On the agenda – the tax policy debate ahead of the party conferences

After last year’s online-only conferences, this year’s conference season can be best characterised as hybrid. Labour and the Conservatives are holding physical conferences, in Brighton and Manchester respectively, though many of the events will be available to view online. The Lib Dems and SNP are holding online conferences.

The CIOT will be attending conferences from all four of the parties (and keeping an eye on developments at the smaller parties’) and reporting back on tax discussions at each of them in turn.

Often new ideas and pressure for policy development comes from think tanks such as, on the left, the Institute for Public Policy Research (IPPR) and, on the right, the Institute for Economic Affairs (IEA). Analysts such as the Institute for Fiscal Studies (IFS) and campaigners such as the Taxpayers’ Alliance can also be influential.

This article previews the 2021 party conference season, focusing in particular on what the think tanks and analysts – many of whom will be prominent of the conference fringes – are saying on tax ahead of this year’s gatherings. It focuses on specific proposals rather than the wider debate about levels of tax, spending and borrowing.

Corporate taxation

Debate around corporate taxes at the conferences is likely to have two main focuses – the government’s decision to raise corporation tax to 25 per cent and the ongoing attempt to agree a deal on reform of the international corporate tax system.

Outside the free market right there is broad support for the CT increase, with Labour and Lib Dems mostly reduced to pointing out what they see as the contradictions in Conservative policy. Additionally, at Lib Dem conference a motion proposed by the party’s Treasury spokesperson suggests looking at the case for “a Windfall Tax on the super-profits of large corporations that benefited from public health restrictions during the pandemic”.

Where do the think tanks stand on the CT rise? The Centre for Policy Studies (CPS), in a briefing note ahead of the spring Budget, set out the case against. Its author Tom Clougherty argued that a big increase to corporation tax would likely prove a drag on growth, adding that it is also likely to lead to lower wages and investment, especially when future increases are telegraphed in such a fashion. But he did say it was also a big mistake to assume that Britain’s corporate tax system is exceptionally competitive just because the headline rate is low by international standards.

The CPS has strong views against a windfall levy. Attempting to single out firms that have performed well during the pandemic and apply a retrospective tax would rip up the principles of good tax policy and send an unmistakable message that, far from being open for business, the British government was actively hostile towards commercial success, claims the CPS.

The TaxPayers’ Alliance is unhappy that corporation tax will go up to 25 per cent. It says this is set to push the UK’s marginal effective rate to the highest among G7 (Canada, France, Germany, Italy, Japan, UK, US) and BRIC (Brazil, Russia, India, China) economies.

The Institute for Fiscal Studies (IFS) claims putting up corporation tax is a risk Rishi Sunak may come to regret. IFS Director Paul Johnson thinks the six per cent increase is unlikely to lead to the additional £17 billion a year that the Chancellor is banking on, at least in the longer term. Higher rates have effects on investment decisions and not all those effects are captured by the official estimates, argues Johnson. “Not only is he unlikely to get as much revenue as he’s banking on, he risks reducing investment levels and hence wages and living standards over the long run. He may also want to reflect on how hard it can be to unwind supposedly temporary giveaways as he prepares to get rid of his formidably expensive super-deduction in two years’ time.”

The IPPR had argued ahead of the Budget for corporation tax to be raised to 24 per cent. The think tank said this would be efficient because corporation tax is only levied on profits, so struggling firms would not be negatively impacted. UK business investment has declined in recent years despite cuts to corporation tax, says IPPR, adding that there is increasing evidence that corporation tax rates at levels comparable with the international average do not hamper business investment.

The Resolution Foundation worries that the scale of the £17 billion rise in corporation tax, the largest since at least 1973, raises questions about whether it will actually be delivered. The Chancellor may be hoping that some of these large tax rises can be watered down later on, but it is equally likely that more will be required, the Foundation has warned.

The centre-right think tank Onward has published a report, Levelling Up the Tax System, which argues the Government’s ‘levelling up’ agenda must go beyond spending more in Britain’s less prosperous regions, and also use the tax system to spread opportunity and growth to less prosperous places.  The report recommends increasing capital allowances, particularly those for plant and machinery or industrial buildings, saying this would likely generate larger gains for the midlands, the north and Wales. Businesses in places such as Warwickshire, Cheshire and the West Midlands invest the most in such things as a share of their local economy, and would be likely to see larger gains from increasing such tax allowances. (Other recommendations of the report are covered elsewhere in this article.)

