Peers divided over impact of corporation tax increase and super-deduction

26 Mar 2021

Peers were divided in their post-Budget debate on whether increasing corporation tax to 25 per cent was sensible or would be counter-productive. A number of opposition peers thought the Government’s tax changes insufficiently progressive and argued that wealth, inheritance and capital gains should be taxed more heavily

Such was the demand to speak in the 12 March debate that backbench speakers were limited to two minute speeches each. The debate was technically on a motion that the House of Lords takes note of the economy in light of the Budget statement. The motion was approved at the end of the session.

Opening frontbench speeches

Treasury Minister Lord Agnew opened the debate for the Government. He said the Budget kept to the Conservative manifesto pledge not to raise the rates of income tax, national insurance or VAT. The increase in corporation tax to 25 per cent from 2023 means it is still the lowest corporation tax rate in the G7 and companies that make less than £50,000 profit annually will only be subject to a 19 per cent tax rate, he said. Worth £25 billion over the two years that it is in place, the super deduction represents the ‘biggest business tax cut in modern British history’, he claimed.

Agnew also focused on issues around upskilling and investment. He said Help to Grow and Help to Grow: Digital will help tens of thousands of SMEs to get world-class management training and help them to develop their digital skills. He talked about the inward investment that will be attracted to through the eight new freeports in eight English regions. He concluded: “The Chancellor has presented a plan that will continue to protect jobs and livelihoods and to support British people and businesses through this moment of crisis. It will begin to fix the public finances and will start the work of building our future economy through investment-led recovery.”

Labour spokesperson Lord Eatwell complained that, for the Chancellor, fiscal resilience – which he described as ‘the heartbeat of austerity’ – is paramount and ‘the unique determinant of economic success’. He argued that the role of taxation is not to pay off the debt but to be part of a balanced programme of fiscal and monetary policy to stimulate the real output needed for the achievement of the Government’s goals. For companies to invest, businesses do not need super deductions, rather they need the prospect of growing demand for their products, he said.

Eatwell said the stamp duty holiday and mortgage guarantee were another example of government throwing money at a problem. The result? Sharply rising house prices and a few more houses, he said.

Lib Dem spokesperson Lord Fox said that businesses’ debt through the recovery loan scheme will haunt the economy for years. The Chancellor has abandoned the industrial strategy but Fox said Brexit, the net zero challenge and COVID-19 makes such a strategy more important. He added: “Councils are being made to tax local residents to shore up the failing social care system, so that the Conservatives can pretend that they are not doing it.”

Conservative backbench speeches

Lord Lamont of Lerwick, a former Chancellor, argued that Rishi Sunak’s Budget began repairing the public finances without endangering the recovery by delaying the increases in corporation tax and the freezing of personal allowances. Lamont said: “The question remains whether such a large increase in corporation tax can be delivered: moving the tax up in one go to 25 per cent may cause prospective investors a bit of hesitation.”

Lord Risby predicted that the super deduction will give an enormous incentive to invest for innovation and to modernise the UK’s industrial and technological capabilities.

The Earl of Caithness reminded peers of a report by the Food, Poverty, Health and Environment Committee that recommended increasing VAT on unhealthy food. The Earl wanted action on this, saying getting us to eat better food will reduce the costs for the NHS hugely—'by billions of pounds’.

Lord Leigh of Hurley, a chartered tax adviser, congratulated the Chancellor on listening to the pleas of 2,500 entrepreneurs who co-signed a letter, written by him and Shalini Khemka of E2E, strongly advising against any rise in capital gains tax for entrepreneurs. Entrepreneurs are vital to the UK economy and we want to see many more of them, he said.

Lord Hunt of Wirral said the furlough scheme has so far slowed the rise in unemployment but sooner or later, we know that many jobs will be lost. He said: “When I became Employment Secretary in 1993 we were emerging from another short and sharp recession. A decade of supply-side reforms had given us the most flexible labour market in Europe, an advantage we still possess.” He wanted the Government to give the kind of commitment to full employment that he gave to the TUC back then.

Lord Blencathra (former cabinet minister David Maclean) welcomed the freeports proposals; it seems they will be proper freeports and not the ‘fake bureaucratic ones we had when we were still in the EU straitjacket’.

Lord Bourne of Aberystwyth said the decision to raise corporation tax to 25 per cent by the end of the Parliament seems sensible given that our rates are currently the lowest in the G20. The plastic packaging tax needs to go ‘further and faster’, particularly when contrasted with what other countries are doing, he added.

Lord Caine was convinced that reducing the rate of corporation tax in Northern Ireland to at least the same level as that in Ireland could have a transformative impact on the economy, which could in turn help to embed further peace and stability.

