Treasury Committee questions CIOT and other tax experts on future of tax system (live blog)

MPs on the House of Commons Treasury Committee questioned tax experts from CIOT, ICAEW and ICAS as part of their Tax after Coronavirus inquiry from 9.30-11.30 on Tuesday 15 September. A live blog of the hearing appears below.  

You can find out more about the Tax after Coronavirus inquiry here.

This is the second hearing of this inquiry. You can read a report on the first, in which the MPs questioned IFS and other economists, here.

You can watch the hearing live here. It began at 9.30 and finished shortly before 11.30.

Witnesses:
John Cullinane, Tax Policy Director at Chartered Institute of Taxation
Charlotte Barbour, Director of Taxation at Institute of Chartered Accountants of Scotland
Anita Monteith, Senior Policy Advisor at Institute of Chartered Accountants in England and Wales

The live blog below is contemporaneous and not checked against the committee transcript. Remarks will often be paraphrased or abbreviated. Quotations in speech marks should be verbatim but we cannot guarantee that no errors have crept in and we advise on checking any passage against the committee transcript once it has been published before repeating it.

Live blog

Examples of potential tax reform

Chair Mel Stride asked for two examples of taxes which the panelists feel need reform.

John Cullinane, CIOT, said there are examples in all taxes. He said VAT exemptions and zero rates and reduced rates cost a lot of money but cause compliance issues. He said we should look at evidence to see if the objectives of these VAT exemptions are achieving their goals. Cullinane also pointed to pension tax relief as an area to investigate.

Anita Monteith, ICAEW, said she is keen on digitalisation and that MTD gives a lot of opportunites to fix things. She suggests examining VAT partial exemptions would simplify matters which would smooth the way for MTD. She questioned why the tax year ends in April which does not fit with digitalisation and quarterly reporting. We must address the lack of fast broadband, too.

Charlotte Barbour, ICAS, advocates being cautious about VAT reform because of the likely high demand for changes/pressure for change because of Brexit. There is scope to do things with VAT post-Brexit but she warns against different VAT rules in different home nations. 

Complexity of tax code

Angela Eagle asked if complexity is inevitable given the length of time our democracy has been around?

John Cullinane said income tax has only been running for 200 years and many taxes such as corporation tax are quite recent. On High Income Child Benefit Charge (HICBC), for example, this complexity comes at a time when people may be going through life-changing moments. Cullinane said that interactions between welfare and taxes can cause confusion - not just the complexity of the tax code. Cullinane used the example of Scottish business people incorporating, potentially taking them out of the Scottish rate of income tax and into taxation of dividends and corporation tax which are taxed at UK level.

Anita Monteith said HICBC led to unfariness. We are in danger of creating problems with the new CGT charge on second property within 30 days. The general public may not know about that, let alone are we hearing estate agents advising their clients about this. If it could be built into the conveyancing system; that will help, she said. Asked whether digitalisation presents a threat to accountants' livelihoods, Monteith said accountants do not want to spend their life doing repeated tasks when they are trained to be more innovative. The tax system is not keeping up with modern times, such as understanding that people live together.

Angela Eagle asked if we can widen the tax base, such as using land taxes and wealth taxes?

Charlotte Barbour said getting political acceptance for such changes is a stumbling block. Do people have the money available to pay such taxes? We need to look at widening the existing big ticket taxes and simplify them.

Self employment 

John Cullinane told Harriet Baldwin that the tax differences between employment and self-employment have become more pronounced.  Employers have big incentives – part tax, also employment law, to put people off payroll, and also once people are self-employed incentives to incorporate are there. Also there is limited liability. In sum, lots of economic and legal trends outside tax - as well as tax - all pulling in the same direction. He added that big employers are prompting people to be self-employed. 

Anita Monteith worries it is too easy to incorporate. We talk about employed and self-employment distinction but we are seeing tweaks to the tax system to address that. But the income tax system works well for small businesses, she argues. We need to be careful with tweaks and maybe the dividing line should be between self-employed people who sit near to employees and small businesses.

