‘High tax’ Sunak under fire as MPs begin Budget debate

The debates began immediately after the Budget statement on Wednesday, continued on Thursday and will continue into Monday and Tuesday next week. Technically the debate is on the first Budget resolution (that income tax is charged for the tax year 2022-23) but the other 56 resolutions are grouped in with it. MPs will vote on the resolutions at the end of the debate on Tuesday (they only divide on the more controversial ones).

You can read the Budget resolutions here, the explanatory notes on them here and if you want background on what the resolutions are for and what MPs can do with them (not much) see here. The debate on Budget Day (Wednesday) is here and Thursday’s debate is here. Below is a summary of the main tax-related comments from the two days.

Labour reaction

Responding to the Budget and spending review, Shadow Chancellor Rachel Reeves said that working families would not recognise the contents of the Budget, accusing the Chancellor of living in a ‘parallel universe’. “The Chancellor decided in this Budget to cut taxes for banks, so at least the bankers on short-haul flights sipping champagne will be cheering it,” she said caustically.

Reeves said that the Budget imposed the highest sustained tax burden in peacetime imposed upon British citizens as opposed to large corporations or financial entities, and that it failed to address the need for better public services. Branding the Conservatives the party of high taxation and low growth, she said the increases in taxation in the present and recent Budgets had fallen on working people, ignoring ‘online giants’.

Reeves welcomed the reduction in the universal credit rate but said that working people on universal credit still faced a higher marginal tax rate than the Prime Minister. On this, she said those unable to work through no fault of their own still faced losing £1,000 a year.

The Shadow Chancellor claimed the Budget did nothing to address the cost of living crisis and that the national insurance increase was a regressive tax for working people. She called for the end of the tax subsidy for private schools. She repeated her conference pledge that Labour would scrap business rates and ensure those with ‘the broadest shoulders’ paid their share.

Shadow Business Secretary Ed Miliband said the Chancellor offers the UK an age of stagnation of low wages, low growth, high taxes. The Chancellor is more concerned about banks than alleviating the burden of high energy prices, he argued. He cited the Resolution Foundation as saying three quarters of families on universal credit will be worse off, even after the changes to the taper. Amazon gets help from the super-deduction, but our ‘energy intensives’ are left out in the cold, he said. Fundamental reform of business rates was ducked yet again, he added.

Shadow Economic Secretary Pat McFadden commented that the stand-out feature was the Chancellor’s admission that taxes are set to rise to their highest levels since the early 1950. Corporation tax, personal allowance freezes, national insurance, council tax – there is one tax rise after another, he said. He added: “The reason for all the tax rises is simple: the Tories have become the party of high taxation because they are the party of low growth. In the 11 years in which they have been in office, economic growth has averaged just 1.8 per cent. In the previous decade, it averaged 2.3 per cent.” The OBR says very clearly that the effect of the pandemic is smaller in the long run than the effect of the low growth over which Conservative party has presided for more than a decade. The Chancellor and the Prime Minister have trapped the country in a vicious circle of low growth, rising inflation, stagnating incomes and rising taxes, he said.

Other opposition reaction

SNP Westminster Leader Ian Blackford said the Budget was “tantamount to grabbing 20 quid out of people’s pockets, handing them back a tenner and expecting them to be grateful.” Today’s announcement does not even come close to compensating for the tax rises and cuts that the Chancellor has imposed over the past month, he said.

Blackford said that, with the removal of the triple lock, there will be a £6 billion saving for the Government from their raid on pension tax credit and on pensioners. He said the changes to the universal credit taper do not change the fundamental fact that everybody on universal credit has just lost £1,000.

While the EU is giving Ireland €1.05 billion to mitigate the damage of Brexit, Scotland has yet to receive a single penny of compensation from Westminster, Blackford claimed. He said businesses need the one per cent ‘hike’ to employer and employee national insurance halted, and the hospitality and tourism sector needs the 12.5 per cent VAT rate to be made permanent.

Lib Dem Treasury spokesperson Christine Jardine warned that we face a looming cost of living crisis. “The Chancellor had a chance to lessen the pain for hard-working families who pay their tax, play by the rules and need his support. Instead, he is hammering them with tax hikes, empty words and broken promises from a Government who are completely out of touch with the people of this country.” Under this Chancellor we have the highest tax burden since the second world war and the lowest school spending per pupil in a generation, she added.