The Institute of Economic Affairs (IEA) published a report in March on how to grow the UK economy by simplifying the tax system, which include ’20 taxes to scrap’. It claims that, if carried out, these reforms would simplify the tax system, reduce the overall burden of taxation, and eliminate many harmful distortions that stifle the UK’s productivity and prosperity. On the business side they would replace corporation tax and the diverted profit tax with a single tax on capital income administered at the corporate level, similar to how PAYE works on wages. Doing so would promote neutrality between capital income and labour, eliminate the debt-capital bias, and spur productivity growth, it is claimed. They would also scrap the bank surcharge

Turning to the G7 tax deal, opposition parties are supportive of a global minimum rate but want to see it higher than the current proposal. Labour’s Shadow Chancellor, Rachel Reeves, has supported the Biden administration’s efforts to agree a global minimum rate of at least 21%. The Liberal Democrats will debate a motion at their conference (likely to be adopted) backing the Biden proposal and also seeking to ensure that profitable subsidiaries of large business groups pay tax in their own right as necessary, “so that tech giants such as Amazon aren’t exempt from new rules due to the 10% profit-margin threshold.”

The IEA has said that the City of London exemption illustrates several flaws in the overall plan. Its Economics Fellow Julian Jessop said it is right to exclude financial services as banks typically have to hold large amounts of capital in the overseas markets in which they operate, and are already subject to plenty of local regulation and tax. He explained: “The proposals adopted at the G7 could simply redistribute revenues in a pretty crude way between countries – and not necessarily to the UK’s advantage – rather than increase the overall take. However, similar arguments could be made for many other sectors. There is therefore a danger that the City gets special treatment. At least it seems likely that the Digital Services Tax will go. This was always a bad tax, driven more by politics than economics, and far more trouble than it was worth.”

The Social Market Foundation (SMF) said the G7 deal should be the start of a fundamental shift to a new British economic model where an active state does much more to promote business-led growth. An SMF paper identifies several recommendations for ministers to help create a pro-business environment. These include designating an annual GDP per capita growth target and setting out multi-year economic plans for how this target will be reached, overhauling the UK’s National Innovation System and establish a share-holding democracy of economic stakeholders. And the aim is to make Britain’s markets the most competitive in the world.

Taxing employment (and capital)

The Government’s national insurance (NI) increase, and the introduction of the Health and Social Care Levy, has put taxation of employment at the top of the political agenda. Opposition parties can be expected to repeat their opposition to the increase and their view that it targets ‘ordinary workers’, many of them low paid, while letting high earners and the wealthy off the hook. Employment taxes are often considered alongside workers’ rights and the growth of the gig economy (and insecure work more generally) on the conference fringe.

There is little, if any support for the NI increase in think-tank-land. The Resolution Foundation are against it, arguing that young people and low earners are hit more by a rise in national insurance and that national insurance is levied only from earnings, and not from unearned income, so those in work would need to contribute more. The Foundation also argues that increasing national insurance will increase the tax gap between employees and the self-employed. It says the far superior alternative is to raise income tax.

Director of the SMF James Kirkup said: “A national insurance increase passes the buck to poorer, working families who have suffered significant financial hardship during the pandemic, whilst protecting the wealth of asset-rich older voters.” John O’Connell, Chief Executive of the TaxPayers' Alliance, said: “When politicians earmark tax proceeds for specific items of spending, it is usually smoke and mirrors… The Government should rethink this assault on taxpayers and look for a long term funding model.”

IEA’s Professor Len Shackleton has argued that NI is simply an income tax by another name, albeit with different exemptions, starting points and arbitrary changes in rates which don’t coincide with tax bands. “We should consider a long-overdue merging of NI with income tax. This would not only save money for employers and government but could redress some of the inequities in our overly complex and badly designed tax system. It would also make it much more obvious who pays what.”

A live debate on the conference fringe is whether taxation of income from wealth and income from labour should be equalised. This is usually framed in terms of raising rates of capital gains tax, and sometimes the rate of tax on dividend income. Broadly the political left supports such moves while the right does not.

Making the case for equalisation of income tax and CGT the IPPR says it would be fair, because in the UK most capital gains benefit only a small number of people, and efficient, because the wealthiest individuals are much more likely to save which leads to lower aggregate demand compared to a situation where gains are more widely shared. It would address the long-standing lopsidedness of the tax system - over-charging labour and under-charging capital - and be ‘recovery friendly’ because raising capital taxes has a low multiplier meaning they should have a low impact on short term growth, argues the think-tank.

