Treasury Committee - Chancellor says HMRC can meet service targets without extra resources

The Chancellor told the committee that HMRC was “on track” to meet its targets. He reiterated a commitment to allocate more resources “whenever HMRC make a good case”. Earlier he had defended the Government’s previous tax increases as necessary to fund help for households and business during the pandemic and a cost of living crisis.

Outlined below are key tax-related points from each session of the committee.

First session with the Office for Budget Responsibility (OBR) (transcript)

Harriett Baldwin, the Chair of the Committee, questioned whether the Autumn Statement constituted the biggest package of tax cuts since the 1980s.

In response, Tom Josephs, a member of the Budget Responsibility Committee, compared the Autumn Statement to other fiscal loosening since 2010, stating that it ranks as the third largest.

Richard Hughes, Chair of the OBR, emphasised that the assessment of the Statement's impact depends on whether it is viewed in isolation or within the broader tax system. “If you take what is going on with the whole of the tax system, over the medium term the tax burden is going up because the effective threshold freezes outweigh the effect of the measures taken.” Asked if considering it as a singular fiscal event in isolation would make the statement factually true, Hughes explained that “our historians have not fact-checked that one”, but acknowledged the Autumn Statement as a large discretionary fiscal loosening, marked by a substantial increase in public spending.

Anne Marie Morris (Con) inquired about the overall change in tax burden.

Hughes said that the policy announcements in the Autumn Statement would reduce the tax burden from where it would have been, but the cumulative effect of government tax policy decisions since 2019 has put the tax burden on an upward trajectory.  He attributed this to the freezing of personal allowances, higher corporation tax, and fiscal drag resulting from threshold freezes. Hughes said that freezing thresholds in particular, has led to lots of fiscal drag, which is dragging more and more people into higher tax bands.

Regarding the Chancellor's belief that high taxes lead to low growth, Professor David Miles, another member of the Budget Responsibility Committee, stated that: “What is almost certainly bad for growth is taxes that disincentivise work, saving or investment”. He recommended reducing marginal tax rates for improved growth and endorsed measures such as the national insurance changes and 'full expensing', “as long as they are in place, are permanent”. However, he thought no changes to the freezing of the tax threshold could have “disincentive effects”.

Morris sought clarification on national insurance from Miles and asked: “if you have a pair of scales in front of you. On one side, you put the NI tax forgone, and on the other side, you put the tax raised by not changing the thresholds. which is heavier”?

In response, Miles said that if there is no change in threshold policy over the next five years, the extra money the Government get from the threshold freeze is bigger than the tax giveaway. He added that this would amount to £10 billion, and over the next five years, the Government may receive around £30 billion more because of the threshold freeze.

Miles also said that individuals at the margin, who may have previously considered it not worth working, might now be persuaded to actively seek employment, as they will receive a bit more after-tax income. The OBR thinks the equivalent of 15,000 full-time workers will come into the labour force as a result. However, he argued that the bigger impact will be on the much larger group of people who are already working but will be incentivised to work additional hours. The OBR thinks that the extra hours of work will be the equivalent of about 80,000 full-time equivalent people.

Asked about the impact of the Statement on the self-employed, Miles said it was “similar to the class 1 thing, because it is just a reduction in the marginal rate of tax. Potentially a side benefit as well is a reduction in complexity.” Josephs added that, for the self-employed, the gain is a bit less, but simplifying the system is beneficial. He told the MPs that “the removal of the class 2 flat rate is actually quite small in monetary terms”.

Keir Mather (Lab) referred to a statement from KPMG suggesting that the full investment expensing is a timing difference that accelerates tax relief, rather than permanently benefiting affected businesses.

Miles responded that while it is a timing effect, that does not mean that it is neutral. He explained: “Getting the money upfront in terms of paying lower corporation tax because you can offset the whole amount now—as opposed to offsetting a bit now and a bit next year, rolling ahead nine or 10 years down the road—is valuable”. Furthermore, he noted that the scheme is expensive; in the short term, it is in the order of £10 billion or £11 billion and in the long term, it is probably a bit under £3 billion a year.

Miles also acknowledged a potential negative short-term effect due to making temporary full expensing permanent, as there may be less incentive to bring investment forward while the generous regime is in place. However, he suggested that in the long term, the sustainable and permanent impact could lead to higher investment levels.

Asked why full expensing is the right policy, Miles said it makes the “tax system neutral” for those bits of investment that get full expensing and where investment is financed from retained earnings or eschewing equity. Secondly, as it’s a permanent feature, you do not get distortions to investment.

