Don’t raise taxes at expense of growth, warn Lords

Discussing the King’s Speech over five days, peers discussed issues including a smoking ban, VAT on private schools and a potential future wealth tax.

Tax levels

Lord Bridges (Con) spoke out against higher taxes, which he said would hinder growth, warning: “If we do not grow, we will not be able to pay for the public services we all want. The road to growth is not paved by bigger government and higher taxes, yet I very much fear that this is the path we are on.”

Baroness Noakes (Con) agreed that “a high-tax economy is not a healthy economy” and warned that the current corporation tax headline rate of 25% is “quite simply anti-growth”. “No amount of relief for R&D or investment will change this, because headline rates are often a deciding factor in major investment decisions,” she said. Noakes also said that frozen tax rates and thresholds have pulled around 4 million more people into the tax net in recent years.

Lord Razzall (Lib Dem) said that he thought the current tax system is a “structural mess” and questioned why it has not been reformed. He warned that simply implementing tax cuts was not the answer, quoting from Prime Minister Rishi Sunak when he was Chancellor: “It is hard to cut taxes at a time when demands on the state are growing”.

Business taxes

Lord Mandelson (Lab) said he welcomed rumoured extensions to business reliefs in the Autumn Statement to those of inheritance tax cuts, but doubted that the move would be “anywhere near sufficient” to stimulate the amount of investment the economy needs. “For this, we need a much bigger growth plan,” he said.

Baroness O’Grady (Lab) called for measures including a green industrial strategy and “holding tech giants to account” to rebuild the UK economy, rather than “pre-election tax cuts for the wealthy and a bankers’ bonuses free-for-all”.

VAT

Lord Lexden (Con) criticised Labour’s plans to charge VAT on private school fees. He said it was a “total myth” that most or all private schools can afford this, saying the majority are “mainly small, unpretentious, but highly successful schools” which are “virtually unknown outside their own local communities”.

He added: “The hard-working families without financial reserves who send children to these do not deserve to be hit by a brutal tax increase. Some will be forced to move their children to schools in the state sector. Why should they be uprooted in this way?”

Baroness Doocey (Lib Dem) said analysis on the impact of the removal of VAT-free shopping for overseas tourists showed the country was “suffering”. She said: “We are now the only major European country not to offer this bonus to international visitors. We are missing out on a rare Brexit opportunity: to offer tax-free sales to the 447 million consumers of the European Union.

“By changing this policy, the government could give an enormous shot in the arm not only to retail sales but to the hospitality, leisure and travel industries. The Treasury would also benefit from all the extra spending on services, hotels, travel and meals.”

Personal taxes (including landlords)

Baroness Bennett (Green) encouraged a potential future Labour Government to explore higher taxes for the wealthy. She said the 50 richest families in the UK have wealth worth more than the bottom half of the whole population, adding: “I suggest that the Labour Party think harder about who is and who is not paying tax and the need for the redistributive effects of a wealth tax in our society.”

Lord Sikka (Lab) agreed, saying: “Wages are taxed at a higher rate than capital gains, dividends and investment income. This needs to be rebalanced; we need to rebalance the tax system by increasing taxes on wealth and reducing taxes on work and the less well off.”

Speaking on homelessness, Lord Best said this had in part been driven by increased demand for housing but a shortage of landlords, put off by measures including unfavourable tax liabilities.

He said: “This is because of taxation arrangements rightly intended to deter speculative investors, necessary requirements for higher standards, the higher interest rates that affect the two-thirds of PRS properties that have mortgages, and much-reduced prospects of making capital gains.”

Lord Howarth (Lab) agreed, adding: “Ill-judged reform of the tax regime for private landlords and rising mortgage costs have reduced supply at a time when demand has been strongly increased.”

Lord Truscott (Lab) called for greater emphasis on inheritance tax rather than taxes on landlords to fund more housing, saying: “Tax changes have meant that buy-to-let landlords are the only business owners I know to be taxed on their turnover, rather than profits. Costs have been piled on landlords, which they pass on to their tenants.”

Lord Balfe (Con) disagreed, calling for an overhaul to inheritance tax, saying there are millions of middle-class people who are “looking forward in a grim sort of way to inheriting the wealth of their parents”.

Other issues

Lord Carrington (crossbencher) said confusion over the tax treatment of farmers and landowners for environmental schemes will also affect what land is available for new properties in the future. He added despite the Agriculture Act and the Environment Act being passed in 2020 and 2021, clarification was still being awaited on issues relating to VAT, income tax, capital gains tax and inheritance tax.

Carrington said: “The interrelationship of housebuilding, environment and tax will all come to a head very soon when the Government’s policy on biodiversity net gain is finally introduced. Failure by the Treasury to resolve tax issues will severely limit the incentive for farmers and landowners to offer land for biodiversity net gain and consequently affect housebuilding numbers, leaving aside lost biodiversity opportunities in the process.”

Lord Shipley (Lib Dem) said he was disappointed not to see more in the Speech on devolution, criticising England as “too centralised”. He said: “While all control of resources and tax raising lies with the Treasury, devolution to combined authorities will prove problematic, because they will end up competing with one another for the favours of the Treasury.”