The CPS disagrees, arguing that it is not clear that rate-alignment would raise that much money – CGT is a fairly minor tax in the grand scheme of things, and previous CPS research (based on the Government’s own figures) suggested that the revenue-maximising rate was around 28 per cent. It goes on to say that taxing the sale of an asset as well as the earnings that give rise to an asset’s price is a form of double taxation. And taxing the returns to saving as well as the income that is saved is another. Both discourage investment and therefore hinder growth, claims the think tank.

However the CPS is open to some reform of the CGT system. A report states: “We could certainly police the boundary between ordinary earnings and capital gains better, so that lower tax rates are only accessible to genuine investors and entrepreneurs. And we could rethink certain features of CGT (like the relatively high annual allowance) that are clearly used primarily for tax planning purposes, rather than serving any clear economic objective.”

The IFS believes the parts of the UK tax system that dictate how different forms of income are taxed are not fit for purpose. Employees’ salaries attract thousands of pounds more in tax each year than the incomes of people who are self-employed or working through their own company, they point out, arguing that this is unfair and pushes people towards working through their own business rather than as employees. The IFS says the policy challenge is to tax capital income and gains at the same rates as labour income without creating barriers to saving and investment. As things stand, simply increasing tax rates on income from business, to bring them closer to tax rates on employment, would worsen the existing distortions to investment and risk-taking, they say.

The IFS suggest:

1. Tax rates on dividends and capital gains could be increased to standard income tax rates while people who buy new shares in a company – including their own company – could get income tax relief on the investment, paying tax when they get their money out instead (like with a pension);
2. Tax rates on self-employment income could be increased, but self-employed people who make a loss and have no other income that year could be allowed to deduct the loss from income from their next job or business venture;
3. Tax rates on dividends and capital gains could be increased but indexation of capital gains for inflation reintroduced, so that only above-inflation gains are taxed.

Resolution Foundation says Business Asset Disposal Relief and the step-up in the basis of capital gains upon death should both be scrapped; investment income tax-free allowances should be simplified and reduced; and the maximum pension tax-fee lump sum should be reduced.

The IEA’s ‘20 taxes to scrap’ include the stamp duties on buying shares, the Apprenticeship Levy and capital gains tax. IEA claims the apprenticeship levy has failed in its objectives. Professor Len Shackleton said: “It only managed to generate half of the three million jobs intended by 2020, and many of the apprenticeships remain at the most basic level, unsuitable for most young people.”

The government will face criticism from opposition parties, think tankers and campaigners alike over the withdrawal of coronavirus economic support. A Liberal Democrat conference motion proposed by the party’s business spokesperson, Sarah Olney, calls for the extension of the Coronavirus Job Retention Scheme (CJRS), and the Self-Employed Income Support Scheme (SEISS) until at least the end of 2021, and for the extension of the SEISS to cover currently excluded groups of self-employed people. This was a message amplified by party leader Ed Davey in a pre-conference interview. The Lib Dem motion also calls for a quadrupling of the annual Employment Allowance to £16,000 for two years.

The IFS has argued that 1.5 million excluded from claiming SEISS could easily be supported by government at modest cost. IFS analysis shows that costs of extending SEISS in full to over a million people with less than half their income from self-employment, and some support to those with incomes above the £50k cut-off, would cost around £1 billion per quarter, just five per cent of the current cost of SEISS to date and just one per cent of the combined current cost of SEISS and furlough schemes combined. Not all that money would be well targeted on those in need, but much of it would. Indeed, there is no reason to believe it would be much less well targeted than the current SEISS which has, remarkably, been taken up by more than three quarters of the potentially eligible population, says IFS.

Onward’s Levelling Up the Tax System report argues that removing the tax advantages for self-employed people would disproportionately be borne in more prosperous regions, resulting in a £3,452 tax increase per self-employee worker in London compared to a UK average of £2,344 and just £1,565 per self-employed worker in the North East and Wales. The report also says, in cash terms a £1,000 increase in the income tax personal allowance would see the largest gains per capita in London. But as a share of income the gains would be larger in lower income regions. For Londoners this amounts to a 0.35 per cent boost to income, compared to 0.52 per cent in the North East, the East Midlands and Wales.)

