Budget debate: Peers clash over NIC increase and impact of inheritance tax on farming

National Insurance 

Lord Johnson of Lainston (Con), shadow minister for business and trade, accused the government of being dishonest and expressed concerns about the impact of the employer’s NIC increase on the voluntary sector. He said: “This is not just hitting hedge fund managers or taxing carried interests in a different way; it is a hypodermic syringe of poison into the very root of our community activity”.

Lib Dem peers including Lord Razzall, Lord Oates and Lord Fox suggested that the increase will impact the hospitality and retail sectors in particular. Lord Fox, the party’s business spokesperson, said that the tax bill for employing a part-time worker would increase by 73% as a result of lowering the threshold. He urged the government to exempt social care providers and GPs from the rise, saying that many care providers are already “on the brink”.

“No growth means no taxes, and if you put up taxes by £40 billion then you get no growth” warned Lord Bilimoria (Cross Bench), who also warned that higher tax on employment could discourage businesses from hiring. The peer explained that studies indicated that a 1% rise in tax correlates to a 0.5% drop in hours worked, and higher labour taxes increase unemployment levels. 

Former Treasury minister Baroness Penn (Con) claimed that due to the government’s decision to reduce the threshold at which employers pay national insurance, businesses have to pay more to take on entry-level workers or employ people part-time. She added: “Can it really be the right decision at a time when one of the biggest challenges for this Government is to support people off benefits and into work”.

While supporting her party’s Budget, Baroness Warwick of Undercliffe (Lab), expressed concern that the tax increase would make a “significant hit” on homeless and supported housing services. She urged the minister to consider a relief for the sector.

Agricultural property relief (APR)

A cross bench peer, The Earl of Devon, implored the government to think again about the changes to APR, warning that it could lead to hundreds of family farms being “swallowed up by commercial farming interests replete with the professional advice and corporate structures that will navigate the Chancellor’s family farms death tax.”

However, he reflected, in some respects, “the phasing out of APR, if properly planned and delivered, could be beneficial. It may encourage the transfer of family-owned farms and other rural businesses earlier in life, thereby decreasing the average age of farmers and increasing productivity.” He recalled his own disappointment “when realisation dawned that it would be most efficient for my father to own the business at the moment when he died. As a relatively young farmer with, hopefully, time on my side, I am not our concern. As proprietor of a 28th-generation family enterprise, whose forebears steered our ever-dwindling resources through rapacious capital taxes, civil wars, attainders, beheadings and the theft of the Isle of Wight, I am not our concern. Our concerns must be for those distressed farmers who cannot readily afford professional advice, whose meagre earnings afford them no provision for retirement and who may not have seven years left to live. They are very afraid right now.”

The earl said that a lack of policy detail had left professional advisers confused. “There is no clarity on the application of rules for lifetime gifts and no information on how the changes will apply to trusts or the apportionment of APR within the 10-year principal charges; there is uncertainty regarding the transfer of farming assets between spouses; and it is totally unclear whether there will be interest charges when paying inheritance tax in instalments.”

The earl also expressed concern about the carbon border adjustment mechanism, saying that levying a carbon tax on imported fertiliser could impact the cost of food grown domestically.

Another crossbencher, Lord de Clifford, was also concerned about the impact of the change to APR. “If we wish to protect our food security, environment, rural economy and the countryside that most of us love, we need to think again about this policy.”

A Northern Irish peer Lord Empey (non-affiliated) said that the move would affect small farm and family businesses, and instead the government should be going after large companies that have used the purchase of land and other assets to avoid tax. 

Baroness Finn (Con) warned that the tax on farms will ‘kill off’ homegrown family businesses and, more generally, that the ‘eye-watering’ rise in taxation is not accompanied by any “appreciable plans for public service reform”.

The Duke of Wellington (Cross Bench) challenged the government’s claim that through limiting APR they will catch the “wealthiest people”. He suggested that, on the contrary, Labour is catching in its net “many small to medium-sized farmers who are strivers”. He called on the minister to raise the threshold to £2-3m.

VAT

Lord Sherbourne of Didsbury (Con) challenged the taxation system in the UK, suggesting that no one has the ‘faintest’ idea how much VAT they pay. He provided an example that when someone gets a £25 takeaway, £4 of that goes to the taxman and if someone buys a washing machine for £350, £60 of that goes to the taxman. He continued: “Every time those prices go up, the Government are taking more”, urging the government to be more open and honest about  the total amount of tax the public are paying.

Lord Lexden (Con) accused the government of “breaking a universal golden rule” by adding VAT on independent school fees. He said it is not even at “a fairly modest rate to ease the process of adjustment but at a whopping 20% from 1 January”.

Lord Moynihan of Chelsea (Con) thought putting VAT on school fees would affect business growth. Lord Berkeley of Knighton (Cross Bench) said VAT on fees at specialist schools would be a particular problem. The Earl of Clancarty (Cross Bench) thanked the government for listening to concerns about VAT on specialist performing arts schools and confirming that courses covering the Music and Dance Scheme and the Dance and Drama Awards scheme will not attract VAT.

Business taxation

While welcoming increased R&D funding Lord Oates expressed disappointment about some businesses waiting for 14 months for their application to be considered by HMRC (despite the standard waiting times being supposed to be six to eight weeks). He warned, “Businesses are going bust waiting. If we cannot get these basics right, we will not deliver sustainable development at home”.

