July Statement sets out plans on non-doms, school fees, tax gap

The announcements are summarised in a written parliamentary statement published this afternoon.

The minister’s statement includes a reference to the government’s plans to tackle the tax gap. It states:

“The government will invest in HMRC’s compliance work, hiring around 5,000 additional staff to recover more tax revenues. HMRC has already started the process of recruiting additional staff into compliance roles. The government will also invest in HMRC’s technology infrastructure, helping to make HMRC more efficient and improve taxpayers’ experience of interacting with HMRC.

“The government will reform the tax system by making policy changes to simplify tax, close loopholes and reduce non-compliance, designing out non-compliance before it happens. At the Budget, the government will provide an update on the implementation and development of measures that form its plan to close the tax gap.”

The documents published today are as follows –

• A technical note confirming changes to VAT and business rates on education and boarding services provided by private schools,
  • 20 per cent VAT will be introduced for school fees across the UK from 1 January 2025.
  • VAT will apply to pre-payments of fees.
  • The changes will not impact pupils with the most acute special educational needs.
  • A technical consultation has been launched, including draft legislation and explanatory notes.
  • Additionally the government will remove private schools’ eligibility for charitable rates relief under business rates in England from April 2025.
• A policy note setting out the plan to remove the concept of domicile status from the tax system, and to implement a new residence-based regime.
  • End the use of offshore trusts to keep assets outside the scope of inheritance tax.
  • Scrap the 50 per cent foreign income discount in the first year of the new regime.
  • Full details of this reform at the Budget.
• A call for evidence on “taking action against the carried interest loophole”.
• A policy document confirming changes to the Energy Profits Levy.
  • Rate increases to 38 per cent from 1 November 2024.
  • Levy extended to March 2030.
  • Energy Security Investment Mechanism will remain.
  • “Unjustifiably generous” investment allowances will be removed, including by abolishing the levy’s core investment allowance.
  • The government will work with the industry and others to develop an approach for responding to price shocks after the EPL ceases.
• Draft legislation for the abolition of the Furnished Holiday Lettings tax regime from April 2025.
  • Includes information about transitional arrangements.
  • Accompanied by a Tax Information and Impact Note (TIIN) and an Explanatory Note.
• Draft legislation relating to Pillar 2 of the OECD-led Inclusive Framework.
  • Anti-avoidance rule to prevent avoidance of Pillar 2 top-up tax by exploiting a temporary simplification in the rules (applies from 14 March 2024).
  • Undertaxed Profits Rule will come in for accounting periods beginning on or after 31 December 2024.
  • Accompanied by a TIIN and an Explanatory Note.

Additionally, on Friday the government published a TIIN on tax treatment of the Horizon Convictions Redress Scheme and Horizon Shortfall Scheme Fixed Sum Award.

All publications can be found on the GOV.UK website. https://www.gov.uk/government/collections/finance-bill-2024-25-draft-legislation-and-technical-tax-documents

Fixing the Foundations

These documents have been published alongside a paper titled Fixing the foundations: public spending audit 2024-25, which sets out the outcome of the new government’s public spending audit, the immediate action the government is taking in response, and the long-term measures being introduced to restore public spending control and improve public services.

This paper refers briefly to the tax measures reported on above, and also states that:

• The audit carried out by the Treasury shows that the forecast overspend on departmental spending is expected to be £21.9 billion above the resource departmental expenditure limit totals set by the Treasury at Spring Budget 2024.
• The government is announcing £5.5 billion worth of savings in 2024-25, bringing the in-year pressures down to £16.4 billion.
• The Chancellor is launching a multi-year Spending Review to conclude in Spring 2025.
• Departmental expenditure limits for 2025-26 will be set alongside the Budget in October, which will also confirm control totals for 2024-25.
• The government will establish a new Office for Value for Money.

Additionally it tells us that:

• The Budget will be on 30 October.
• The Budget will confirm the full details and OBR-certified costings for the government’s priority tax commitments that will close loopholes and help sustainably fund the government’s priorities. 
• The government is committed to holding just one major fiscal event a year.
• The government is committed to bringing the current budget into balance so that day-to-day costs are met by revenues and getting debt falling as a share of the economy by the fifth year of the forecast.