Workers’ rights are always high on Labour’s agenda. A report from the party’s Economy, Business and Trade Policy Commission, likely to be endorsed at the conference, states that, “In concert with its affiliated unions, Labour will offer a transformative ‘new deal’ for workers to ensure work is dignified, secure and well-paid for all.” The party is likely to be receptive to research from the Resolution Foundation on labour market enforcement, which found the proportion of low-paid workers doing insecure work rose to almost one-in-four in the wake of the financial crisis and called for a new Single Enforcement Body.

The TUC wants the Government to ban zero-hours contracts. However the IEA believes this would exclude some workers from employment. A complete ban on zero-hours contracts would be completely the wrong move at a time when we need greater, rather than less, labour market flexibility to get back to pre-pandemic levels of employment, they argue. IEA also disagree with the unions over the Supreme Court’s ruling that Uber must classify its drivers as workers rather than self-employed. While this ruling was hailed by the unions, IEA think it will raise prices and inconvenience consumers, while cutting off earning opportunities for thousands of workers.

SMF research has shed more light on the impact of a four-day week sometime mooted by think tanks. A key point is that most workers – 80 per cent – would not favour a four-day week if it meant earning less. That puts the onus on advocates of the policy to explain how shorter working hours can be paid for, with no loss of income for workers, says SMF.

Environmental taxation

Ahead of COP26 the challenge of framing policies to achieve net zero will be at the top of the agenda at all the party conferences. But it is far from clear how central tax will be to Conservative and Labour plans, and the Lib Dems are moving away from a carbon tax towards a strengthened system of emissions trading.

The Liberal Democrat plan is set out in a policy paper likely to be endorsed at the conference. The paper – which has backing from a working group and the party’s spokesperson – argues that Lib Dem policy in this area should be to reform the UK Emissions Trading System (ETS), raising the price of allowances, and linking it to the EU ETS. This would replace the party’s support for a carbon tax. It also proposes the introduction, in collaboration with the EU, of a carbon border adjustment mechanism for high-emission products such as metals and chemicals, and abolishing the Carbon Support Price and the Climate Change Levy, as they would no longer be needed once the UK ETS is more effective.

Environmental policy could be a flashpoint at Labour conference. MPs including the former shadow chancellor John McDonnell are reportedly among those calling on the party to reverse a decision to rule out of order a conference motion calling for Labour to endorse a green new deal. Labour insists the green new deal motion, passed by 21 local parties and endorsed by the Momentum campaign group, was rejected because it was too broadly drawn. Party leader Keir Starmer has stated he is committed to debating plans for a green new deal at the conference.

Labour are likely to be looking closely at the findings of a series of citizens’ juries run by the IPPR, looking at climate change policy. The take home message of these juries has been that the cost of climate change must not fall on low and middle-income households. A report published in July states that the gilets jaunes (yellow vest) protests in France show that fuel tax increases will bring a backlash if they are perceived as unfair. Instead, it commends Canada as an example of redistributing carbon tax revenues among citizens.

The New Economics Foundation (NEF) supports environmental border taxes that put a higher price on imports of environmentally harmful goods. NEF also argues for a frequent flyer levy (FFL) to achieve the combined aim of limiting aviation emissions while ensuring a more progressive distribution of flights. The FFL would apply a charge, starting at zero for the first flight, but increasing for every subsequent flight taken within a year. It would replace the existing Air Passenger Duty (APD). (More here.)

The TaxPayers’ Alliance are seeking cuts in APD. Chief Executive John O’Connell says: “Flyers need tax cuts to make travel as cheap as possible and help our battered airlines industry… Simplifying or outright abolishing airfare taxes would be the perfect way to help post-pandemic Britain really take off.”

The IEA’s ‘20 taxes to scrap’ paper states that discriminatory and incoherent application of APD means there is a strong case for its abolition. The IEA says emissions from aviation can instead be addressed by the Government’s general environmental policies. The Climate Change Levy and renewables obligations add economic distortion and complexity to the tax system. These levies could be brought into a single, less distortionary, environmental taxation system – either through the Emissions Trading Scheme or a comprehensive carbon tax.

Billions of pounds of new road taxes are needed to plug the tax shortfall set to be created by the switch to electric cars, the Tony Blair Institute For Global Change has warned. In a study they argue that ‘road pricing’ is needed to replace the more than £30 billion in revenue generated annually from motoring taxes. This would see drivers pay per mile or per minute for the amount of distance or time spent on the roads. The report estimates that, by 2040, the Treasury stands to lose as much as £260 billion in revenue without any new taxes.

Reform Scotland has argued that road and fuel taxes should be abolished and replaced with a pay-as-you-drive scheme, modelled on a scheme that has operated in Singapore since 1998.