Alcohol duty reform

Conservative MPs lined up to praise the Government’s reform of alcohol duty. Tim Loughton said it was a ‘ridiculous anomaly’ when sparkling wine, with 11 per cent alcohol, was taxed a third more than still wine, typically with 13 per cent to 14 per cent alcohol. Kevin Hollinrake said a simpler, more stable alcohol taxation system is absolutely right.

Mike Wood highlighted that pubs and brewing support around 930,000 jobs throughout the UK. Resolving anomalies in the duty system is only possible now that we have the control to restructure outside of the previous EU excise duties regulations, he claimed.

James Daly was sad that the profits from the cut to beer duty will go to the pub companies. He said often the contractual and leasehold arrangements that pub companies have with their tenants make it financially unviable for the pubs to succeed, no matter what steps are taken in respect of tax.

Andrew Jones remarked that pubs have a social function in our communities that is not easy to quantify, but we all know that pubs are at the heart of village and town life. The cut is therefore helpful for the on-trade, he said. But he said the small brewers relief has had a disincentivising effect on investment and growth in the beer industry.

From the opposition benches, Alison Thewliss (SNP) welcomed the review of alcohol duty and hope it will lead to better outcomes on public health.

Sammy Wilson (DUP) asked, since Northern Ireland is part of the EU excise regime due to the Northern Ireland protocol, whether the changes will apply to taxation on alcohol in Northern Ireland? No reply came during the debate but the Treasury consultation document on the reform states that the Government is “seeking a more flexible settlement regarding excise laws applicable in Northern Ireland” and “will continue to discuss the application of these reforms to Northern Ireland with the EU during the consultation period”.

Air Passenger Duty

MPs were split on whether the cut to APD on domestic flights was a good thing. Christine Jardine (Lib Dem) asked what signal it sends to COP26. Ian Blackford for the SNP wondered: “What on earth are we doing? How can we say that we are taking our climate obligations seriously?” He reminded MPs that the Scottish Government, “exactly because of our climate responsibilities, took the decision in 2019 to remove our planned reduction in air passenger duty”.

On the Labour benches, Barry Gardiner contrasted the Budget announcement on APD with other countries that have banned domestic flights where a fast rail link exists and have been investing in their low-carbon rail infrastructure. It is obscene that it is often cheaper to fly within the UK than to take the train, he said.

But Conservatives were more supportive. Bournemouth MP Tobias Ellwood welcomed the move. Nigel Mills said it was absolutely right that people should be able to fly within their own country at a lower tax rate than when they fly overseas.

Jim Shannon was also happy with the reduction in APD, seeing it as “a method of levelling up that we can all take advantage of”.

Corporation tax and the bank surcharge

For opposition MPs, the reduction in the bank surcharge provided a contrast to tax increases for working people.

Anna McMorrin (Labour) remarked that there was a £4 billion tax cut for banks, a £300 million tax cut in domestic APD and a £12 billion tax cut for large businesses such as Amazon. Those tax cuts do absolutely nothing to help working people who are struggling day to day, she said.

Barry Gardiner (Labour) claimed that, instead of working with international partners to develop a proper tax framework for companies such as Amazon, the Government had done all they can to block one. Working families get tax rises; banks get tax cuts, he continued. Meanwhile, on the tax super-deduction for capital investment, Gardiner said the Chancellor failed to mention that these have ‘no environmental or climate filter’ and that some of the biggest fossil fuel companies will be able to use them.

Catherine West (Labour) said: “Why do we not make them work for the tax cut - the £4 billion - that they got from the Treasury yesterday and say, ‘In return, every time a bank is closed on the high street, put in an ATM so that at least we can get cash out and our high streets are not deserts’?”

Christine Jardine (Lib Dem) asked how it could be that NHS staff and care workers are facing a £900 million tax hike while banks are being given a £900 million tax cut?

Chair of the Treasury Committee Mel Stride (Conservative) said a one per cent rise in inflation would impact the rise of corporation tax increases, describing it as a ‘vulnerability’. He welcomed the drop in the bank surcharge.

Conservative Nigel Mills welcomed the plan to take away the right to offset losses incurred across Europe from UK corporation tax. That is a sensible measure, he said, because there is no reason why a loss that someone incurs overseas should reduce their UK tax bill. But he asked that the Government reinstate a collection of tax avoidance measures now we have the freedom to do so post-Brexit to ‘protect our tax’.

