Conservative peers at odds over tax hikes

Opposition peers, on the other hand, did not generally question the need for taxes to rise, though some had particular criticisms around the energy profits levy and changes to research and development credits, as well as suggestions for reform of inheritance tax and capital gains tax.

Government opening speech

The debate, which lasted for just short of four and a half hours, was opened by Treasury minister Baroness Penn, who claimed the Autumn Statement will lead to a ‘shallower downturn’, lower energy bills, lower interest rates, higher long-term growth and a stronger NHS and education system.

On tax, Penn said the Government is asking those who have more to contribute more, and will avoid the tax rises that most damage growth. She highlighted that the Government is reforming allowances on unearned income, and said that after the changes the smallest 40 per cent of businesses will still pay no national insurance at all. The UK has a VAT registration threshold more than twice as high as the EU and OECD averages and it will implement OECD pillar II corporation tax reforms, she added.

Conservative backbench speeches

Lord Bridges of Headley, chair of the Lords Economic Affairs Committee, was among a number of Conservative peers warning of the damage tax increases could do. He warned: “We must beware stability becoming the stability of the graveyard, where ever-higher taxes and spending snuff out enterprise and growth.” He ‘profoundly disagreed’ with the “creeping consensus that we must somehow accept that we are in a new era of higher taxation, higher spending and a bigger state”, saying: “I reject that thesis outright. It is not what I believe in, not just for reasons of principle but because this approach, I contend, will fur up the arteries of our economy. That will hinder growth, and our children’s and their children’s ability to pay for the services their generations will need.”

Baroness Noakes, a former ICAEW President, was similarly appalled by the tax burden rising to a post-war high of 37.5 per cent. High taxes blunt incentives to work, invest and innovate, she said. She deplored the return to a ‘socialist narrative’ that singles out savings and investments, with a tax (or perhaps attacks?) on capital gains and investment income. The high marginal rates of tax associated with the higher tax bands interacting with personal reliefs were already a ‘stain on our tax system’, and this has now been magnified by the reduced threshold for the higher rate of tax. “We will likely not be forgiven by an electorate that will learn what fiscal drag really is in a time of inflation and what it does to household finances,” she concluded.

However Lord Tugendhat took to task those of his colleagues who had attacked raising taxes as being ‘fundamentally un-Conservative’. “Of course, there is a strong preference in the Conservative Party for lower taxes and a smaller state, but it is not always possible to pursue policies in that direction,” he told the House, adding that the preference for lower taxes “has never been an article of faith”. The requirements of good government sometimes involve raising taxes and increasing the size of the state, he explained, saying that the challenges of climate change, the pandemic, demography, defence and the threat posed by Russia mean that now is such a time.

Lord Horam agreed that it was ‘quite normal’ for Conservative governments to increase taxation: “George Osborne did it; Geoffrey Howe did it. For heaven’s sake, Benjamin Disraeli did it. When the Liberals were promising to end income tax altogether, he maintained it because it was necessary for important public works.” It is argued, he said, that if you have high taxes, you diminish growth, but UK tax levels as a share of GDP are significantly lower than those in most EU countries, but looking at the growth of, say, France or Germany compared to the UK, “there is not a lot of difference over the past 20 or 30 years, despite their having higher taxes.” High taxes are necessary from time to time, they give us better public services and greater equality, and we should not fear them, he concluded.

A number of Conservative peers took a more nuanced view. Lord Lamont of Lerwick was among them. Calling the Government’s approach ‘balanced’ he said the Chancellor could not escape the shadow of the mini-Budget, which meant that, above all, he had to satisfy the markets that the national finances were sustainable. Lamont, a former Chancellor himself, questioned the conventional wisdom that you cannot raise taxes going into a recession (he cited the Budget of 1981), but observed that that was anyway not what today’s Chancellor is doing: “We are not tightening fiscal policy going into a recession. Most of the fiscal tightening falls in the latter part of the survey period, by which time, I hope, the recession will be over.”

Former Shadow Chief Secretary to the Treasury Lord Flight also took a more balanced view, calling the ‘Autumn Budget’ (his words) ‘sensible’ but regretting the Government’s reduction of the income level at which the 45p tax rate will apply. After the costs of mortgages and children, there is little left over from income levels of £125,000, especially if there are more children involved, he claimed.

A number of Tory peers made the case for tax reform in the debate. Lord Livingston of Parkhead said we need a tax system that encourages people to strive to achieve, promoting social mobility and growth: “Yet large parts of our tax system do not do that today; we still tax earnings more than gifts. Why is it that, if a 20-something is lucky enough to be given by his uncle £40,000, he or she pays less or no tax than if he or she worked for 60 hours a week and earned that? There is something wrong—we are not supporting people who are striving to achieve.” He agreed with the IFS that “raising badly designed taxes will be more economically damaging than raising sensibly reformed ones.”