In a paper published in June, the CPS argues free markets and what it calls ‘clean free trade’ are the best way to protect the environment and promote environmental standards. CPS calls on the UK Government to unilaterally remove tariffs and non-tariff barriers on environmental goods and services, and encourage other governments to do the same: “ insisting on zero-tariffs or measures to liberalise Non-Tariff Barriers (NTBs) which apply to environmental goods and services could be something the UK does when negotiating – or renegotiating – free trade agreements in future.” And it argues that the Government should lead on global efforts to introduce carbon border tariffs to ensure the climate costs of producing goods are accounted for, levelling the playing field between nations which enforce strict climate policies and those which do not.

In a report, the Institute for Government (IfG) has said the Treasury and the Department for Business, Energy and Industrial Strategy (BEIS) should take responsibility for securing a green recovery.

Property and wealth taxes

The taxation of wealth and capital will be put on the conference agenda at fringe meetings hosted by the CIOT and the Institute for Fiscal Studies at Labour and Conservative conferences. Both will feature speakers from the recent Wealth Tax Commission as well as from prominent parliamentarians and the IFS. There is also likely to be

The Wealth Tax Commission report late last year suggested a broad-based one-off ‘wealth tax’ would be an effective way to patch up UK public finances battered by the coronavirus crisis. If the Government chooses to raise taxes as part of its response to the Covid-19 crisis then, rather than increasing taxes on work (such as income tax) or on spending (such as VAT), they should instead look at a household-based tax on the assets of the wealthy, the commission said. Taxing those households an extra one per cent above a £1 million threshold could raise £260 billion over five years, they found.

The three commissioners – Arun Advani (who will be speaking at the Labour event), Emma Chamberlain (who will be speaking at the Conservative event) and Andy Summers – believe that a one-off tax on high net worth individuals would not discourage economic activity, and it would be very difficult to avoid by moving money offshore or by emigrating. The suggested tax would include all assets such as main homes and pension pots, as well as business and financial wealth, but not debts such as mortgages. It would be paid by any UK resident, including ‘non-doms’. The commission also proposed an alternative where a threshold of £4 million would be set per household, assuming it contained two people with £2 million each, taxed at a rate of one per cent per year on wealth above that threshold. It said that a one-off wealth tax in this scenario would raise £80bn over five years after admin costs.

The idea of a wealth tax got short shrift from the political right. Rishi Sunak rejected the idea, saying it would be "un-Conservative" and go against Tory values. Madsen Pirie, president of the Adam Smith Institute (ASI), said the proposal goes against "what most people see as a fair principle: that buyers, sellers and facilitators of transactions take a cut - including the state through tax." He added that the proposals amount to "attempting petty theft by instalments, only the numbers they're proposing to rob from people's pockets are pretty substantial."

James Heywood of the CPS wrote that the wealth tax was “a solution looking for a problem, all couched in the usual flimsy ‘Covid changed everything’ justifications.” While the report makes it clear that the wealth tax only really ‘works’ if it’s a one-off, making it a one-off renders it largely pointless in his view. Thus, the Wealth Tax Commission “have done a good job of torpedoing the case for a wealth tax”.

The Resolution Foundation published a report on the UK’s wealth distribution and characteristics of high-wealth households, earlier this year. It found that wealth inequality in the UK is high and evidence suggests it has slightly increased over the past decade. But the report concluded that more work is needed on data and analysis to properly understand and account for the scale of household wealth in the UK before the Government introduces a wealth tax.

The IPPR is more sympathetic to wealth taxes. In a report published before the spring Budget they proposed four ‘priority reforms’: raising capital gains and dividend tax (see earlier section), raising corporation tax, reforming wealth taxes and a land value tax. These could make the system significantly more balanced, raise up to £55 billion, and have only a small impact on growth during the recovery, they argue.

One IPPR proposal is around wealth transfers. A recent study showed that, in the UK, 60 per cent of wealth is inherited rather than accumulated through work. The current system of inheritance tax is easy to avoid and favours the ‘wealthy, healthy and well-advised’, says IPPR, and not ordinary citizens. To make the system more just and efficient, IPPR has advocated that inheritance taxes should be abolished and replaced with a lifetime gifts tax. The APPG on Inheritance and Intergenerational Fairness in 2020 came to the same conclusion.

The Government’s review of business rates is expected to report this autumn. IPPR want to see business rates replaced with a land value tax for commercial property. This is a tax on the rental value of land in its optimal use, excluding the value of any buildings or structures, as already implemented in European countries and parts of the US.