Charlotte Barbour said it is difficult to justify the logic of different tax treatment for different workers. It is too wide, she said. We need a public debate about this, she pleads.

Cullinane added that employers' national insurance is a key driver of how people choose to work. The amount of money that self-employed people are able to charge in the market no doubt reflects the fact that they are able to charge less than if they were working on an employed basis. Getting from A to B (equalising taxes) would be very difficult politically - "it would be a massive shock to people". Current situation is very hard to sustain.

Monteith said we should also look at the benefits self-employed people get. They might be willing to pay more tax if they got more benefits.

Barbour said that devolving taxes adds an extra level of complexity. Higher rates of income tax for some people in Scotland brings forward the discussion about whether you might want to incorporate.

Tax devolution

Alison Thewliss asked what are the main tax policy challenges around devolution of taxes?

Charlotte Barbour said the biggest policy challenges - with income tax anyway - are that you [Scottish Government] are more constrained than you think you would be. Taxes still need to slot into a UK system.

Thewliss asked whether assignment of VAT was worthwhile if there was no ability to change it. Barbour said the difficulty is models don't equate to the economy. It's a moot point as to whether it serves a useful purpose.

John Cullinane agreed, saying VAT assignment doesn't give autonomy, it's just a statistical exercise. But full VAT devolution would be 'a very risky way forward'. 

Thewliss asked whether the fiscal framework needs to be changed. Barbour said it is due to be looked at. It is quite difficult to understand how block grant adjustments interact with tax. 

Cullinane agreed. There is no perfect fiscal framework. Most people find it difficult to understand.

Tax policy-making

Steve Baker referred to some research he had done in 2012 that found 46% of the product of the labour of someone on a £26,000 salary goes to the state. If people understood that we would have a revolution, he suggested.

John Cullinane replied that if you go from a situation where things are obscured to one where it is clearer people may react strongly. We pay a great deal of tax but we are not taxed as much as some of our neighbours.

Baker suggested one of the problems of PAYE is people don't notice they are paying tax.

Anita Monteith agreed there is a problem with understanding of tax. She highlighted the pie charts in the red book each year. When these are shown to schoolchildren and you show them how much is spent on different things they get really engaged. The conversation needs to be addressed to the audience. 

Cullinane noted that in the US everyone has to do a tax return, but we've always put a premium on reducing HMRC's own costs and the compliance costs. Even in the US they have an employee withholding tax. It tends to take too much and you have to fill in a tax return to get your money back.

Charlotte Barbour said that people need a sense of what they are contributing to the common good. 

Baker said at the last session IfG had said it would be helpful for governments to be clear what they are trying to achieve from the tax system. 

Cullinane agreed. Government should set out broad objectives and set out publicly what the options are. At the moment "pretty much everything comes as a surprise on Budget day". If you look at how the state pension age was increased, overall that change has been remarkably well accepted. That's because it was put out there as a problem years earlier and there was a more consultative approach.

"Wouldn't it just be a different kind of pantomime when we had a huge row over the overall direction of tax policy," asked Baker. You just have to trust that public opinion can be influenced by debate, said Cullinane. Current system leads to post-Budget problems.

Monteith also agreed. She referred to Making Tax Digital (MTD), saying it started unclearly but we are in a better position now with a roadmap. Inheritance tax nil rate band is a 'horrendous complexity' introduced to the IHT system. Policy was designed piecemeal. We've ended up with something very few people can understand but will have to operate at a very difficult point of their life.

Should we have a tax commission, asked Baker. Barbour said there had been a lot of constructive working between tax profession and HMRC during covid-19. Cullinane said it depended what the commission would do. Monteith said we are still waiting to see the outputs of the Charity Tax Commission. 