Lord Lamont of Lerwick (Con) considered the Budget anti-business and argued that many observers, including the Institute for Fiscal Studies, predict that the government would increase taxes again in the next couple of years. He said “One can make the pips squeak, but our tax base is relatively narrow” with only top 1% of all taxpayers paid 29% of all income tax and the top 10% paid 61%.

The Earl of Clancarty was disappointed that arts tax reliefs have not been extended to choirs. He also warned that the reduction in business rates relief would adversely affect the arts. “The Music Venue Trust has calculated that this reduction will place an additional £7 million burden on 350 grass-roots music venues, put at risk more than 12,000 jobs and cost more than £250 million in economic activity.” 

Tax levels and administration

Baroness Wheatcroft (Cross Bench) urged the government to simply the tax system, arguing that “we need…to tax what needs taxing”. She raised a concern that the UK’s tax guide is more than 1000 pages, suggesting that people do not understand it or “pay expensive advisers to avoid or evade tax.”

Lord Burns (Cross Bench) believed that when the ‘primary’ objective is raising revenue in any Budget, it is better to focus on the major taxes, where the consequences are ‘predictable’.  However, he worried that the impact of changes to taxes on wealth and inheritance is “very difficult” to predict. The peer stated “They are largely about incentives and fairness, and they are much better handled under the heading of tax reform than as part of a tax-raising Budget”.

Another Cross Bench peer, Lord Desai, supported higher taxation, suggesting that the UK should set taxes at 40% or 45% of GDP similar to some northern European countries. He added: “We have to stop believing that we can have an American level of taxation and a British level of welfare state”.

Lord Desai said the UK’s tax structure “is biased against investing in equities and encourages investing in bricks and mortar. There is only one asset in this country that is tax-free. If you have your own house and invest in it, when you sell it, if it is your principal residence, you do not get taxed on the capital gain. Imagine an asset with a 0% taxation rate for capital gains”.

Lord Sikka (Lab) said “progressive taxation can reduce inequalities, but the Chancellor seems reluctant to embrace it”. He suggested that there are still “plenty of tax avoidance opportunities for the rich” despite the government announcements about capital gains tax and carried interest. 

Lord Bridges of Headley (Con) acknowledged that his party’s record on growth was not “as good as” it should have been but also blamed Labour for breaking their manifesto promises. He believed that after the initial ‘sugar rush’, the Budget would lower growth in the medium term. The peer stated: “When I read the Budget, the only growth I can be absolutely sure of is 5,000 more tax inspectors”. 

Personal taxation

Lord Sharkey (Lib Dem) raised an issue that HMRC do not view diminishing shared ownership, common in sharia finance, as a settlement for income tax, CGT, or inheritance tax. He asked the Treasury to provide binding guidance, otherwise, rating agencies could make “securitisation very problematic”.

Lord Davies of Brixton (Lab) supported the Budget, especially in relation to inheritance tax on unused pensions. Labelling the measure as ‘reasonable’ he said “The money was put in the pension fund tax free and it seems eminently reasonable that, when the money is taken out, it should be subject to tax. Pension funds are for the purpose of providing pensions; they are not for the purpose of inheritance tax planning or tax avoidance”.

Lord Londesborough (Cross Bench) said the Budget was ‘unbalanced’. He questioned the rationale for increasing stamp duty land tax and freezing fuel duty, despite Labour’s commitment to net zero goals. 

Lord Moynihan and Lord Elliott of Mickle Fell raised concerns about wealth creators leaving the UK, with Moynihan claiming there would be further ‘diminution’ in economic growth from the flood of entrepreneurs and non-doms. Elliott said: “For every top 1% taxpayer who leaves, 26 additional median taxpayers are needed to plug the gap”. 

Former cabinet minister Lord Young of Cookham (Con) observed that council tax has not been revalued for over 30 years. He asked whether it would increase again next April and consequently local government get the blame for the ‘breach’ of a government pledge. Lord Shipley (Lib Dem) considered council tax ‘regressive’ and questioned the rationale of not reforming it yet.

Labour reactions and the minister's response 

Labour peers including Lord Liddle, Baroness Liddell of Coatdyke, Lord Eatwell and Lord McConnell of Glenscorrodale welcomed the measures announced in the Budget with Lord Eatwell claiming that the Budget indicates that the government’s “strategy of reform is on track to succeed”.

The Financial Secretary, Lord Livermore, acknowledged concerns about the increase in employers’ NIC, but suggested that the government is protecting small businesses by increasing the employment allowance from £5,000 to £10,500. He further added that charities are able to claim employer NICs reliefs, including those for under 21s and under 25 apprentices (where eligible). He referred to the Bank of England which predicts unemployment will fall, adding: “According to the OBR, employment will grow over the forecast period by 1.2 million”.

On SDLT, Lord Livermore said that the government is reforming the levy so that those who buy second homes pay two percentage points more than before. This will support an estimated 130,000 additional people to buy their first home.

In regards to the APR announcement, the minister argued that “currently the largest estates pay a lower effective tax rate than smaller estates. That cannot be right”. He continued that individuals can pass up to £500,000 to a direct descendant, and then agricultural property relief will provide another £1 million tax-free allowance.

On inheritance tax on pensions, Lord Livermore believed that the reforms remove ‘distortions’ resulting from pensions tax policy over.

You can read the full debate here.