IPPR is among those backing a Proportional Property Tax to replace SDLT and council tax. This tax, which would be proportional to the present-day value of homes, is being vocally advocated by the Fairer Share campaign. It has the backing of significant numbers of MPs from across different parties, including Conservatives Kevin Hollinrake and John Stevenson and Margaret Hodge and John McDonnell from Labour. In July the House of Commons Committee for Housing, Communities and Local Government published a list of recommendations to the UK Government calling for Council Tax reform and specifically for the Government to look at replacing Council Tax with a Proportional Property Tax.

In a paper published in April, IPPR Scotland published a number of recommendations in relation to reform of Council Tax in Scotland. It suggested changes to the existing system of council tax, as well as more fundamental reform (a property value tax, as above). Within the existing regime, they recommended amending the ratio between council tax bands to increase the progressivity of the system and ensure that higher value properties pay more, and called for an expansion to the council tax reduction scheme and improved uptake.

The IFS have noted that making council tax rates proportional to the value of the property would alleviate council tax’s geographic inequities and have progressive distributional effects, with the richest fifth of households seeing an increase in council tax bills and the poorest 70 per cent a decrease. Short of that, IFS is calling for a revaluation of council tax some 30 years after the last one in England and Scotland. As discussed in an IFS report, simply conducting a revaluation would remove some of the ‘arbitrariness and geographic inequities’ of council tax, and have fairly similar impacts on poorer and richer households. On average, those in London and the South East would pay more, and those in the North of England would pay less – potentially contributing to the Government’s ‘levelling up’ agenda. Onward’s Levelling Up the Tax System report makes a similar point.

The IEA’s ‘20 taxes to scrap’ paper includes scrapping stamp duty land tax. They argue that it acts as a major deterrent for those wishing to downsize or move to more suitable housing. Other property taxes such as council tax, the Community Infrastructure Levy, business rates and affordable housing and other s106 obligations, could be replaced with a single land value tax. Under this proposed system, disincentives for property improvements and housebuilding would be removed, claims the IEA.

However, the Chancellor needs to be wary of two major bear traps, the IEA says. The overall tax burden in the UK is ‘far too high’. If the tax take on property is to rise, other taxes need to be cut by at least as much. We also need to get away from the belief that changes in the tax system are only acceptable if they result in the relatively wealthy paying more and the majority paying less, says IEA.

The CPS called earlier in the year for the Government to make the stamp duty holiday permanent, saying stamp duty is an extraordinarily bad tax that wreaks havoc on the property market. Raising the threshold to £500,000 would put almost 90 percent of primary home sales outside the stamp duty net altogether. The Chancellor should also consider cutting the marginal tax rates for primary residences above that threshold – with CPS suggesting four percent on the value between £500,000 and £1 million and five percent beyond that.

The NEF argues for a land value tax to generate a new source for financing investments and generating resources to support low-income households. This policy will have negligible effects on economic activity, but will help correct wealth and power inequalities, says NEF, who say it would tax windfall increases in land value while increasing the efficiency of land use in rural areas.

Resolution Foundation argues that for a Council Tax Supplement for homes worth over £2 million should be introduced.

A CPS report by Jethro Elsden and Alex Morton looked at how the pandemic has had a dramatic impact on high streets and commercial centres across the UK. Among other recommendations the authors urge the government to reform business rates. These were too high even before the pandemic, but now risk damaging employers at a time when many are already under strain, they say, claiming that the current rates see commercial spaces charged seven times as much as residential property. The Government’s business rates retention scheme also creates an ill-advised incentive for councils to keep properties vacant, they argue.

Sales taxes and duties

As part of the review of business rates the Government is considering the introduction of an online sales tax, as a way to ‘level the playing field’ between online retail and the British high street. This suggestion has been frequently raised during previous conference seasons and is likely to be debated again.

CPS speak for many on the free market, low tax right when they say they believe an online sales tax would simply burden consumers – especially vulnerable ones who need to have goods brought to them at home – while doing very little to change the economics of town-centre retail. Any reform in this area should focus on helping retailers compete, in particular via business rates reform, rather than punishing online firms, they argue.

Responses to the business rates review suggest that most retailers’ priority is a cut in their rates bill, rather than a new tax on online retailers. But, of course, additional tax revenue may be needed to enable such a cut. The British Retail Consortium says that the key principle should be that retail is an overtaxed industry and there should be no net additional tax burdens placed upon it.