There was relatively little criticism of the impending corporation tax increase. One exception was Conservative John Baron, who said the evidence suggests that if we reduce corporation tax or taxes generally, in the medium to long term, we increase revenues. He encouraged the Government “to consider bringing back a lower rate of corporation tax for small and medium-sized enterprises, which we all know employ a disproportionate number of people”. Another was David Davis who feared “that when investors are deciding which country to invest in, they take the headline rate of corporation tax into account.”

Business rates

MPs welcomed the extension of business rates relief but there was disappointment on both sides of the House that the Government’s ‘fundamental review of business rates’ had not gone further in its recommendations.

On the Conservative side, Sir David Evennett said the business rates cut to help hospitality, retail and leisure, alongside the small business rates relief, equates to a business tax cut worth £7 billion for more than 700,000 eligible businesses - the biggest business rates tax cut in 30 years. Sir Peter Bottomley said the relief for hospitality will be greatly welcomed by businesses in his Worthing constituency. Mark Harper said the reduction will be a tremendous benefit to the affected sectors. Tobias Ellwood said the rates cut was particularly appreciated by the hospitality industry.

Tom Hunt welcomed ‘one of the biggest reforms of business rates we have seen’, saying it is not just tinkering because ‘it goes much further than that’. Anne Marie Morris (Conservative) said the multiplier being frozen is brilliant because it will make a huge difference overall, along with the revaluation changes. Andrew Jones welcomed more frequent revaluations, but said rates need reform in the longer term.

Some other Conservatives agreed with this. Tim Loughton called for the Government to look at permanent solutions to put in place once the temporary reliefs were removed. Felicity Buchan also pushed the need for a longer-term solution. She was also concerned about the 50 per cent discount for hospitality being capped at £110,000 given she represents a Central London constituency.

Kevin Hollinrake believed that we should scrap business rates completely because ‘the system is completely archaic’. He added: “In my view, we already have an online sales tax: it is called VAT. A simple solution not easy, but simple - would be to add the £25 billion cost to VAT while lowering the threshold for VAT registration.”

Labour MPs were mostly unimpressed. Catherine West thought this had not been a proper review of business rates. She praised Labour’s proposal to take more in digital tax from Amazon to top up small business relief. Rachael Maskell said the relief for the hospitality sector will act as a ‘sticking plaster ‘to address some of the issues that it is facing, yet not all’. A property related tax belongs to a different era, she argued, saying businesses in her York constituency are calling for a tax that looks at profit and turnover to address their contribution proportionately.

Alison Thewliss, for the SNP, said the Scottish Government offer 100 per cent rates relief to retail and hospitality for a full year, the only part of the UK to do so. That was done without consequential funding from the UK Government.

Sammy Wilson (DUP) noted the 50 per cent discount on rates, took it that there will be a Barnett consequential of that for Northern Ireland, and hoped that it would be replicated by the Finance Minister there.

Research and Development

MPs were full of questions about the Government’s R&D announcements.

Opening Thursday’s debate Business Secretary Kwasi Kwarteng said that increasing R&D investment to £22 billion will confirm the UK as a science and technology ‘superpower’. The global investment summit was a huge success, and it was proof that we are open for business as a country and attracting investment to a degree we have never seen before, he added.

A former Business Secretary, Dame Andrea Leadsom (Conservative), said the investment in R&D is superb because it will create the jobs, particularly the green jobs, and productivity that we want to see across our country. However another Conservative, Nigel Mills, urged the Government to introduce the detail behind R&D changes and to add a rule that says, ‘If you are going to claim that tax credit, the IP produced needs to be owned in the UK for you to get it’. That will be more important in the long run than where the research was carried out.

Another former Business Secretary, Greg Clark, regretted that the Government will not meet its manifesto commitment to invest £22 billion in research and development by 2024-25. Treasury Committee Chair Mel Stride also pointed out that the UK had slipped on its R&D targets.

For Labour, Seema Malhotra asked how much of the increased R&D investment, which is so critical to supporting innovative businesses at the cutting edge of the new economy, is going to support small businesses on their transition to net zero, and how it is going to be enabled.

For the SNP, Richard Thomson worried that the UK’s R&D spending of 1.7 per cent of GDP is languishing well below OECD average of 2.5 per cent and it remains to be seen if the Budget announcement will close that gap.