Lord Leigh of Hurley, a chartered tax adviser, currently chairing the Lords Finance Bill Sub-Committee, said the digital services tax is not fit for purpose, but the Government had rejected ideas to tighten it up. He was pleased to see that pillar 2 of the OECD Inclusive Framework will include a qualified domestic minimum top-up tax. But to him, this means that Amazon, Google and other companies within its scope may pay ‘a tiny bit more tax’ on their business in the UK, but nothing that will move the dial and, of course, it will mean that UK groups bear the extra tax and compliance costs of their worldwide income. He said the undertaxed profits rule would be helpful: “It is a backstop so will help, and the Government are to be congratulated on confirming that it will be used, but that does not come in until 2025. So, we have not really addressed the taxation of, in particular, US groups trading here, and this needs urgent attention and action.”

Leigh also welcomed the Chancellor’s decision not to raise capital gains tax rates, something which had been rumoured ahead of the Autumn Statement. “The Chancellor listened to real concerns from British entrepreneurs and investors in both public and private companies, who said that an increase in capital gains tax would have been a disaster for SMEs, which, as has just been described to us, are the engine of growth for our economy,” he told peers.

The economist and former Director of the Centre for Policy Studies, Ruth Lea, newly ennobled as Baroness Lea of Lymm, made her maiden speech in the debate. She took the opportunity to reflect on the nature, difficulties and uncertainties relating to economic forecasts, defending the OBR with the observation that its record has been ‘perfectly respectable’ when compared with other forecasts.

Labour speeches

Labour peers broadly accepted that higher taxes were necessary, though they had a range of specific criticisms of the Autumn Statement measures and the tax system more widely.

Why would anyone invest in a Britain that the Chancellor tells us is heading for a recession, not just now but with massive cuts in 2024 and 2025 too? asked Labour Treasury spokesperson Lord Eatwell. He observed that, in his 2021 Budget speech, Rishi Sunak had declared his goal was to reduce taxes, and that, in the Autumn Statement, Jeremy Hunt had similarly warned that “high-tax economies damage enterprise and erode freedom.” “Tell that to the Scandinavians,” said Eatwell, adding that, “The point about these statements is not that reducing the burden of taxation is a bad idea—we all want lower taxes. In appropriate circumstances, cutting taxes may be a very good idea, but underfunding the public sector sources of growth is a very bad one.”

“If there is a black hole in the British economic cosmos, it is that which sucks resources away from low-income families and public services and piles them up in the bank accounts of the wealthy”, said Lord Howarth of Newport, adding that: “The Chancellor’s reductions in capital gains tax and dividend allowances twinkle only faintly in that murk.” Howarth, one of the small number of politicians to have served as a minister in both Conservative and Labour governments, added that the tax changes announced on stamp duty and business rates were not part of a programme of tax reform to drive improved productivity. We urgently need ‘a rational tax system’, he said.

Lord Sikka said depressions are avoided by improving people’s purchasing power but this Government are bent on depleting it. He repeated his claim that the Government are ‘penalising workers’ by taxing earned income at higher rates than capital gains. He said that it was a flaw of the windfall tax that it applied only to profits from the North Sea and excluded profits generated through refining, trading and forecourts. It did not apply to untaxed global profits of companies resident in the UK, he lamented.

Sikka also criticized underinvestment in HMRC. Every £1 spent on investigations into the tax affairs of large businesses yields an extra £56 in tax to HMRC, while investigations into wealthy individuals yield £28 for every £1 spent, he told peers. He said that, for 2022-23, the budget for HMRC is £5.9 billion, for 2023-24 it goes down to £5.6 billion and for 2024-25 it is down to £4.6 billion. Adding in double-digit inflation “means that HMRC’s budget is in fact totally depleted.”

We are told that 45 per cent is at the margins of what is acceptable, Lord Davies of Brixton commented, yet pensions, where people have sought to provide themselves with a decent income, are being taxed at 55 per cent. Davies said: “Clearly, pensions taxation is a mess and needs a thorough review, but we still need some short-term measures to address the problems caused by the annual allowance.”

Viscount Chandos advocated “a much more significant increase in the taxation of wealth than the phased reduction of the capital gains tax tax-free allowance”. However he did not share Lord Sikka’s conviction that CGT and income tax rates should be equalised. “Evidence from the tax take after that doctrinaire socialist… Lord Lawson, equalised the rates suggests that it may not be the optimal policy. Equally, the right rate in terms of both tax take and fairness is almost certainly not the 50% of marginal income tax that currently applies.”

Chandos endorsed Lord Livingston’s questioning of why gifts should be taxed at a lower rate than income. “The great reform of inheritance tax that is needed is the restoration of the taxation of inter vivos gifts as applied in capital transfer tax, introduced by Denis Healey,” said the Viscount. “It is worth saying that this is particularly relevant for non-doms because, even if a non-dom volunteers to pay income tax on income from assets held overseas, the potential avoidance of UK inheritance tax deprives the Exchequer of substantial revenue”.

Lord Hain, a former cabinet minister, said the Statement ‘is going to bomb at the box office, mercifully opening the door to a Labour Government delivering public investment, kick-started growth, business success and sound public finances, because these all go hand in hand’.

Lord Tunnicliffe commented that the UK needs a serious plan for growth if it is to break free of the ‘doom loop’ of Conservative mismanagement.

