money, talk about raising tax rates and thresholds and so on, but of course there are vast amounts of tax foregone on the basis of reliefs, and in fact if you took the largest five or six areas of tax relief and abolish them, and I am not saying you could – there would be huge political challenges with doing that, not least because one of those is the absence of VAT on food, for example – it would come to about 10 per cent of the tax take in the UK.
So I think one of the things that I felt when I was Financial Secretary to the Treasury was that the… an understanding then that when it came to reliefs there was often a paucity of information around whether they were truly fit for purpose and whether they were really doing the things that those reliefs were required to be doing, so I think the committee will be looking quite closely at that area as well.
I think I’ve probably had just about my 10 minutes so on that basis can I just thank you once again for hosting this important event today. We are delighted to be working as a committee with you. Thanks very much Glyn.
Angela Eagle’s opening remarks
Thank you Glyn. Obviously since Mel chairs the committee, and you will have seen the published terms of reference, it is fairly clear what we will be discussing, and I think Mel has just given a pretty good summary of some of the issues, so I just want to make a few observations.
Firstly as a veteran of reading the hugely detailed and seven years in the making Mirrlees Report, I think tax reform has to think beyond its intellectual foundations to be practical. I am in politics to be practical, and it is no good having an absolutely beautifully balanced, brand new shiny tax system if it is politically impossible to introduce it. So I would quite like people to concentrate on some of the practical issues of tax reform when they are thinking about the intellectual reasons for things. It has to be practical.
The second thing is that Mel and I would have slightly different approaches to the philosophical and values-based nature of taxes, given we are from different political parties. Many Conservatives want a small-state tax system because they think that creates the best environment for business success. Whereas Labour members often want to see what they can do about redistribution and talk about opportunities and how you can have a reasonable standard of public service. And so philosophical and values issues are quite important in tax. Why are we taxing? What are we doing it for – ona whole system basis?
And I think I’d also be interested in forward looking – trends and pressures on our tax system. Mel has talked about some of that with the high pressure there is on the tax base. Just as Covid-19 has exacerbated the issues facing us, which is we are not and haven’t been collecting the taxes that were forecast to be due for most of this century; there has been under-performance in terms of collecting the taxes that were forecast. And there’s constant pressure on the tax base itself. Some of this comes because of technological change – Mel mentioned digital issues. Some of it comes because of the very global nature of capital, and how quickly it is now possible to move wealth and particularly money around the world, to more favourable tax bases. We are not dealing well internationally with that. Then there are issues that tax needs to be brought to bear to change behaviour. For example the climate change challenge and how we can incentivise a more rapid switch to an environmentally sustainable future.
And then there are issues I think for all advanced economies of demographic change. How are we going to be able to raise enough money given our population is ageing, and the ratios of older people to workers are in decline in the future, and that will carry on. How can we make our tax system more sustainable from that point of view?
So I think forward-looking but it has to be practical as well. Obviously as a Labour member of the committee I will be looking for fairness and distributive issues as well. And I think that from a tax base point of view I am interested in looking at wealth and what can be done about that. Is there an issue, for example, of having a solidarity tax to deal with a hole in the public finances that has been created by the Covid-19 pandemic? What about land taxes? What about green taxes and how best to create a sustainable future. And also as Mel has mentioned, digital.
Now looking at all of those things doesn’t mean I am advocating any of them. What we want to see is what’s possible in the future, what isn’t working, where incentives are the wrong ones, and how we can plug the gaps and holes, particularly presented by things like tax havens which allow certain people to get away with not paying their fair share and doing their best as citizens.
And we have seen a change I think recently, in even the emergence of very many multi-billionaires who are saying that they need to be taxed more effectively so that we can create future socially and environmentally sustainable societies as we move forward. I don’t want to get into the reeds as much as many people do when we get into tax issues. I want to look at some of these huge macro, future-facing points.