Supporters of an online sales tax include some trade unions. The general secretary of Usdaw, the shop workers’ union, noted in July that a levy set at 1% of online sales would raise around £1.5bn, which could fund a cut in business rates of around 20%.

The IFS has looked at tackling heavy drinking through tax reform and minimum unit pricing, claiming the current system of alcohol taxes in the UK is incoherent. The IFS found that the introduction of a minimum unit price in Scotland led to an increase in the average price per unit of alcohol sold in shops of 3p per unit, or roughly five per cent. But there was a great deal of variation in the impact on different products. IFS conclude that the impact of introducing a minimum unit price for the entire UK, relative to it not being in place anywhere, would be to reduce tax revenue by £390 million per year. A two-rate structure that taxes alcohol in proportion to its alcohol content, with a higher rate on strong spirits, and a 50p minimum unit price would be as well targeted at the alcohol purchases of heavy drinkers as the same minimum unit price applied on top of the current system of taxation, while leading to a smaller decline in tax revenue than if the alcohol duties were left unchanged, they believe.

The IEA’s ‘20 taxes to scrap’ paper argues for abolition of vehicle excise duty and duties on alcohol, tobacco, and gambling.

However the SMF studied the economic impact of the gambling industry and concluded that – despite its size and rapid growth – less money spent on gambling would deliver greater benefits for the wider UK economy. The SMF study found that money spent on gambling supports fewer jobs and generates less tax revenue than money spent in most other sectors of the economy.

The Lib Dems and the Taxpayers’ Alliance are both calling for the extension of the 5% reduced rate of VAT for hospitality and tourism. The Lib Dems want the extension to run until the end of the 2021–22 financial year, and also for businesses in struggling sectors to get relief on their deferred VAT payments. The TaxPayers’ Alliance is calling on the Government to extend the VAT reduction until April 2023, and include alcoholic drinks. The Alliance says this would support jobs, boost footfall, keep down the cost of living and help the economy bounce back.

On VAT, the Resolution Foundation argues that there is a strong case for significantly reducing the VAT threshold. Roughly halving the threshold could raise £1-1.5 billion, it claims. However, the report says that, given the disruption of coronavirus and Brexit, this may not be the time to do this.

Reform Scotland believe that the UK’s exit from the EU means that powers over VAT can be devolved to the Scottish Parliament. The idea was first floated by the group in a paper published in 2018, which argued that Brexit removed the legal impediments that had prevented the tax from being devolved in 2014, and was repeated in its April 2021 manifesto for the new parliament. The CIOT and ICAS also suggested in April (see below) that the upcoming review of the fiscal framework (governing how Scotland is funded) provided an opportunity to ‘define the role of VAT in the devolution debate’.

Devolved taxation

There is a lively ongoing debate on how the Scottish Parliament should exercise the tax powers at its disposal, and which new powers it should have.

In April, the CIOT and ICAS (Institute of Chartered Accountants of Scotland) set out a number of proposals for the Scottish Government and Scottish Parliament to adopt in the new parliamentary session in a pre-election manifesto, Building a Better Tax System. The recommendations included strengthened decision-making, with the introduction of an annual Scottish finance bill and improved collaboration between Scottish and UK tax authorities; a more strategic approach to tax policy making and a move away from the practice has seen Scotland follow the UK with last minute budget rabbits from the hat; and better public understanding of taxation with a focus on public education and improved visibility of tax in the political calendar.

The David Hume Institute would also like to see Holyrood adopt a longer-term strategic approach to its budget process. In August, the organisation called for the Scottish Parliament to adopt a multi-year approach to budget setting, while noting the constraints of the country’s devolved tax powers.

IPPR Scotland has called for a ‘social renewal supplement’ paid for by reducing the higher rate threshold for Scottish Income Tax to £40,000 from 2022 onwards. In a briefing published in March, the think-tank suggested that the move would cost higher earners an extra £5 per week, and suggested that the policy could raise an additional £690 million of tax revenue by 2025/26. They said that this move would give the Scottish Parliament the headroom needed to double the devolved Scottish Child Payment from £10 to £20, and to then increase it to £40 by the end of the 2021-26 parliament.

Reform Scotland has recommended the devolution of Corporation Tax to the Scottish Parliament. In April, they argued that devolution would leave the Scottish Parliament less reliant on one devolved income stream (Scottish Income Tax) and would allow Holyrood ‘to design a tax policy that attracts more entrepreneurs and incentivises the creation and development of new businesses’.

