Staking out the tax battleground – our big read

Includes:

• Government tax strategy – taxes continue to rise, for now
• Labour tax strategy – Starmer offers reassurance and targets Tories over competence
• Taxing income – new ideas but little prospect of radical change for reliable revenue raiser
• Corporate taxes – Tory discontent over tax rise remains
• Property and capital taxes – could IHT be scrapped?
• Sales taxes and duties – little appetite for substantial VAT reform
• Environmental taxation – parties cautious over green levies
• Scotland, Wales and devolved taxes – tax rises incoming?
• Other issues – from service levels to voter priorities

Government tax strategy – taxes continue to rise, for now

Midway between the Truss ‘mini-Budget’ and a general election campaign, the government is pursuing a tax strategy reminiscent of St Augustine, promising its supporters tax cuts, but not yet.

A year ago, radicalism was the order of the day, with the Truss-Kwarteng Growth Plan promising the biggest package of tax cuts in the UK for 50 years. However a few short weeks later most of the package was toast, as were its progenitors, politically speaking. Reassurance was the new focus, with stability and cutting inflation the economic priorities for the new Sunak-Hunt regime.

Having spent last autumn announcing tax increases and reversing proposed cuts, the Chancellor is downplaying the prospect of significant tax cuts in this year’s Autumn Statement, arguing that falling inflation will benefit families more than tax cuts. Asked on the BBC’s Laura Kuenssberg programme whether he would be announcing tax cuts in November, Jeremy Hunt replied: “There are two ways to bring the tax burden down. The first is to grow the economy and we’re making good progress on that. The second is to spend taxpayers’ money more efficiently.”

On LBC last week the Chancellor was even more explicit, stating that current levels of debt payments make Autumn Statement tax cuts “virtually impossible”. In response to a suggestion that the holding of interest rates at 5.25 per cent means the government are now £11 billion better off than they expected in March he said the suggestion that there was “extra headroom” to cut taxes was just not true.

However the forces of ‘low tax Conservatism’ are regrouping under the banner of the Trussite ‘Conservative Growth Group’ (CGG). Simon Clarke, one of its leaders and a former cabinet minister, has argued that it would be “wrong” to use inflation as a reason not to cut taxes. Other ex-cabinet members, including Priti Patel and Jacob Rees-Mogg, spoke at a conference of the ‘Conservative Democratic Organisation’, in support of ‘traditional Conservative tax-cutting policies’.

Conservative leaders are keen to offer reassurances that historically high levels of taxation are not permanent. Prime Minister Rishi Sunak identifies himself as a “low tax Conservative”. Cabinet minister Grant Shapps claimed in August that tax cuts are in the Conservative party’s ‘DNA’.

Sunak has raised hopes that taxes could start to be reduced as soon as the Spring Budget. The latest speculation is that cuts to inheritance tax – potentially even its abolition – could be on the way (see later section). Treasury coffers are somewhat healthier than anticipated in part due to higher revenues from the decision to freeze income tax and other thresholds, driven in part by high inflation levels.

While this has prompted some to call for tax cuts, significant pressures on public finances remain, with Paul Johnson, director of the Institute for Fiscal Studies, saying the chancellor faces “one almighty fiscal headache”.

Labour tax strategy – Starmer offers reassurance and targets Tories over competence

Labour blames current high tax levels on Conservative economic mismanagement. They want to reassure voters that a Labour government would not further increase the tax burden.

Labour’s accusation is that Conservative economic mismanagement has led to the highest tax burden in generations. In an interview with the Daily Mirror at the start of the month, Keir Starmer argued that the Conservatives had created a “doom loop” of sluggish economic growth. Rachel Reeves, the Shadow Chancellor, has described the government’s tax rises as “an invoice for the economic carnage” of the Truss government.

Starmer also used the Mirror interview to promise not to raise taxes on working people if he becomes Prime Minister, pledging in particular to not increase income tax.

This followed a promise from Reeves that the party will not increase the top rate of income tax. In an interview with the Sunday Telegraph, she said: “I don't see a route towards having more money for public services that is through taxing our way there” adding that “It is going to be through growing our way there.”

However, Labour has not guaranteed that it would not increase the overall tax burden. Pressed on the question in an interview last weekend by Sky News, Starmer declined to give that assurance, but emphasised: "I want it [the tax burden] to come down for working people.”

Part of the Labour critique of Conservative tax policy is that it favours the wealthy over ordinary people. In April,  the party’s deputy leader, Angela Rayner, said Sunak was offering tax breaks to the rich while “pushing the burden on working families” and indicated that her party would increase taxes on the wealthiest. She pointed to policies such as abolishing non-dom status and reversing the abolition of the pensions lifetime allowance. Labour have, however, ruled out introducing a wealth tax (see later section), a mansion tax on expensive properties or increasing capital gains tax.

