No hints at future Conservative tax policy, but ‘red wall’ voters are watching closely - CIOT/IFS tax debate at Conservative Party conference 2020

A video of the debate is available - here

Recent figures from the Office for Budget Responsibility have suggested that the cost of the government’s coronavirus response could be as much as £372 billion (and counting).

So what does that mean for the future of the UK’s tax system? Are tax rises on the horizon, or should policymakers be smarter and look at reforming the tax system to pay for the cost of the pandemic?

And what do members of the public – particularly those in the so-called ‘red wall’ seats wrested from the Labour Party in last December’s General Election who hold so much political leverage over the Johnson government – think?

Those were some of the main issues considered by Financial Secretary to the Treasury (FST), Jesse Norman. and a panel of tax and polling experts, at the CIOT/Institute for Fiscal Studies event, Tax after the pandemic, held at the (online) Conservative Party conference on Monday (5 October).

Are tax rises on the horizon?

Eventual tax hikes are seen by many as a necessary response to the pandemic’s mounting bills, but the question is also being asked as to whether these should come with a more fundamental review of the tax system.

Helen Miller, the deputy director and head of tax at the Institute for Fiscal Studies, believes there is a case for looking at the latter as the government seek to rebalance the books post-COVID. “It’s hard to think of a current tax that couldn’t be better designed”, she said, before adding “although we don’t have to raise taxes, I think there are some reasons to raise taxes and I think there’s going to have to be a debate about if we don’t raise taxes, where are we going to cut spending.”

When should taxes be increased? ‘Not yet’, she said, arguing that with the economy ‘still on its knees’, politicians should hold off for the time being.

“But now is an excellent time to start planning what any tax rises might look like, and in particular asking questions like who should be paying more”. That debate may be bigger than just demanding that the rich pay more. “It won’t just be rich v poor v the middle classes. It will also be things like how should it be spread across generations.”

So what should we do?

The ‘quick and easy workhorses’ of income tax, National Insurance and VAT may offer the path of least resistance in that they could deliver large sums of revenue for very little in the way of structural change. And although the Conservatives’ manifesto last year pledged not to increase these rates of tax, Miller would later suggest that the pandemic may potentially offer the party a get-out clause from this pledge.

“Let’s try to reform taxes as we go”, Miller said, “there are lots of options”.

Suggestions for consideration included aligning taxes on different form of income, reforms to the tax base for capital gains, a review of zero and reduced rates of VAT and reform of the Council Tax and Business Rates regimes – potentially including consideration of a Land Value Tax – as examples of areas that could help to both raise revenues and introduce greater fairness within the tax regime.

“Whichever tax you pick…we could do ourselves some favours by reforming it as well as increasing it.”

How can we support businesses impacted by the pandemic?

Peter Rayney, the deputy president of the Chartered Institute of Taxation, focused on the impact of the pandemic on the small and medium-sized business (SME) sector. He said that the economy had been ‘ravaged’ by coronavirus, and now was not the time to be looking at tax rises, particularly for the SME sector, which he said accounted for around half of the total job market.

He continued; “Generating tax revenues, as government has seen in the past, comes from economic growth and from the UK being seen as a great place to do business. As economies around the world begin to recover, I think it is very important that we do maintain our international tax competitiveness.”

He said that there were three steps that could be taken to maintain the competitiveness of the SME sector and support the tax base.

Firstly, Rayney urged the chancellor to follow the lead of his predecessor, Nigel Lawson, in simplifying the tax system. He lamented that the UK had one of the world’s largest and most complicated tax codes, which was a struggle to many small business owners and their advisers. This complexity could lead to innocent mistakes and non-compliance, which in turn could drain time and resources away from SME owners trying to run their business.

Secondly, Rayney called for greater certainty and stability within the tax system. He said initiatives – such as George Osborne’s Corporation Tax (CT) roadmap early in the 2010-15 coalition government and Ken Clarke’s decision to give advance warning of CT changes in 1994 – gave businesses greater confidence to plan for the future. He advocated a new post-COVID CT roadmap for business covering CT and employer NIC rates, as well as retaining the £1 million annual investment allowance which is due to be cut at the end of this year.

Lastly, he argued in favour of extended trading loss carrybacks for struggling businesses. Citing the chancellorships of Norman Lamont and George Osborne, Rayney said that both had introduced a three-year carryback system for losses during previous recessions, enabling companies to recover more tax that they had already paid in the past.

Rayney said that it would be ‘logical and sensible’ for the government to extend trading loss carrybacks for businesses impacted by the pandemic, enabling them to recover taxes paid in the three years from the 2017-18 tax year. “Yes, I know it costs money, but we do need this form of reform for struggling companies and their battered cash flows.”

What do voters think?

Deborah Mattinson, the founding partner of the Britain Thinks research consultancy, provided a flavour of how Britons view tax, with a particular focus on the red wall voters who had delivered the Conservative Party their 80 seat majority late last year.

“They like it [tax] a lot more than they used to…a lot more than just after the financial crisis when there was a general consensus that cutting back, austerity as it became known, was the way forward.” Over the last two years, an average of 57 per cent of those surveyed by the social research agency NatCen have been in favour of more tax and spending.