Gemma Tetlow, Chief Economist, Institute for Government. Tetlow welcomed the inquiry because it has been a while since the Treasury Committee looked at tax reform as a question. She said there were long term problems with the UK tax system before COVID-19, such as revenues in structural decline, technical issues that lead to distortion and inefficiencies (e.g. taxation of different forms of working), and increasingly mismatches between how much revenue to raise from the existing tax system and growing pressures on public spending such as on health and social care. COVID-19 likely to exacerbate these problems, she warned.
Successive governments have struggled to grasp the issue of tax reform because there are really deep political economy issues around this (such as winners v losers). The result is that over the past decade we have not had a big overhaul of the tax system, leaving governments to find sums of money in less known taxes. But there are areas where there is scope for non-partisan views on tax reform, which she hopes the Treasury Committee will look at.
Sam Mitha CBE, former Head of HMRC’s Central Tax Policy Group; Trustee, Tax Help for Older People. Mitha said the biggest problem facing the British economy before COVID-19 was the stagnant productivity in the UK, not helped by a lack of change in the mechanism of R&D tax credits. There is a strong case for revisiting tax reliefs to encourage productivity growth, he opined. The UK provides tax relief for heavy duty plant and machinery, when in reality the kind of capital that firms are reliant upon now is intangible capital which is not catered for in the tax system. We also neglect human capital, he continued, adding that the apprenticeship levy is not a success.
The Government has inadvertently encouraged the growth of small companies and then allowed individuals to use arbitrage between the different tax rates paid by individuals and partnerships and those who set up companies, Mitha continued, adding that there has not been a readiness to address this. On IR35, he said it is time to address this issue but it is not something government itself can do the ground-clearing work for – however the Treasury Committee can, because of its access to a wider range of people it can speak to.
The tax system contains anomalies that disproportionately affect lower paid people, such as the way the net pay arrangements on pension contributions disadvantage 1.7 million people, a majority of them women. This must be addressed, said Mitha.
Heather Self, Partner, Blick Rothenberg, is delighted that the Treasury Committee is focusing on tax reform. The Committee will find it difficult to solve all the problems in the tax system in the time available, she warns. But the Committee can come up with principles and ideas for roadmaps which any future government can follow; the corporation tax roadmap in 2010 was one of the big success of the Coalition Government, she said.
Employment boundaries are now blurred, and it is going to be difficult to come up with a clear test to determine someone’s employment status, she worries. The tax system can create perverse incentives in relation to people’s employment status. Those incentives are perverse not only for those at a higher level of income, they also impact those on lower pay in the gig economy who might be forced to be self-employed with a lot of doubts over whether they are really self-employed, and therefore the potential savings are not going to individuals, she suggests.
On windfall taxes, she warned that however they are imposed they will not apply in the way the Committee thinks they will; there will be perverse implications. Self said that she once worked for a utility company that took the Government to court over the perverse implications of a windfall tax. She said the real danger is, if you want to use a windfall tax, people fear it will happen again and it can be a real disincentive to investment.
Response and discussion
Mel Stride responded by saying the high-profile problems with the taxation of employment are a priority for the Committee. Angela Eagle compared the tax relief system to ‘barnacles on a boat’, all the ones that have been there for ages sit there growing and when trying to deal with how the economy has moved on today, you can end up with a boat full of barnacles with so many reliefs that you cannot stop the perverse implications from happening. She wants a simpler, dynamic system of reliefs. An industrial strategy can help achieve this, she suggests.
Glyn Fullelove then put some of the attendees’ points and questions to the panel. One question was how the Committee will try and measure the impact of reliefs, and another asked how the Committee will look at how technology can help with tax reform. Eagle said she has always been impressed with HMRC and Treasury ability to analyse the impact of tax reliefs. She wants to see more ongoing reviews of existing taxes, in order to get a dynamic analysis of the effects. Tax systems are now automatic and more electronic, which should mean more data and a better chance of analysing taxes.
Stride said the Committee will look at international comparisons. On Making Tax Digital (MTD), he said it is ‘inevitable and right’. He said MTD will reduce errors and help close the ‘tax gap’. We need to move to more technologically driven interface between businesses and the Government, and there will be efficiency benefits, he suggests.