Labour’s proposed tax changes so far are mostly carefully targeted tax increases designed to bring in extra revenue from specific groups. As well as the non-dom and lifetime allowance proposals, they plan to introduce VAT on private school fees, scrap the carried interest ‘loophole’, increase the energy profits levy and are considering levying higher taxes on foreign buyers of UK homes. (See later sections for more on these.) They also plan to scrap the current system of business rates in England and Wales (again, see below) and to ‘crack down on tax evasion and tax avoidance’.

Taxing income – new ideas but little prospect of radical change for reliable revenue raiser

Influential think-tanks on the right and left will help set the tone for debate on reform of income taxes even if no radical reforms are likely to be adopted by either major party. Meanwhile a ‘stealth tax’ is proving ever more lucrative for the Treasury, and limiting opposition parties’ room for manoeuvre.

Political debate on employment taxes divides neatly between changes to thresholds and rates, and structural and design changes.

The freezing of the personal allowance, income tax and national insurance thresholds until 2028 is a significant revenue raiser for the government, especially while high inflation persists. Analysis by the Institute for Fiscal Studies (IFS) suggests freezing income tax thresholds will lead to basic rate taxpayers paying an extra £500 this year and higher rate taxpayers an extra £1,000. The Resolution Foundation estimates the policy will raise an extra £25 billion a year by 2028, and that by this time, it will have undone around half of the coalition government’s ‘signature tax policy’ of raising the personal allowance to take low earners out of tax. Shadow Chancellor Rachel Reeves has warned that if the Conservatives stay in power, workers may face an additional income tax / NI bill of £43 billion compared to 2010, or £2,345 per working household.

The policy has drawn criticism from across the political spectrum. The TaxPayers' Alliance has argued that thresholds should increase in line with inflation, while the Liberal Democrats used the local election campaign this spring to run digital advertisements attacking it.

But the freeze is likely to remain as the sums involved are so great and public resistance has been relatively muted. ‘Senior government sources’ told The Times in April that – if the money is available for a tax cut at some point – a rate cut is regarded as preferable to increasing the personal allowance because it is easier for the public to understand. This may help explain the suggestion in June that the Prime Minister is planning to reduce National Insurance or income tax by up to 2p before the next election to “incentivise work.” A ‘government source’ told the Telegraph at the time: “No one should be in any doubt that we will go into the election having cut taxes and promising to do more.”

Although rate cuts are the preference, the same article reported that No 10 is also discussing raising the thresholds at which workers start to pay income tax and National Insurance. However, the move is reportedly seen as “eye-wateringly expensive” and unlikely.

While bodies such as the Taxpayers’ Alliance have welcomed the prospect of tax cuts, IFS economists have warned that inflation and the state of public finances could scupper the government’s ambitions.

Recognising that the freezing of income tax and national insurance allowances and thresholds amounts to a tax rise equivalent to 4p on the basic rate (OBR figures), the Lib Dems have dropped their call for a 1p increase in the basic rate. This aligns the party’s policy with Labour (see above) who had already promised not to raise income tax. The Lib Dems had planned to use this money to increase NHS and social care spending. Asked where the funding for this would come from now, party leader Sir Ed Davey said the party would put forward a costed manifesto at the election but pointed to banks (via the corporation tax surcharge) and oil and gas companies (via the windfall tax) as two groups the party would look to.

Reports from think-tanks on the left and right offer interesting proposals for income tax reform. Summer saw a report by the Centre for Policy Studies (CPS) and the Conservative Growth Group (CGG) arguing that  the ‘bias… against single earner couples’ should be ended by making the personal allowance fully transferable between spouses, with no income restriction on utilising it.

In the longer run, the report encourages the government to explore more comprehensive reforms of family taxation, such as German-style ‘income-splitting’ for married couples or the French approach which lowers your tax bill according to the number of dependent children you have.

Of more interest to the left will be the new tax paper from the Resolution Foundation (RF), which sets out proposals for the equalisation of tax rates on different income sources and the removal of high marginal rates. Specifically they propose higher dividend and capital gains taxes and higher top national insurance (NI) rates for the self-employed, offset by indexing capital gains to inflation, a cut in employer NI and reinstating the personal allowance above £100,000. They would introduce NI on rental income, lower the cap on the pension tax-free lump sum and place NI on employer pension contributions, while removing it from personal pension contributions.

One area of common ground between the two reports is a dislike for the high marginal rate imposed by the High Income Child Benefit Charge. CPS propose withdrawing the charge at a set taper rate over a wider range of income as well as basing it on household rather than individual income. RF propose scrapping the charge altogether, alongside “some significant tax rises on high-income individuals” such as lowering the additional rate threshold to £100,000.