But perhaps this support is superficial? “People’s understanding of what tax means can be quite limited and quite poor”, Mattinson said. “I’ve done focus groups where people have asserted how keen they would be to have an extra penny on their income tax if it went to a pet project, usually the NHS, to then discover when you dig a bit deeper that what they mean is a penny a year.”

Support for the chancellor – and the government’s pandemic response measures – has been high, and while the public has placed a premium on protecting health, they are increasingly worried (but many remain oblivious) to the economic challenges ahead.

Mattinson said that 70 per cent of the voters she has polled believe that taxes will rise to pay for the pandemic, with 60 per cent indicating that they would be prepared to pay more personally to support the NHS. Those voters are resigned to the fact that they will be worse off as a result, but they see this as a better price to pay than further public sector spending cuts.

Voters in red wall constituencies are also concerned about tax, but they continue to feel that they and their communities receive a ‘bad deal’ from the government. 64 per cent of North East voters surveyed think their communities receive less in return for what they pay in, compared with just 30 per cent of Londoners.

So where now?

It appears that these voters have set a high bar for the government. ‘They see they have political power’, Mattinson said, ‘and they want to exercise it’.

But both parties won’t be without their troubles to seek.

The Labour Party – who will hope to woo back these voters in 2024 (when the next election is expected) – are still perceived as profligate with public funds: “they slosh your money around”, according to one red wall voter.

But, “there is a presumption that the Conservatives will run the economy in a way that favours the rich and, that they will starve public services, especially our beloved NHS, of funds.”

How is government responding?

Jesse Norman, the FST, had no plans to give the game away and announce future government tax policy, despite the decision to postpone this year’s Budget; “I’m afraid that does not mean that the Treasury’s policy about not commenting on fiscal measures between fiscal measures is going to be relaxed”, he said.

Echoing earlier comments made by Deborah Mattinson, the FST said that tax was a policy area where ‘everyone thinks they know something’ and have ideas of their own which, ‘typically in my experience do not apply to them’.

In the absence of a preview of future government tax policy, Norman set out a number of areas where the Treasury has been developing tax policy, including the introduction of the Digital Services Tax – a ‘toe in the water’ for the evolution of tax in response to the growing online economy – a review of the Business Rates regime and the development of a long-term focus on tax administration and strategy. “Even at this time, we’ve been extremely active as a Treasury in thinking about tax policy, irrespective of COVID.”

The FST also said that tax reform has to be well designed and well executed because, “in a world which is governed by social media, as ours is now, every single tax change has behind it an instantly mobilisable terracotta army of people who are angry about a potential reduction in the positive effects it has on them or an increase in the negative effects it has on them.”

He referred to the earlier suggestion of a land-based replacement for Council Tax and Business Rates, “the difficulty is that it would involve…the valuation or revaluation of every premises in the country…a task that you might properly ask whether or not, for all its benefits – if there are such benefits…you would need to make quite a convincing cost-benefit analysis to show why that was a good idea.”

This led the FST to the conclusion that tax is ‘more complex…than people think’. He noted, “there is no substitute for very careful attention to detail and very good communications. That is what any well-functioning Treasury should aspire to.”

What did the viewers think?

There were calls for government to look again at the valuation of properties for Council Tax. The FST suggested that this was a very serious matter which may be ‘astonishingly complex and difficult’. Perhaps that is why it is an issue that has been ducked by finance ministers across the UK’s political parties and devolved administrations.

The suggestion of a ‘solidarity tax’ to acknowledge the contribution of the NHS to the fight against Coronavirus – and along the lines of the solidarity surcharge (Solidaritaetszuschlag) introduced following German reunification – was proposed.

Helen Miller suggested that if it was designed as a one-off wealth tax to pay for the structural deficit, one of the main questions to consider would be deciding who would pay it and on what it would be levied. But she cautioned against hypothecation, noting that over time governments and political priorities (and therefore the use of revenues) change.

Mattinson said voters would want to know what it was being spent on. Norman said transparency and purpose would be important factors to consider in any future discussion on the matter while also noting that the Treasury, as a general rule of thumb, was reluctant to go down the hypothecation route.

There were also concerns that trust in the tax system has been eroded and required restoration. Peter Rayney said that the loan charge stood out as an example of an area of tax policy that had dented public trust. He added that the professional bodies were well placed to work with HMRC to help improve trust and simplify tax legislation. and offered the weight of the tax profession to help overcome these setbacks.

Norman was robust in his defence of the government’s approach to the loan charge. He also spoke approvingly of the way that HMRC had mobilised in response to the onset of the pandemic ‘in a staggeringly short period of time’. He said HMRC was thinking more systematically about how it used its powers to improve trust and confidence in its operations.

What about National Insurance? Surely the time has come to merge it with income tax? For Miller, it made sense as a consideration, although she warned that it would be hard to achieve in practice.

She also argued that the pandemic might offer the government a way out of its pledge not to increase rates of income tax, NICs and VAT. This was a suggestion that the FST took umbrage at; “it’s a bit difficult to say how important it is to have trust and consent in politics and then say that the recently elected government’s early decision should be to set aside one of its principal manifesto commitments.”

Mattinson said there was a poor understanding among the public of how taxes are structured and that helping people to understand it would help to improve trust in the system. “As long as you have incomprehensible pockets of tax people don’t understand, the more it looks like sleight of hand,” she judged.

By Chris Young