Tax rises

Perhaps taking their cue from the Chancellor, Conservative MPs lined up to urge no further increases in the tax burden, and to argue for tax cuts as soon as possible. Labour MPs, meanwhile, focused more on how the tax burden is being distributed.

On the Conservative benches, Former PM Theresa May said that people are hit by increased taxes on business, because those increased costs often cannot be absorbed and are passed through to consumers – to members of the public. Chris Grayling said the Conservatives are a small-state, free-enterprise party. This needs to be an equal, levelled-up society, and we will not do that with a big state and high taxes, he charged. Robert Jenrick remarked that the overall tax burden is at its highest sustained level in peacetime, and he worried that we will not be able to go much further than that.

John Redwood remarked that lower tax rates should not be a reward for achieving growth that is much more difficult to achieve if it is done against the background of much higher tax rates. David Davis opined that the ‘simple truth’ is that the increase in NICs will undoubtedly depress growth and employment and, as a result, depress the tax take, and the freeze in the income tax personal allowance will have a big effect on the poorer families. John Baron said in the end an increase in national insurance is reflected in lower pay and higher prices, which are bad for workers, businesses, customers and the economy as a whole. Felicity Buchan claimed it is with lower taxes that we encourage growth and get more investment, which leads to greater productivity, which is key.

Mark Harper said he was not comfortable with putting up taxes, but ‘it was necessary and we would have regretted doing anything differently’. Richard Fuller said we all have to recognise that any tax reductions in this Parliament will mean that choices will have to be made and they should be focused on improving the efficiency and enterprising part of the economy.

On the Labour side, Stephen Timms said we all understand why the tax burden is high coming out of the pandemic, but there seems to have been no attempt to share that burden fairly because it is is all being borne by working families. Alex Davies-Jones accused the Government of piling costs on working people and businesses at the worst possible time, hitting them with tax rises and a cut in universal credit while ‘of course giving breaks to bankers and big companies such as Amazon’.

Sammy Wilson (DUP) said those in low-paid or even medium-paid jobs will face a bleak period in the near future, whether through the tax rises already declared or the fact that we are already facing huge energy price increases.

Alison Thewliss (SNP) said an increase to national insurance is a tax on jobs.

Universal credit and other income support

There was broad support for the reduction in the universal credit (UC) taper, though opposition MPs drew attention to other changes which would leave low earners worse off.

Chair of the Public Accounts Committee Dame Meg Hillier (Labour) welcomed the offer to revise the taper, but said it will affect only those who are in work and rather plays into a negative narrative that some people are scrounging off the state. Nicholas Brown (also Labour) remarked that the problem of the interface between benefits to people who are in work is not a new one, and his view is that more thought needs to be given to this to find a more equitable solution. The marginal tax rate is still quite high, he added.

Derek Twigg was among the Labour MPs pointing out that even the rise in the living wage and UC taper change would not offset the £20 UC loss. Clive Efford said when we take into consideration that income tax thresholds have been frozen and the increase in national insurance, with the marginal rate of tax for people on the national living wage, the change will be minimal. They will be lucky if they end up with £7 a week – not the large figures read out by the Chancellor, he said. Dame Angela Eagle said the taper would help only one in three and still leave millionaires paying a marginal tax rate of 45p while those on poor wages who qualify for universal credit and are able to work pay 55 per cent.

Stephen Timms said the reduction in the UC taper and the increase in the work allowance are significant changes that are large enough to be worthwhile. Timms, Chair of the Work and Pensions Committee, went on to worry that benefit support for unemployed families is now at its lowest level, in real terms, for more than 30 years. In those 30 years, GDP has increased by more than 50 per cent in real terms but support for unemployed families is no bigger than it was 30 years ago. He said his committee is going to conduct an inquiry to look at what the level of support for unemployed people should be, to consider the approaches being taken elsewhere and the evidence on the effectiveness of those different approaches.

For the SNP Richard Thomson complained that there is no arguing that, even with the reduction in the taper rate, anyone who earns an additional £1 will still lose more than if they were paying the higher rate of income tax on it. Alison Thewliss said people who are out of work or not earning very much will see no overall benefit to these changes, and those on legacy benefits, including people with disabilities and carers, are ‘again forgotten about altogether by this UK Conservative Government’.