Liberal Democrat speeches

The Government provided small businesses with a little relief from the uprating effect of business rates, but freezing the VAT threshold, keeping the lower national insurance threshold for employees and cutting the R&D relief scheme will undo much of the benefit, said Baroness Kramer, Lib Dem Treasury spokesperson. In the industry conversation Kramer had last week, they said that nearly a quarter of small firms are considering either downsizing, restructuring or closing rather than investing in innovation, and that is driven by the changes to R&D relief.

Lord Fox, Lib Dem business spokesperson, said the Autumn Statement was informed not just by a lack of headroom but by fairly cynical politics because borrowing will take the strain in the near term, with the great majority of the planned consolidation due only after the next election. Focusing his remarks on the changes to R&D tax credits, Fox cited Make UK which points out that about two-thirds of private sector expenditure on R&D is made by manufacturing companies and a large number of those will be hit by this change. “It is in SMEs that key innovations often start, and to hit them is not sensible”, he said. The peer wants the Government to take CBI’s advice and look more carefully at the definition of R&D and to improve complicated HMRC and BEIS tax credit guidance.

Lord Shipley accused the Government of “yet again… shifting the tax burden for social care to poorer people and areas, which collect lower revenues from their tax bands but face higher demands for social care. Council tax is a regressive tax.”

The freezing of tax allowances to increase tax revenues is simply designed to enable the Chancellor to stick to the manifesto commitment not to put up income tax rates, but so-called fiscal drag will still put up tax for most people, opined Lord Razzall. The Government has refused to admit that they have introduced a windfall tax on energy companies despite the fact that they have, he said.

Other speeches

Baroness Hayman, a crossbencher, remarked that while the windfall tax on oil and gas has a generous investment allowance, no equivalent is proposed for the electricity generator levy. Considerable concern has been expressed within the industry that the disparity between the respective taxes on the oil and gas industry and renewable generators will, effectively, said Hayman.

Baroness Jones of Moulsecoomb, Green Party, said the Government should close the loopholes in the windfall tax to enable investment in green solutions to the energy and climate crisis – not schemes like Sizewell C, which will cost a fortune to build, will come onstream far too late to make a difference and will be incredibly polluting during its construction phase.

The 130 per cent super- deduction was absolutely brilliant, said Lord Bilimoria (crossbencher), but now that corporation tax is going up from 19 per cent to 25 per cent, we need permanent full allowances, because that will incentivise companies to invest.

Lord Skidelsky (another crossbencher) wants the Government to revive the almost forgotten Keynesian idea of a ‘balanced budget multiplier’. A contemporary version of this would suggest a windfall tax or excess profits tax on energy producers, the proceeds of which would be spent by the Government on maintaining investment and consumer demand in the face of the economic downturn.

Baroness Fox of Buckley, a non-affiliated peer, has a broad concern that over recent months politicians have done too much deferring to third-party bodies. Fox said: “Breaking the productivity deadlock requires supply side reforms, such as cheap childcare and business investment in training and skills, not cynically cheating by treating migrants as cheap labour.”

Another non-affiliated peer, Lord Desai, made probably the gloomiest speech of the debate. Warning that, if anything, we are going to face a much worse situation than currently envisaged, he said we ought to get our thinking out of ‘this current tax and growth nonsense’. “Regardless of whatever damage Liz Truss may or may not have done, long before that I had a premonition that this economy was going to go down the drain. That is all I can say. I am not the Chancellor and have no chance of becoming Prime Minister, so I will sit down.”

Treasury minister Baroness Penn replied to the debate for the Government. On Lord Fox’s scepticism about the approach to consolidation, she said the Government has had to strike a balance, providing support to households and the economy while inflation is high and growth is low – then, once growth returns, it will increase the pace of consolidation to get debt falling. In 2010, total departmental spending fell by about three per cent a year; in this Parliament, it will rise at 3.6 per cent a year in real terms, she claimed.

On criticisms of the R&D credit changes, she said the Government’s aim is to ensure that the spending is as effective as possible and to do more to work towards a simplified, single R&D tax credit for all. She told Lord Leigh that the UK has long been committed to tackling base erosion and profit-shifting, which is why the UK introduced the diverted profits tax in 2015 and the corporation interest restriction rules in 2017. And the Government will continue to work internationally on finalising Pillar 1, so that the corresponding multilateral convention can be ready for signature in the first half of 2023, allowing for implementation in 2024.

On concerns about the design of the energy profits levy, the minister said that the UK will also receive tax revenues from the investments made under the investment allowance, as and when they generate a profit. “Given that these companies are mostly the same ones that are innovating and producing renewable energies, their investments will bring wider economic benefits through jobs, a secure supply chain and more progress towards net zero.” The electricity generators levy is charged on a different basis from the energy profits levy and at a lower combined rate, she continued. “The EPL is applied to total profits, whereas the EGL applies to only extraordinary returns above a given level. I reassure noble Lords that the electricity generators levy is designed in a way that maintains incentives for investment and preserves the effect of existing government support. Renewable generators will be able to deduct investment costs from their corporation tax.”

The full session is here.

By Hamant Verma, CIOT Senior External Relations Officer