Impact of the Coronavirus crisis on the tax gap and avoidance/evasion

Rushanara Ali asked what HMRC could do to tackle ‘stubbornly high’ levels of tax evasion and whether the organisation’s ability to do would be diminished because of  the extra work it has taken on in response to Coronavirus.

John Cullinane said that HMRC had responded well to the extra challenges of the pandemic but conceded its resources would be under strain.

He said that in recent years, public accounts scrutiny of its operation had led to it adopt more commercial practices which he said, in turn, may have led HMRC to prioritise the needs of larger businesses (with higher tax bills) to the detriment of smaller businesses seeking help.

Cullinane also said that HMRC’s focus in recent years had been around tackling issues related to tax avoidance. He added that HMRC had developed ‘pretty smart’ technology to help in their efforts against tax evasion and that banks and financial institutions were sharing increasing amounts of information to assist with this. He said that other pressures on HMRC’s ability to clamp down on this included mistakes and errors, the prioritisation of avoidance over evasion and government guidance.

Charlotte Barbour also noted that HMRC had prioritised action against avoidance in the last decade, which had ‘completely shifted the pendulum’. She said that a combination of data analytics and ‘old fashioned policing’ could be used to tackle tax evasion. She also warned that that the messaging around tax avoidance needed to be calibrated in order to prevent an erosion of public trust in the tax system.

Anita Monteith was also complimentary about the systems put in place by HMRC to tackle avoidance and evasion but warned about concerns with ‘errors and mistakes’.

She said that the increasing use of digital technologies for transactions in place of cash during the pandemic was likely to present HMRC with increasing amounts of data to assist in its policing of the tax system. She suggested that businesses that have maintained their dependence on cash transactions may find their operations under increased scrutiny because of this.

Ali also asked the panelists if they could recommend steps that could be taken to add an element of conditionality to the government’s coronavirus bailout packages. She quoted figures from TaxWatch UK that £4.79 billion of bailout cash had been handed to companies with links to tax havens or embroiled in financial controversy. She cited comments made by CIOT President Glyn Fullelove that attaching certain forms of conditionality to bailouts could have been made a condition for eligibility for these schemes.

John Cullinane said HMRC faced huge challenges in the implementation of these schemes at the onset of the pandemic. He said that there was a ‘public appetite’ to challenge companies that may have exploited the tax system in the past but that the main challenge with this would be in defining bad behaviour in a way that you can translate into law. What is a tax haven?  This would add additional complexity to the system. "I don't think anybody would deny there has to be a quid pro quo in terms of support."

Is the quid pro quo sufficient, asked Ali. There are all sorts of ways you can criticise them, said Cullinane, but they were implemented at speed and this has led to 'rough justice'.

Ali asked if the government had perhaps failed to learn the lessons of the bank bailouts following the 2009 financial crisis. Cullinane suggested that the schemes in place in 2009 and 2020 were very different and therefore difficult to compare.

Reform of Tax Administration and Making Tax Digital

Felicity Buchan asked why ICAS supports reform of tax administration in the UK.

Charlotte Barbour said there were a number of reasons, although central to this was the issue of public trust. She said that rewriting the rules underpinning the system would help the public understand their duties and responsibilities. She also said that the management of the tax system was contained in tax law dating back to the 1970s and that over time, there had been a proliferation of rules, regulations and powers. This was not user friendly, she suggested.

Buchan wondered whether a rewrite of tax administration would over-complicate the system. Barbour said that she hoped not and expressed confidence that it would help to improve trust and understanding. She also acknowledged that this project may not be politically appealing but stressed it was fundamental to the continued health of the tax system.

Barbour said that this would likely be a large project but one that may have the support of HMRC. She noted their 10 year plan for building a modern tax administration system. Perhaps there should be a roadmap for delivering this.