Christine Jardine (Lib Dem) said the Chancellor’s announcement on universal credit is giving just a third of what he snatched away, and millions of families who are not in work will not be helped at all.

Conservatives were generally more positive. Tim Loughton welcomed the ‘masterstroke’ on universal credit. Andrew Jones said the change to the taper is ‘extremely positive and very significant’. Dame Andrea Leadsom also praised the change.

Conservatives particularly emphasised how the change would incentivize work. We are seeing a record number of vacancies in the economy, said Mark Harper, and the reduction of the taper rate will make it ‘absolutely worth their while’ to take on extra hours or increase their skills to earn extra income. Tom Hunt commented that the key thing about universal credit is that it was to try to ensure that it always pays to work—that work pays. Kevin Hollinrake, as co-chair of the all-party parliamentary group on poverty, believed it a far better use of taxpayers’ money to provide a greater incentive to work, rather than simply paying people through other taxpayers’ contributions to their income.

Nigel Mills welcomed the reduction in the taper but to get the real marginal tax rate said that we have to add the 55 per cent new taper rate, the 13 per cent national insurance rate and the 20 per cent income tax rate for those earning over £12,000, leaving an 88 per cent marginal tax rate. But he also said ‘nobody really believes that people can move into work from benefits and not have any reduction in their benefits’.

Other areas

A range of other points were also made by MPs, including calls for greener taxes and a wealth tax.

Tim Loughton (Conservative) asked the Chancellor to look at using the estimated £100 million additional revenue from the VAT receipts on rising energy prices, and perhaps some of the additional £1 billion the Treasury is gaining from the rising carbon tax revenues due to gas price hikes, to concentrate on a winter fuel payment to vulnerable working-age households, providing direct relief to help with energy bills this winter. As part of the green revolution, he wanted to see zero-rated VAT applied to heat pumps and energy efficient measures as well, he said, adding that it is ‘incongruous’ for a Government who are strongly and effectively pushing the green agenda to be taxing environmental goods when no longer compelled to do so by the EU.

Alison Thewliss said retaining the reduced 12.5 per cent VAT rate for the hospitality industry would make a significant difference as supply chain costs and prices for fuel and labour increase, and it would increase the sector’s attractiveness and global competitiveness. There should have been measures to tackle energy inefficiency, such as cutting VAT on insulation and solar panels for houses, she added.

Rachael Maskell (Labour) commented that a wealth tax would have seen redistribution and been a first step to tackling entrenched disparity.

Barry Gardiner (Labour) complained that the Government has no strategy to tax wealth on unearned income. It is ‘shameful’ that a cleaner on universal credit doing three jobs to make ends meet pays a higher rate of marginal tax and national insurance than her landlord, he said.

Plaid Cymru’s Ben Lake supported the Federation of Small Businesses call for an increase in the employment allowance for small businesses and simplification of the process of making tax digital.

Kerry McCarthy (Labour) noted that, according to an OBR document published on Budget Day, the primary function of freeports is ‘to alter the location rather than the volume of economic activity. So the costs have been estimated on the basis of activity being displaced from elsewhere’. That feeds into Labour’s biggest concern about freeports, that they do not boost economic growth and performance overall. It is just a case of taking those from one area to another, she said.

Conservative Robert Jenrick welcomed the tax relief for investment because the way we boost productivity is by backing the private sector in the economy. This is also about ensuring that we have sensible tax arrangements in UK that can incentivise investment and ensure that businesses can prosper, he said.

Government response

Winding up the debate, the Financial Secretary to the Treasury Lucy Frazer said the Chancellor is committed to cut taxes and that the first step is a cut of the UC taper rate for those on the lowest incomes. Reducing the taper rate from 63 per cent to 55 per cent, which, combined with a £500 increase in the work allowance, means an effective tax cut worth more than £2 billion a year.

On energy taxation the minister said the Budget freezes fuel duty for the 12th year in a row. She said a cut in VAT on domestic fuel would apply for everyone, so would not only help the low-paid. Labour’s Barry Gardiner intervened to say it is the poor who pay the largest portion of their disposable income in fuel costs.

Frazer closed her speech by claiming: “This Budget levels up to a higher wage, higher skilled and higher productivity economy.”

The debate will resume on Monday (1 November).

By Hamant Verma, CIOT Senior External Relations Officer