The Earl of Shrewsbury commented that instead of ‘hiking’ corporation tax to 25 per cent, the Chancellor should instigate a ‘root-and-branch’ reform of our ‘overcomplex’ tax regime, developing a simplified low-tax system to attract foreign companies. We need to incentivise, not penalise, our business community – we are a nation of entrepreneurs and we need to encourage those businesses, he charged. He added: “In such a reformed tax system, there would be less inclination to try to avoid paying taxes and more incentive to invest and grow. Tax reform is key to growth and future success.”

Lord Sarfraz praised the ‘refreshing’ ideas around R&D tax relief, pension fund asset allocations, the EMI scheme and the crypto assets consultation, all of which could greatly benefit entrepreneurs, he claimed.

Baroness Gardner of Parkes asked for the £20 uplift to universal credit made permanent because it is the ‘difference between keeping your head above water and drowning in debt’.

Lord Vaizey of Didcot hoped that the review of capital gains tax will not penalise entrepreneurs who invest their time and energy in their companies. On the planned digital tax, he said he has no truck with Amazon paying no tax, but it seems unwise to penalise consumers for their change in behaviour.

Lord Sharpe of Epsom hoped the generous R&D exemptions would have the intended effect of stimulating productivity gains among SMEs. Lord Sharpe claimed that freeports will not only help us to level up the UK but are a manifestation of what global Britain can mean in practice.

Lord Wharton of Yarm was pleased there was a delay to a rise in corporation tax because it gives an opportunity for circumstances and policies to change.

Lord Hannan of Kingsclere said raising taxes is not a long-term solution to a debt and deficit problem. The higher you raise the tax, the more that you find you are squeezing the ‘revenue-producing bit of the economy’ to sustain the revenue-consuming bit, and people change their behaviour in consequence. When tax rates get to a certain level, people will begin to work shorter hours, take earlier retirement or, indeed, move their activities to friendlier jurisdictions. He said cutting tax rates leads to greater revenue with each successive cut in corporation tax down to 19 per cent leading to more income for the Treasury. “Instead of raising taxes, we should be looking intelligently to cut taxes, especially those on employment and investment, to get companies hiring again,” he said. He would have liked to have seen cuts in national insurance both for the employer and for the employee. “If we get the economy growing then we get more people at work, we get them earning and paying taxes, we are shelling out less and, left to itself, the deficit will dwindle and fade,” he concluded.

Labour backbench speeches

Lord West of Spithead welcomed the formation of an ARPA equivalent and the increase in R&D funding, saying ‘we need technological innovation, not least to ensure zero-carbon energy in the future’.

Lord Monks was angry at the absence of significant help for hard-pressed local authorities, struggling as they are, particularly with social care. And money that has been available has been unashamedly targeted towards Tory marginal seats on a basis that makes it look like the pork barrel still operates, he asserted.

Baroness Andrews complained that there was nothing in the Budget about meeting the added cost to the health service, as it works through the huge backlog of diagnosis and treatment; or the unseen costs of the pandemic on mental health and family breakdown; or the future costs of staffing the NHS or funding affordable social care.

The Chancellor is trying to find an early exit from his fiscal dilemma, said Lord Hain. “By rushing his fences he risks removing support for the economy and derailing recovery just when the vaccine offers a way out of the virus, piling even more pressure on massively underfunded health and care services,” he argued.

As someone who played a small role in indexing tax thresholds in 1977 (a reference to the famous Rooker-Wise amendment), Lord Rooker said he supported the current plan to freeze them. But he added: “It can and should be tweaked for the very low paid—those who are not paying tax at the moment—in a way that does not cause a ripple to the higher rates.”

Lord Campbell-Savours said we should use inheritance tax on death as an opportunity for the wider distribution of wealth with a substantial increase in net beneficiaries. We should abolish the tax completely, transfer the liability to tax from the deceased estate to the recipients, and tax the recipient beneficiaries at their marginal rate, he said.

The Chancellor’s claim that the Budget will support business and build our future economy seems ‘somewhat fanciful’ with the raising of corporation tax, the collapse of exports to the EU, precious little action to improve our low productivity levels and the axing of the industrial strategy, claimed Lord Hunt of Kings Heath.

The decision to delay the correct increase in corporation tax for two years is wrong, in the context of a Government trying to justify deeply inadequate pay proposals for the NHS on grounds of affordability, said Viscount Chandos.

Why have the Government failed to extend the sugar tax, which has proven so effective? asked Lord Brooke of Alverthorpe.