Anita Monteith acknowledged that a reform of tax administration would have benefits but suggested that a bigger priority would be to ensure improved accessibility to the public-facing aspects of HMRC. She suggested that a fundamental rewrite of administration was a ‘project for a rainy day’ as it would not directly impact many. The biggest change we need to address is 'the fifth of April' - "the 10 year roadmap gives us an opportunity to make our tax system more streamlined, and we can't do that if income tax and VAT end on different dates; we can't keep pretending that 31st March for a VAT quarter is the same as 5th April for an income tax quarter, for example".

Felicity Buchan then asked John Cullinane what benefits the CIOT would like to see from the next stage of the government’s Making Tax Digital Strategy.

Cullinane said that he hoped MTD would create a more efficient regime that works for the benefit of all involved and he urged the government to take on board the lessons from the pilot schemes to see how it has worked in practice. People should want to engage with MTD because represents an easier and better option.

Cullinane was also asked about the potential for merging the tax and benefits agencies into one. He said that the idea of a merger was perhaps too big an ask, but did say there was a need to ensure better interaction between these departments. If you are self-employed and looking to claim universal credit the two departments look to you to keep accounts in two different formats. People in that situation face as much complexity as multinationals dealing with the complexities of international tax.

Review of tax reliefs

Felicity Buchan asked whether there needed to be a review of tax reliefs, which she said (according to National Audit Office statistics) cost £155 billion.

Anita Monteith said that the government needed to be better at evaluating the costs of reliefs and the benefits they bring. She suggested the introduction of ‘sunset clauses’ for some reliefs if they fail to meet their objectives after a period of operation (5 years was suggested).

Monteith also warned that many reliefs were ‘very, very useful’ but that the more expensive of these tended to be demonised because of the nature of the people claiming them (eg. successful businesses, successful entrepreneurs). She suggested now might be a good time to look at tax relief for training. "I've lost my job. I want to retrain myself as a plumber. I want to be able to get some tax relief for the cost of that course I need to go on to be a plumber. But you don't get any tax relief at all for doing that. And that to me feels wrong." 

On the subject of proposed changes to pension tax relief, John Cullinane acknowledged that there could be challenges associated with any potential reform. People save for their pensions over a long period so you have expectations build up. He said the last overhaul of pension tax relief had taken place in 2006 and that subsequent changes had been piecemeal. It has now become very complicated and in the last Budget we saw a partial reversal to some of the limits on reliefs when you put money in that had been put in place previously.

Each of the panellists was asked which reliefs they would change or abolish. Charlotte Barbour said that she would like to see a flatter tax system with fewer tax reliefs overall.

Monteith said the first step in this process would be to review the Office for Tax Simplification’s work on reliefs, suggesting a thorough review of the evidence was required before embarking on reform.

Cullinane said a review of reliefs was much more complicated than simply picking reliefs to abolish. He called for the creation of a commission to review and investigate those areas.

Wealth tax

Siobhain McDonagh asked about the issues around a wealth tax. With wealth inequality growing at twice the rate of income inequality, what are the practical problems which need to be tackled around taxing wealth?

Anita Monteith said ability to pay was an issue. Taxing value of a property someone is living in comes up against whether people have the money to pay (eg. little old lady living in £3m house in central London who has always lived there).

John Cullinane said the issues are that, as Anita said, it can be a ‘dry charge’, without a cash flow to fund it. Valuations another issue, more for some assets than others (eg valuing a private company) and with the mega-wealthy people who can find ways of concealing it or getting it out of the country. There are trade-offs with how ambitious you want to be. If you want to raise lots of money you need to get some from ‘relatively ordinary’ people more of whose wealth is going to be in property form. Amount of information exchange between countries on tax and assets now huge – big change on a generation ago. Worth looking into - there is public interest in exploring.

Charlotte Barbour said there had been lots of changes to property tax in recent years - extra charges. Ned to think about how they all fit together. Be mindful of whether it would be a whole of UK tax or whether Wales and Scotland would be separate, given land and property tax largely devolved.

On lead-in time, Barbour said it was hard to imagine you could do this quickly or easily.

