Treasury looking at R&D ‘unexplained gap’, Chancellor tells MPs

The Chancellor also argued with a Labour MP over whether the universal credit taper change was a tax cut, denied that he was raising taxes now so he could cut them ahead of the next election, and implied that other motoring taxes would need to rise to make up for the loss of fuel duty as petrol and diesel vehicles leave the roads.

The session was wide-ranging, from education spending to ‘net-zero’ but this write-up is focussed principally on the tax discussion.

Business taxes and reliefs

On research and development (R&D), Committee Chair Mel Stride (Conservative) asked why the £22 billion target is slipping back two years to 2024-25. The Chancellor replied: “If we had never mentioned £22 billion, what would people see? They would see £20 billion representing the largest amount that any Government has spent on R&D in this country.” He went on to say he is ensuring that core research gets very generous settlements and making sure that incremental funds are able to go the later-stage R&D on the innovation side. Stride responded that some people would say that tax reliefs around R&D are not the same as putting public funds into R&D, because some of that R&D that companies will claim relief against would have happened anyway. Sunak said this was a fair question and that the Treasury is looking at the ‘very big unexplained gap’ between what is claimed regarding R&D tax credits and what is spent in this country in R&D. He said on the RDEC scheme, for every £1 we get £2 or £3 worth of value but for the SME scheme, ‘we get far less than that’.

Sunak said the annual investment allowance is a very easy-to-use full expensing for capital investment. Stride remarked that the OBR said that it would not really make any material difference to the path of business investment, to which Sunak replied that even if there is not the most overwhelming, compelling evidence that it was going to be transformative, it certainly, probably on the margin, is helpful.

Siobhain McDonagh (Labour) highlighted that the top 10 executives and shareholders of Britain’s largest house-builders have personally pocketed more money since the terrible fire at Grenfell than their firms have set aside to fix the cladding crisis. Sunak said the new residential property developer tax will capture many of them. The Housing Department is bringing in a new charge on high-rise buildings as part of the new building safety regime, so there is an additional regulatory intervention there, he said.

In March, Ireland announced plans to move homeworking to shift workers from the cities to more rural areas in a big decentralisation push. They are also looking at offering tax incentives for businesses that want to relocate to other areas of the country. Emma Hardy (Labour) asked for Sunak’s view, but he would not be drawn on Ireland. The Chancellor replied that the tax system already provides tax relief for people with some of their home-working expenses, and that the Treasury is very much a believer in moving jobs outside of London. We have opened a campus in Darlington for the Treasury to use, he said.

Personal taxes and the cost of living

Emma Hardy asked if the health and social care tax measures go far enough, considering ‘of the revenue raised by the levy, only 18 per cent is going to go towards adult social care over the next three years’. Sunak said ‘yes’ because it represents historically very high levels of investment in social care. Are you going to be looking at raising the levy rates again to manage this increased demand for adult social care in the future? asked Hardy. Sunak replied that ‘it does not feel to me like that would be necessary in the forecast period that we have’.

Sunak was rebuked by Labour’s Siobhain McDonagh for a claim to have cut taxes for millions of the lowest-paid people in the country. McDonagh pointed out that the change to the universal credit taper was a benefit change not a tax cut.

McDonagh complained: “In your Budget, the national insurance increases will cost a care worker £140 a year more, a nurse £310 a year more, and a paramedic £420. Meanwhile, banks that have recorded record profits are set to save £4 billion in taxes by 2027.” Sunak said he needed to raise money and NICs was the fairest way compared to VAT and income tax. He said you must look at the decision on the bank surcharge in combination with the fact that the core underlying corporation tax is going up from 19 per cent to 25 per cent.

Dame Angela Eagle, Labour, asked how we can have a high wage economy when in the 16 years from 1992 to 2008, real wages went up by 36 per cent. The OBR forecast showed that, in the years between 2008 and 2024, ‘we can expect a grand rise of 2.4 per cent’. Sunak accepted Dame Angela’s view but said the Government has taken quite particular action to improve wages at the bottom end of the wage spectrum. He said a lot of the wage growth that she pointed to leading up to 2008 was not very evenly shared. There was also a report just last week that said that the proportion of people in the UK on low pay was the lowest it has been since 1997 or 1998, he said. We have a 26 per cent increase in real terms and a 40-something percent increase in cash terms over this Parliament in skills which should lead to higher wages, he claimed.

Dame Angela said one of things that has squeezed people’s real living standards is the increase in the tax take. The Resolution Foundation (RF) calculated it at £3,000 per year since 2019 at the last election. But Sunak said the RF ‘combined lots of different taxes, which were not all necessarily directly levied on individuals’. It is all very well to look just at the taxes without looking at what you are getting, he said. The significant investment in public services that those taxes are paying for is ‘highly progressive’ for those on lowest incomes, he claimed.