The Chancellor’s chosen method of introducing a range of tax increases was to freeze a whole bundle of tax thresholds and allowances at 2021-22 levels —'a rather weasel way of circumventing [Conservative] manifesto commitments’, remarked Lord McKenzie of Luton. It leaves the determination of the rates of real increases in tax to a range of market economic factors not necessarily under the direct control of the Chancellor. Given the scale of the public finance crisis, there is an imperative to think big on tax, he said. “Why should we not at least develop our thinking on a wealth tax—a broad-base tax on the ownership of net wealth—to help pay the bills, as some have suggested? Public attitudes, according to the [Wealth Tax Commission] report, show a clear desire for wealth to be taxed more relative to income.”

The Equality Trust states that, before COVID-19, the poorest 10 per cent of households paid on average 42 per cent of their income in direct and indirect taxes, compared to 34.3 per cent paid by the richest 10 per cent of households. This led Lord Sikka to say the Budget will force the less well-off to pay higher amounts in income tax, national insurance contributions, VAT and council tax, ‘which will inevitably deplete the purchasing power of the masses and damage economic recovery’. He speculated that just two reforms - taxing capital gains at the same marginal rates as earned income and restricting tax relief on pension contributions to the basic rate of income tax - could generate an additional £25 billion per year for redistribution and levelling up and change the balance of taxation.

Lord Triesman charged that the Budget fails to stimulate seed-corn innovation in green technologies, repair the social and welfare damage that has been done, or deal with wealth divisions. Nor does it help children, who are not mentioned, or mitigate inevitable unemployment, which is on the horizon.

Lord Blunkett said he believed very strongly that the levelling-up agenda will be achieved only by open, transparent analysis of the strategy that is needed for industrial investment and investment in the new industries of the future. He added: “Freeports are a reinvention of enterprise zones from the 1980s. It is not going backwards that we need; it is a strategy for the future.”

Lib Dem backbench speeches

On the super deduction, Lord Palmer of Childs Hill predicted ‘the creative tax avoidance industry is already working on a redefinition of what is “plants and machinery’. Palmer said this Budget will drag more people into the tax net by freezing personal allowances. “Then there is the increase in corporation tax—but not until 2023, so as to give enough time for business to relocate overseas.” He went on to say the Government has failed to appreciate the administration burden they create, such as the implementation of the VAT reverse charge, which is a ‘severe burden’ on the construction industry.

Baroness Doocey called on the Government to ask councils to prioritise some of the £425 million in new Additional Restrictions Grants (ARGs) specifically to parts of the tourism sector that have ‘fallen through the cracks of government funding for business during the pandemic’, and to agree to include those businesses in the extended business rate and start-up grants.

A national refit programme may not have the glamour of moonshots to new technologies, but there is no path to net zero without one, said Lord Oates, and added that the absence of any reference to it in the Chancellor’s Statement left a ‘gaping hole’ in his Budget and threatens any hope of meeting our obligations under the Climate Change Act.

Baroness Janke said: “Being disabled is expensive and the failure of the Chancellor to extend the £20 uplift to legacy benefits is a curt dismissal of this basic fact.”

Lord Shipley said the opening of the Treasury’s northern base in Darlington and the UK infrastructure bank in Leeds are a ‘sign of confidence in the north’.

Crossbench speeches

On the proposed rise in corporation tax, Lord Macpherson of Earl’s Court commented that Britain risks becoming uncompetitive as a result, with activity moving to lower-tax jurisdictions. He is also sceptical that the tax will raise as much revenue as the OBR suggests.

Lord King of Lothbury remarked that fiddling with the Bank of England’s remit, while at the same time taking no action on a carbon tax and freezing fuel duty again, are gestures, not a coherent policy.

Lord O’Neill of Gatley admired the decision to plan for an increase in corporate taxes. It has been obvious to him for years that the general Anglo-Saxon obsession with ever-lower corporate taxes, while it has boosted profits, has had no positive impact on investments.

Lord Butler of Brockwell suggested a one-off, tax-free bonus of £1,000 to all in the NHS, and said a temporary one per cent increase in the 40 per cent higher rate of income tax would raise something over £1 billion, which would go a long way towards covering the bonus.

Lord Desai reflected that the clever thing about the Budget is that the Chancellor has found a way of not disturbing tax rates that much, but he has expanded the tax base.

Lord Bilimoria said the planned rise to corporation tax ‘sends a worrying signal’ to those planning to invest in the UK, and Northern Ireland must compete with the Republic of Ireland next door, which has a rate of 12.5 per cent. The leap of six per cent in one go has caused a sharp intake of breath for firms. Britain is the second or third-largest recipient of inward investment in the world. We must not jeopardise that in any way, he said. He thought super-deduction is a bold and positive move for the UK.