McDonagh asked how wealthy people would react to the tax. Cullinane said so much depends on the design of it – do you start applying it to people who are resident here, or domiciled here, or citizens? And design features. Not sure it’s possible to give a sensible answer at a high level.

McDonagh asked whether ‘the risks of it all are just too high’. Barbour suggested looking at capital gains tax and inheritance tax might be the place to start, looking at how they could be improved, rather than starting again. Monteith agreed, suggesting the CGT/IHT overlap was a ‘no brainer’ and had to be looked at.

Cullinane said there’s a fear of talking about some of these things sometimes because of Budget secrecy traditions. We’re in fear of our own shadows because we don’t discuss tax in a mature, open way.

Would it be easier to go for a windfall tax on wealth, asked McDonagh. Cullinane said his fear was you’d get the same amount of controversy for one year’s tax rather than an ongoing source of revenue. He added that, in relation to gainers from covid-19, it was hard to identify who has had a ‘windfall’ in relation to it. It would be hard to relate to tax law.

Monteith noted that we already have corporation tax so businesses which have larger profits than usual will pay more tax; those which have made losses will pay less and be able to offset those against profits in future years. Looking at the taxes we have already got is a more sustainable way of increasing our tax take than inventing new ones.

Business taxes

Anthony Browne asked whether the panel think business is over or under-taxed.

John Cullinane said it may be taxed for the wrong things. For corporation tax we are part of an international pool and there is no tax where we are more exposed to what other countries do. There are big penalties for being a CT outlier. The trend of recent years has been to broaden the base and lower the rate. That may go into reverse as people want more incentives for capital expenditure in recovering from the virus. Business rates are more within our control. He said there was a lot of evidence that most investment planning by multinational companies is pre-tax, with specific exceptions, and they just look to make sure there isn’t a fundamental tax problem. That may sound naïve but given how often tax rates change in the countries they are dealing with it is not irrational. He added that he thought the UK Treasury had done a very good job over the years of getting a good take out of corporation tax with such an open economy.

Anita Monteith said we need to be clear that corporation tax is applied to what’s left of your profits at the end of the year. She would like to see more investment and less left. Annual investment allowance due to drop down at end of year; everyone is looking for it to be retained at a high level.

Browne asked about the Digital Services Tax. Monteith said she feels very much it is a temporary solution. “Clearly we are going into battle with some other countries – America for instance – who do not like it.” She noted that over the last few months there had been a further shift to purchasing online. We are not going back to the high street, she added, so the business rates system is broken, or at least on the way out. We need a tax system which addresses the need for a level paying-field.

Charlotte Barbour stressed the importance of working with other countries, including through the OECD, to work out how to ‘divvy up’ profits internationally.

Browne asked what the main challenges are with taxing small businesses. Monteith said the biggest problem is knowing what they are liable to pay, and what reports they have to make. She would like to see a more joined-up process, with Companies House working closely with HMRC. The Business Tax Account needs a lot of work. Maybe we need a tax commission for small business?

Cullinane said the OTS were looking at greater alignment between small companies' tax base and accounts, with fewer adjustments; looking through a company to the individual. Looking at people shut out of coronavirus help, it's often how they see themselves, as being still self-employed even though they have a company which protects their liability, so maybe we should respond to that? Nic to say 'we should have a separate regime for small business' but problems of defining and what happens when companies grow.

Browne asked about incentives for investment. Cullinane responded with a word of caution - at the moment large numbers of small businesses don't pay a lot of corporation tax because annual investment allowance eliminates liabilities. If you extended that across the piece you'd collect very little CT at all. 

Browne asked what one business tax change the panel would make as a priority. Barbour said investment relief for those who invest in smaller businesses. Monteith said she would simplify national insurance for unincorporated businesses. Cullinane focused on business rates. He would deal with some of the irrationalities such as the way it penalises people for improving premises.

Mel Stride thanked the panel for their input, suggesting they had identified a lot of 'elephants in the room' as well as a few 'dragons to slay'. The session concluded at 11.27.

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