Parliamentary statement

Making her statement on the public spending audit (29 July), the Chancellor, Rachel Reeves, told MPs that the projected overspend of £22 billion will lead to the government making “incredibly tough choices”.

She set out Labour’s “immediate action” to deal with the situation, including announcing a number of spending cuts such as means-testing Winter Fuel Payments for pensioners, not capping the amount people pay for social care, and stopping “all non-essential spending on consultancy and government communications”. She said she is also asking departments to find 2% savings in their back-office costs.

Reeves said the Budget on 30 October would “be a Budget to fix the foundations of our economy”. She reaffirmed her commitment to not increase “taxes on working people”, specifying once again that that means “that we will not increase national insurance, the basic, higher or additional rates of income tax, or VAT”. The Exchequer Secretary, she continued, is today “publishing further detail on our manifesto commitments to close tax loopholes and clamp down on tax avoidance to ensure that we bring in that money as quickly as possible” (see above).

The Chancellor’s statement was strongly worded and the Shadow Chancellor’s response was equally fierce. Jeremy Hunt claimed Reeves “will fool absolutely no one with a shameless attempt to lay the grounds for tax rises that she did not have the courage to tell us about [before the election].” He accused her of blaming the last government for “tax rises and project cancellations that she has been planning all along”.

Hunt argued that the figures in today’s paper contradicted the Chancellor’s spending estimate announced four days ago, saying if her claims are accurate she should “ask the cabinet secretary to investigate those civil servants and apologise to the House for laying misleading estimates”. He defended the Conservative government for making “painful but necessary decisions on tax and spend”, arguing if Labour took “difficult decisions on pay, productivity and welfare reform, we could live within our means and start to bring taxes down”.

Sarah Olney, Lib Dem Treasury spokesperson, criticised the last government for raising taxes for working people and proposed the government “raise funding for our public services in a fair way” by considering reversing tax cuts for big banks, putting in place a windfall tax on oil and gas producers, and raising the digital services tax on social media giants.

Asked by Adrian Ramsay, co-leader of the Green Party, if the Chancellor would consider introducing a wealth tax given the situation, she responded negatively, arguing that the Labour Party wants the UK to be a ‘great’ place for investors and “a wealth tax would have the opposite effect”.

Pete Wishart, SNP Deputy Westminster Leader, questioned the Chancellor’s choice to cut winter fuel payments to all pensioners and described it as “Tory austerity”.

Based on the recommendations of pay review bodies, Ben Lake (Plaid Cymru) asked whether government departments, facing an additional £9 billion cost, would need to find up to £3 billion in savings. In response, the Chancellor stated that the departments will need to ‘absorb’ £3.2 billion of the pressures.

Lib Dem Christine Jardine noted that the Chancellor had said that she would work “on bringing more people forward and encouraging them to sign up for [pension] credits” but wondered “how she is going to do that if she is also going to cut the government communications budget”.

You can read the full debate here.

Other reaction

Responding to Reeves’ spending audit, Paul Johnson, Director of the Institute for Fiscal Studies (IFS), argued that “it was always clear and obvious that the spending plans she inherited were incompatible with Labour’s ambitions for public services, and that more cash would be required eventually”. He considered some of the identified overspends as “one-offs” and welcomed changes to the spending framework while predicting “some big fiscal decisions in the autumn”.

The Office for Budget Responsibility (OBR) said that it would initiate a review into the preparation of forecasts for the March Budget held by the last government. OBR Chair Richard Hughes said that he had been made aware of the scale of the overspend last week, and would review the preparation of departmental spending plans, known as Departmental Expenditure Limits (DEL), as a result. "If a significant fraction of these pressures is ultimately accommodated through higher DEL spending in 2024-25, this would constitute one of the largest year ahead overspends against DEL forecasts outside of the pandemic years," Hughes said in a letter to a parliamentary committee.