In a press release launching the inquiry, issued under embargo on Thursday 16 July, the committee says:
Treasury Committee launches ‘Tax after coronavirus’ inquiry
The Treasury Committee is launching a new inquiry called ‘Tax after coronavirus’.
The reconstruction of the economy after the unprecedented economic fallout of the coronavirus crisis is an opportunity for the Committee to examine the tax system.
The Committee will look at what the major long-term pressures on the UK tax system are, what more the UK can do to protect its tax base from globalisation and technological change, and whether such pressures should be met with tax reform.
The Committee will also seek evidence on what overall level of taxation the economy can bear, the role of tax reliefs in rebuilding the economy, and whether there is a role for windfall taxes in the post-coronavirus world.
The Chartered Institute of Taxation (CIOT) is hosting a virtual launch event for the inquiry tomorrow, Friday 17 July. Details of how to register, watch and take part in the event are below.
Commenting on the launch of the inquiry, Rt Hon. Mel Stride MP, Chair of the Treasury Committee, said:
“The UK economy, like many economies around the world, has been placed under extraordinary stress due to coronavirus, with the worst of the economic fallout perhaps yet to come.
“Tax will play a major role in the years ahead in restoring the public finances and ensuring that we have a recovery which is balanced across the UK and fair to all.”
“So the Treasury Committee has launched this inquiry to examine how the Government should approach taxation after the coronavirus.”
Also commenting on the launch of the inquiry, Glyn Fullelove, President of CIOT, said:
“The UK economy faces enormous challenges in the aftermath of the Covid-19 pandemic.
“Whatever policies are adopted to meet the challenges ahead, being able to predict what the UK tax system will deliver under any given set of measures is vital for the Chancellor of the Exchequer. Exploring whether this is possible is a vital task.
“I am delighted the Treasury Committee has launched this inquiry into the weaknesses – and strengths – of the system as it stands.”
The full terms of reference for the inquiry are as follows:
Terms of Reference
The coronavirus pandemic has had a major effect on the UK economy and public finances, and when the economy recovers from the crisis, debt levels will be significantly higher than they were before. The UK will need a strong tax base to maintain the level of public services at sustainable rates of borrowing. The crisis has also brought to the fore issues such as whether the Government’s economic response to the pandemic should be reflected in changes to taxation.
The UK tax system has been largely unchanged for many years, whereas the 1960s, 1970s and 1980s saw a number of radical and far reaching reforms. But even before the crisis there were a number of pressures building up in the tax system which had already led to calls for reform. For example, demographic shifts are changing the tax base and demands for public services, and the growth of online- and data-driven employment and business models are eroding traditional sources of taxation and raising questions about the future of the tax system. The reconstruction of the economy after the unprecedented economic fallout of the coronavirus pandemic is an opportunity to reflect upon and address these issues.
The Committee is seeking evidence on:
- What are the major long-term pressures on the tax system in the UK, including those arising from changes in working practices, demographics, the environment and other factors? How are these affecting the efficiency of the tax base and the overall level of demand for public services?
- What more can the UK do to protect its tax base from erosion as a result of globalisation and technological change, and what further impacts will the coronavirus pandemic have on our tax base?
- Do these pressures need to be met with tax reform, and if so, is this the right time for reform?
- What overall level of taxation can the economy bear without undesirable or counterproductive harm to economic growth?
- Which areas of the tax system are most in need of reform, and which are best left alone?
- What reforms should be considered in response to the pressures on the tax system?
- What is the role of tax reliefs in rebuilding the economy and promoting economic growth and efficiency? Does the current regime of tax reliefs perform this role well?
- What are the areas for simplification?
- Is there a role for windfall taxes in the post coronavirus world?
- What is the right balance between taxation of work, savings/pensions and wealth?
- What is the best way to tackle tax reform, including what changes might be needed at HMRC to support implementation, and how should the Government consult with stakeholders and parliament?
For further information on the inquiry and how to submit evidence click here.