Reform Scotland has also called for control over Council Tax and Business Rates to be devolved to local government. They described the existing set-up as ‘local in name only’ and said full devolution would better take local circumstances into account and give councils – if they choose – the power to retain, reform or replace the existing regime with other forms of local taxation.

IPPR Scotland thinks that local tax offers the greater opportunity for reform of the tax system in Scotland. While they did not set out the specifics of what this would involve, the think tank said that Holyrood’s ‘near full powers over local tax…may offer the greatest opportunities to broaden’ the tax base and deliver a fair economic recovery’.

Universal credit and income support

While not strictly tax the ending of the £20 universal credit (UC) uplift is likely to be a prominent issue alongside national insurance and income tax during conference debates on the cost of living. The big increase in the number of people needing help from the state during the pandemic has also led to increased interest in welfare reform more generally.

The IEA is adamant that any extension of the UC uplift should not be made permanent, saying: “We are borrowing a hair-raising amount of money every month”. The Resolution Foundation argues that if the only reason for the emergency universal credit uplift was to support the economy and family finances through the pandemic, then it should be continued until the labour market is back to normal, and jobseekers have realistic chances of finding work.

In a report published earlier this year, the CPS was unsupportive of extending the £20 uplift indefinitely, but argued for a temporary ‘coronavirus hardship payment’ to ensure claimants do not see a sudden fall in income while restrictions are still in place, combined with a more generous one-off uprating of universal credit (currently set to rise by just 0.5 per cent) of 2.5 per cent, in line with the rate being applied to the State Pension. In addition, they argue that the Government should improve the work incentives within universal credit through an 8p cut to the taper rate and increased work allowances.

The IfG also has ideas for reform in this area. They highlight that the current £16,000 limit on savings for those claiming universal credit has not been increased since April 2006. To restore its real-terms value it should be increased to £25,000 and then indexed each year, with funds held in a Lifetime ISA excluded, they argue. If someone’s savings or partner’s earnings disqualify the from means-tested benefits, the Government should more actively – on its website and via Jobcentres – point people to the possibility that they may qualify for contribution-based benefits.

The IFS recently published an observation on the expiry of the universal credit uplift: impacts and policy options. The research institute notes that the Chancellor faces the standard trade-offs in benefit policymaking – keeping the uplift boosts incomes for poorer households, but weakens work incentives and means that at some point taxes must be increased or other spending cut to pay for it. They note that the universal credit expansion represents the first significant real terms increase in entitlements for out-of-work claimants without children in half a century, despite the fact that earnings have doubled in that time (and therefore financial incentives to work have been substantially strengthened over this period). This lack of real increases has also left the safety net for those without children unusually thin by international standards, says the IfS.

In ‘A shock to come at the end of furlough?‘ IFS have noted that the UK is fairly unusual in not offering extra support to people on higher levels of earnings who lose their jobs. A large majority of other developed countries provide some form of ‘social insurance’ scheme which offers more support for at least a few months to higher earners when they lose their job. This is a political choice, say the IFS, posing the question of whether the experience of the pandemic and of furlough will increase demand for more government support along these lines.

Various proposals have been put forward in support of the concept of a universal basic – or minimum – income as the country emerges from the pandemic. The Lib Dems backed it in principle at their conference last year, and are holding a consultative session on their proposals this time. It is an idea that has generated particular interest across Scottish think-tanks.

Reform Scotland’s proposal for a Basic Income Guarantee (first published in April last year and revised during the recent Scottish election campaign) is for ‘every citizen, regardless of income, gender or employment status’ to receive ‘a set amount of money, free of tax, but in place of personal allowances, tax credits and a number of other benefits.’ They recommended that this be set at £5,200 per year for adults, and £2,600 per year for children.

IPPR Scotland have advocated for a Minimum Income Guarantee, or MIG. This is an idea that has since gained traction within the Scottish Government, as evidenced in the establishment of a government-backed steering group on the topic.

Writing in March this year, IPPR Scotland suggested that a MIG would be a ‘targeted payment’ that ensured a minimum standard of living and which would help to reduce poverty, inequality and insecurity. They acknowledged that this would require additional powers over tax and social security to be devolved to the Scottish Parliament, but suggested a series of ‘interim’ measures (within the powers the parliament presently has) to boost living standards. These include reforming council tax (see above), the creation of a social renewal supplement (also above) and the use of Holyrood’s social security powers to support carers, the disabled and children.

By Hamant Verma and George Crozier, with additional material from Chris Young