Dame Angela remarked that the Government is saving £30.5 billion over the next five years by ending the pensions ‘triple lock’. Sunak replied that ‘we did not scrap the triple lock in its entirety, as some people said we should. We just temporarily moved to a double lock’, believing ‘that is the right and fair thing to do’. Relative to earnings, pensions in this country are the highest they have been in over 30 years, he said.

Sunak told Mel Stride that he did not decide to freeze income tax thresholds to hedge against future inflation.

Indirect taxes and duties

Mel Stride was pleased with changes to the alcohol duties and the taper change for universal credit in the Budget. Why did you not go further on the ‘tax cutting side’ of things at this point compared to leaning into spending quite so much? he asked. Sunak said: “We have a bunch of commitments that we want to deliver.”

SNP MP Alison Thewliss wondered why the Budget found that the best way to go about promoting the ‘net-zero’ targets was to cut air passenger duty (APD) for internal flights. Sunak said he created a brand-new rate for ultra-long-haul and if you look at the impact of those two things, from a carbon emissions point of view, ‘they probably just about offset each other or a bit more than reduce’. Thewliss urged him to act on high train prices in the UK rather than cut APD considering flights intra-UK can be cheaper than rail. Sunak pointed out that that carbon emissions from aviation are about eight per cent of our total; of that eight per cent less than five per cent comes from domestic aviation.

The Government’s policy to ban new petrol and diesel vehicles by 2030 will lead to the loss of, at today’s prices, £37 billion of revenue through fuel duty, pointed out Thewliss. Sunak replied that revenue from motoring taxes will have to keep pace with the change in the adoption of electric vehicles. The Transport Select Committee is currently doing some work in that space, he said.

Thewliss asked why there were no measures within the Budget to incentivise people to make improvements to their homes to reduce their carbon impact – for example, cutting VAT to home insulation, energy efficiency, solar panels? Sunak replied that ‘there is money put aside for doing exactly what you said: building efficiency upgrades to reduce people’s energy bills’. But the SNP MP said that if you were to remove VAT from those measures, it would save a huge amount of money for housing associations up and down the country. Sunak countered that we are taking an alternative approach with direct grants targeted to people who need them.

Fuel duty is something that benefits people very broadly, said the Chancellor, but a VAT cut on energy would not be a sensible thing to do because the bulk of that very expensive tax cut would go to the wealthy.

Fiscal rules and Budget impact

Mel Stride remarked that Sunak’s headroom against his two major fiscal targets (on net debt and the deficit) ‘looks rather pale’ in comparison to previous chancellors and their respective targets. Sunak did not disagree. He added that from this point forward we have fixed budgets for the next three years which gives the Treasury an ‘enormous’ amount of certainty on the spending side of the equation compared to previous fiscal events. There is contingency built into all the spending numbers, he reassured the MPs.

What do you have to show for the tax burden rising to the level that it has? asked Labour’s Rushanara Ali. The Chancellor said the tax burden is very high is because we are ‘spending a lot on lots of different things’ such as on health and education. Should the British people be confident in the measures that you have put in place in terms of taxation and expenditure, given what has happened in relation to the consequences of Brexit as well as of the pandemic? asked Ali. The OBR described our interventions as ‘remarkably successful’, retorted Sunak, adding that on the capital side, because of things like the super-deduction and lowered business insolvencies, and investment in things like R&D, innovation has continued to be strong, people can feel much more confident.

Sunak denied he is raising taxes now so that he can cut taxes closer to a general election, claiming ‘the last thing I would do is voluntarily raise taxes’.

Ali pointed out that women are left £48 billion poorer by the Budget, six million families have been hit by the £20 cut from universal credit (while 1.9 million families will benefit from the changes to the taper rate) and we are going to see over four million children still living in poverty. But Sunak counterclaimed that a single parent who is working full-time on the national living wage, with two kids, renting, is going to be, as a result of the change to the universal credit taper rate, £1,200 better off.

Sunak told Anthony Browne, Conservative, that the trajectory on debt is probably more important than the absolute level to investors.

Emma Hardy was worried at the loss of face-to-face support for people in debt when the Money and Pensions Service goes ‘virtual’. Sunak said it not something that he has a view on in terms of its rationale.

Anthony Browne queried why trade with the EU has not bounced back as much as it has with the rest of the world. Sunak replied that we have a free trade agreement with EU but it is not exactly the same as we had before, which means that the trade patterns are going to take some time to adjust.

Mel Stride closed the session by saying: “Now, of course, all that people are demanding is that you go from this high-debt, high-deficit, high-tax, low-growth, low-productivity large state, with low real wage growth, huge pressures on living standards, in the face of threats of interest rate rises, inflation and all the other things that are lurking out there, and that you deliver to us a high-growth, low tax, high-skilled, high-productivity, high-wage, fiscally health future and that you do it all in a very fair way, if you do not mind. That is a very huge challenge.”

The transcript is here.

By Hamant Verma, CIOT Senior External Relations Officer