Asked whether the policy creates a bias towards investing in qualifying plant machinery, rather than focusing on other areas, Miles said it depended on whether they are substitutable. “If you have a piece of investment that is in research and development or something, which may not get full expensing, versus buying a van, they are not really substitutes.”

Second session with economists (transcript)

During the Committee’s session with economists, Harriett Baldwin asked Torsten Bell of the Resolution Foundation if he recognised the Treasury’s description of the Autumn Statement as the largest tax cut since the 1980s.

Bell affirmed this view in terms of the fiscal effect in the final year of the forecast period. He claimed that the permanent tax cut would be smaller due to the lower permanent fiscal effect of moving to full expensing of plant and machinery investment.

Anne Marie Morris asked the opinion of Paul Johnson, Director of the Institute for Fiscal Studies, on whether the tax burden is decreasing or increasing.

Johnson said the tax burden is rising, “ essentially to the same peak that it was expected to reach beforehand, but a year or two later—so to 37.7% of national income.” However, the tax burden could have gone even higher if tax cut measures were not included in the Autumn Statement.

Johnson viewed the “huge amount of fiscal drag that has been put into the system by six years of freezing income tax thresholds and allowances” as the main reason for this high tax burden. He stated that this Parliament will most likely be the biggest tax-raising Parliament in peace-time history, and the UK is going to hit 37% to 38% of national income as tax.

He continued: “We had decades in which tax wobbled around 33% or so of national income. Then, over a seven or eight-year period, it is going to move up by something like 4% of national income in a way that it just has not done in the past 60 years.” He speculated that this situation could persist for some time due to pressures on public spending.

Morris also was interested to hear the view of Dr Jumana Saleheen, Chief Economist and Head of Investment Strategy Group, Vanguard Europe, on this issue and asked “do you think it is wise, appropriate, reliable and resilient to assume that trajectory will be up as opposed to looking at the impact of the tax cuts on the day itself…which will affect individuals’ behaviour”?

Saleheen suggested focusing on the trajectory. She pointed out that the tax burden is rising from 36.2% of GDP to 37.7%.

Bell proposed reframing tax cuts not as a simple choice but as a response to wider economic changes increasing the tax burden. He noted that the Chancellor chose to return additional tax revenues to the public, addressing the rising debt interest bill by maintaining overall public spending levels while reducing public service spending.

Drew Hendry (SNP) questioned which tax cuts were the ‘right decision’ for the UK economy and who would be the winners and losers following the Autumn Statement measures. In response, Johnson suggested that cutting income tax or national insurance was the right choice, given its better distributional consequence.

He added that the distributional impact of the tax change is very progressive due to the freezing of tax allowances. “If you are asking about the balance between tax cuts and the promised spending cuts, I would say it is not the right decision in prospect, because I don’t think it is a genuine statement of the most likely outcome of what will happen”.

Saleheen suggested that reducing debt levels could have been a better choice for macroeconomic stability.

Bell argued that higher public investment should have been included in the Autumn Statement and noted that there are “decent microeconomic choices on the tax cuts”.

The Head of Research and Policy at the Women’s Budget Group, Dr Zubaida Haque, claimed that the Autumn Statement tax cuts were ‘political’ and “not the right decision”. She argued that they would not benefit women as much as men, and meanwhile public services are not “in a good state”. “It goes back to the point that a healthy population is a healthy economy, so the Chancellor should have been investing in that”.

Discussing other measures in the Autumn Statement, Johnson criticised the inclusion of the business rates package, suggesting it should have been permanent rather than rolled over annually. He noted that this measure and some other were initially introduced during covid and then rolled over to other years come at a big cost. “[I]f you want to have them permanently—say you have them permanently—do not roll them over year by year such that no one has any idea where we will be into the future”

Bell disagreed with the focus on small businesses for growth, advocating targeting tax support at young firms instead.

Third session with the Chancellor (transcript)

Siobhain McDonagh (Lab) criticised the Chancellor’s tax measures generally, claiming they would result in people paying £1,200 more in tax.

Jeremy Hunt, the Chancellor, disagreed. Taxes had had to go up to provide support during covid and the cost of living crisis, he acknowledged, but the Government was now starting to reduce the tax burden. Hunt added that due to cuts in national insurance, for example, an average teacher would receive around £630 more and a nurse would get about £520 extra next year.