Other speakers

Green Party peer Baroness Jones of Moulsecoomb said that corporation tax is one of the most powerful levers governments can use to adjust the way the economy works. Allowing companies to avoid their tax responsibilities to pay for infrastructure and health and education services is short-sighted when they depend on those very services to function effectively. Her party would support a windfall tax for companies that have seen profits spiral during the pandemic. She would have liked a carbon tax that is £100 now rising to £500 by 2030. This proposal is matched by another Green Party proposal to ensure that money is generated to compensate citizens as fossil fuel companies increase their prices to absorb the cost of the tax. We would use it to fund a universal basic income, she said.

Another Green Party peer, Baroness Bennett of Manor Castle, welcomed the ‘modest’ increase in corporation tax in the Budget. It is a reversal, if a delayed one, of the encouragement of the increasing ‘parasitism’ of giant multinational companies sucking wealth out of our communities and failing to contribute to the infrastructure and services that make those profits possible, she argued.

The Lord Bishop of Portsmouth said freezing income tax thresholds will level not up but down for many, squeezing household budgets, especially in the interaction with benefits, for those already squeezed. The extended uplift in universal credit offers some welcome respite for those at the sharp end, but it will be cold comfort to those facing a cliff edge as the ‘nights draw in’.

Baroness Ritchie of Downpatrick, non-affiliated, was disappointed that the circular economy did not form part of the Budget, suggesting that the Treasury does not recognise the important impact that better use of resources could have on cutting carbon, creating jobs and improving business productivity.

Plaid Cymru’s Lord Wigley said the Budget should have urged Wales to maximise capital expenditure using, where necessary, Wales’ own borrowing and tax-varying powers to respond to local needs. He  complained that the shared prosperity fund has just £220 million for the whole UK this year, compared to the annual £375 million that Wales received from EU structural funds.

Lord Dodds of Duncairn, DUP, said freezing tax thresholds for such a lengthy period is not a good idea because ‘taxation by stealth’ in this way means many more people paying much more tax in the long run. He also regretted that there was no mention of air passenger duty reduction in the Budget which is so critical to the very damaged aviation industry.

Closing frontbench speeches

Baroness Kramer, Lib Dem Treasury spokesperson, said she still cannot understand why most of the 3.8 million freelancers and contractors have been excluded from any help so far and remain excluded. She asked why the super-deduction tax scheme to get businesses to invest is limited to plant and machinery? It is an analogue proposal in a digital age, she opined, arguing that it should include intangible investments.

Kramer also argued that small businesses are the backbone of our economy and no recovery is possible unless they recover. “The recovery loan fund provides help for some, but many small firms need a mechanism to get out of debt. My party has called for a revenue loss scheme that would cover the fixed expenses of small businesses during the period when they have been forced to close. With that in hand, recovery and growth become possible.”

When we look at this Budget in the round, it is striking just how similar it is to the austerity Budgets of the Conservative and Liberal Democrat coalition Government, said Labour’s spokesperson, Lord Tunnicliffe. He noted that the IFS believes that the Chancellor’s spending plans are “likely to be undeliverable, at least not without inflicting considerable pain on individuals, families and public services.”

Closing the debate for the Government, Lord Agnew of Oulton claimed that extending the stamp duty holiday will reduce the risk of a fall in house prices in the short term, which is building momentum and encouraging confidence in the housing market. He said the Government are providing local authorities with additional funding for COVID-19-related pressures and giving local authorities the flexibility to raise council tax bills across their budgets. The CJRS and SEISS are designed to target support to those who need it most and to protect taxpayers against error, fraud and abuse, while also trying to reach as many people as possible, he claimed.

The minister argued that the increase in the personal allowance over the last few years means that fewer people than ever are paying income tax and freezing the personal allowance and higher rate threshold is ‘progressive and fair’. The Government will publish a consultation on aviation tax reform in the spring, he said, and that the upcoming busines rates review will answer how to rebalance tax burden to manage the transition to digital. At 25 per cent, the headline rate of corporation tax will remain one of the lowest - or the lowest - in the G7, he added; companies operating in Northern Ireland will continue to benefit from a headline rate that is competitive in the G7. The super deduction will help firms to become more productive, safeguarding and creating new jobs; and there are anti-avoidance provisions that apply to counteract arrangements that are contrived or abnormal or that lack a genuine commercial purpose.

Agnew told peers worried about the Northern Ireland protocol being bad for trade, that the Government were ‘absolutely committed’ to ensuring that Northern Ireland makes the most of the arrangement. “I offer my own personal reassurance that I am working on this as the HMRC Borders Minister and doing everything that I can to make the friction as minimal as possible for traders in Northern Ireland,” he added.

The full session on 12 March 2021 is here.