In response, McDonagh said that teachers and nurses were being pushed into the 40% tax bracket.

Hunt explained that the freezing of tax thresholds allowed the Government to fund extra support for families. “In this autumn statement we had a position where it was possible to relieve tax pressure, and I took the choice to concentrate those efforts in areas that will grow the economy the most”. He emphasised the national insurance cut as a means to boost workforce participation and support growth.

Danny Kruger (Con) welcomed the ‘full expensing’ measure, but questioned whether companies would see the full value of this scheme given the significant increase in corporation tax.

Hunt reiterated the CBI’s statement that the scheme is a ‘game-changer’ and would ‘fire-up’ the economy. He pointed out that the UK has lower productivity than Germany, America and France and the scheme could potentially improve business investment.

Kruger argued that ‘full expensing’ would mainly benefit larger businesses and suggested the Chancellor could have done more to support start-ups.

“For start-ups, we announced that we are extending the EIS, the SEIS and the VCT scheme for another 10 years from 2025. That is probably the single biggest measure that has made us the start-up capital of Europe for high-growth, high-tech businesses,” stated the Chancellor.

William Macfarlane, Director, Strategy, Planning and Budget at the HM Treasury, clarified that the full expensing measure is targeted at the largest, most capital-intensive firms. However, smaller business already receive 100% tax relief on qualifying plant and machinery investment up to a £1 million limit, under the Annual Investment Allowance.

Dame Angela Eagle (Lab) asked the Chancellor to confirm whether taxes are down or up.

Hunt asserted that he has cut taxes to stimulate growth, and emphasised the importance of a growing economy in funding public services over the medium term.

Eagle accused Hunt of engaging in fiscal fiction, asserting that while benefiting from increased tax receipts due to prolonged and higher-than-expected inflation, he has failed to compensate for the additional costs of inflation in public spending.

In response, Hunt defended the increase in public spending, saying it was going up in real terms. He said it would have been ‘fiscal fiction’ if he had used the resources for tax cuts that had no impact on growth, but that was not what he had done.

Drew Hendry questioned Hunt about HMRC funding, initially raising concerns about the significant outstanding tax debts, amounting to £45.9 billion in March. He asked why additional funding was only being given now.

Hunt defended the Government's approach, highlighting the comparatively lower tax gap in the UK. He emphasised that “in every fiscal event I have done, I have prioritised giving extra resources to HMRC, because I think it is absolutely fundamental that people pay the taxes that they owe.” He mentioned the allocation of resources to combat Covid fraud and stated his commitment to providing more resources “whenever HMRC make a good case”.

Hendry was not satisfied by Hunt answer and suggested that the allocated resources were insufficient, particularly for HMRC's compliance and customer service functions. He pointed out HMRC's struggle to meet customer service targets and the potential impact of fiscal drag.

Hunt responded by assuring that HMRC was “on track” to meet its targets and promised to provide a detailed update in due course.

Hendry further inquired about any risks outlined by HMRC regarding tax collection and assistance to customers due to resource constraints.

“I can assure you that when I have had requests from HMRC to increase the number of people they need to tackle taxes that should be paid but aren’t being paid, we have responded very sympathetically”, claimed the Chancellor.

However, Hendry pressed on concerns about people's ability to contact HMRC for assistance, given the reported issues.

Hunt insisted that he had discussed the matter with HMRC's head, who assured him of “plans in place” to improve customer service without additional resources: “My understanding is that they will be able to meet their customer service targets with the resources they have.”

Hendry expressed scepticism about HMRC's ability to meet its targets without increased funding for customer service functions.

Macfarlane argued that the Government’s emphasis on enhancing public sector efficiency and productivity is reflected in the autumn statement. He pointed out that the plan involves eliminating the threshold for high-income employees to file a self-assessment tax return, which addresses the issue of individuals unnecessarily engaging in HMRC processes. Macfarlane stated that: “There was previously an income trigger to enter self-assessment, but the Government is streamlining that, not with additional resources but by trying to improve the customer interface between HMRC and the taxpayer”.

Baldwin expressed concern about the complexity of the tax system, reminding the Chancellor of the committee’s objection to the abolition of the Office of Tax Simplification. While acknowledging some simplification measures taken by the Chancellor, she emphasised the need for more work, especially addressing high marginal tax rates, cliff edges, and complexities at various income levels.

Hunt acknowledged the importance of simplification and expressed his commitment to continuing such efforts.