Are these recommendations likely to be adopted? Probably not. The CPS/CGG proposals are unlikely to be regarded as affordable in the current climate, while the RF proposals will mostly be seen as too radical by a cautious Labour leadership.

However reform of non-dom rules is a more likely proposition. Labour propose to replace it with a regime limited to people who are in the UK only temporarily. One study has suggested that scrapping the non-dom regime could generate £3.6 billion a year, with Labour planning to use the money to establish new free breakfast clubs for schoolchildren and hire additional doctors and nurses for the NHS. The party sees this policy as a vote winner, partly because it draws attention to the Prime Minister’s wife’s non-dom status, so we are likely to hear more of it in the coming months.

Corporate taxes – Tory discontent over tax rise remains

Unhappiness in the Conservative Party and on the right persists over the corporation tax increase. We may hear more about making full expensing permanent.

No policy area has seen more Grand-Old-Duke-of-Yorkery in recent years than the corporation tax (CT) rate, with Conservative troops being marched up and down the hill in rapid succession on the question of whether a low CT rate is a necessity or not. As chancellor, George Osborne cut the rate from 28 to 20 per cent (while increasing the tax’s scope). His successors planned to cut it to 17 per cent, then decided to stick on 19 per cent, then decided to raise it to 25 per cent, then decided to keep it at 19 per cent, before finally increasing it to 25 per cent this year. Conservative MPs can be forgiven for any whiplash they might be feeling.

Ministers have taken a number of different approaches to defending the hike. Rishi Sunak insists the UK will remain attractive to foreign companies despite the tax increase, arguing Britain still has the lowest level of corporation tax among G7 nations. Jeremy Hunt has challenged the Conservative orthodoxy around the benefits of a low rate by citing evidence that reducing it to 19 per cent in 2018 did not lead to more business investment. Treasury Minister Victoria Atkins emphasises the existence of the small profits rate, explaining that the 25 per cent rate is only for “the 10 per cent most profitable businesses”.

Labour supported the CT increase but they have roundly criticised the lack of policy stability. In a speech in March, Rachel Reeves said corporation tax has “gone up and down like a yo-yo . . . it’s no wonder businesses are unable to plan and our investment rates are cratering”.

However, not everyone agrees with the government’s decision, including former Chancellors George Osborne, Philip Hammond and Kwasi Kwarteng, as well as former Prime Minister Boris Johnson. Johnson – despite the increase to 25 per cent first being put forward under his leadership – now argues that reducing CT would enhance Britain’s competitiveness. He has said the UK should be “more American in our attitude to personal and business tax, and to wealth creation.”

Prominent critics of the CT increase include the Conservative Growth Group (CGG), the Confederation of British Industry (CBI) and various free market think-tanks. During Finance Bill debate in the House of Commons, CGG members Sir Jacob Rees-Mogg, Kit Malthouse and Sir Simon Clarke all criticised the government’s decision to increase the tax. Rees-Mogg called the move “a major blunder”. Sir John Redwood, another member of the CGG, has stated that the rate should be slashed to 12.5 per cent to match Ireland. Lord Bilimoria, deputy president of the CBI, noted that “Businesses have suffered so much ... They’ve had three years of pandemic followed by the Ukraine war, the energy crisis, cost of living crisis, inflation and, on top of that, you’re increasing taxes.”

Much of the government’s response to criticism has focussed on the introduction of ‘full capital expensing’ and the annual investment allowance being permanently set at £1 million per year. Full expensing has been widely welcomed, including by CIOT, although its temporary nature has been criticised. The Resolution Foundation has called for it to be made permanent. It’s a good bet that if the money can be found to do this in the next Budget it will happen. We might even hear this commitment from one of the parties during the conference season.

In March Labour announced that the party would review the UK business tax regime as part of efforts to make Britain the fastest-growing economy in the G7. It is unclear what form this review is taking but we could potentially hear more in Reeves’ speech in Liverpool.

Another live issue on the corporate tax front is the OECD-led two pillar Inclusive Framework. This is another area where the government’s approach arguably finds more favour with shadow ministers than with some of their own backbenchers. Labour and the Lib Dems have both argued for a higher global minimum rate (suggesting 21 per cent) and Lib Dems have argued that profitable subsidiaries of large groups should pay the tax in their own right. But neither is critical of the broad thrust of the OECD’s work or of the government’s support for it. In contrast, a minority of Conservative MPs, including Jacob Rees Mogg, Priti Patel and Richard Fuller, are sceptical of the changes, or at least about the UK’s pace of adoption. Fuller has suggested that the UK should implement the changes only when all major OECD countries, including the United States, have done so.

Meanwhile, a proposal unlikely to find favour on either front bench was put forward earlier this month by an adviser to the chancellor. Writing in the FT, Sushil Wadhwani, a member of the Chancellor’s Economy Advisory Committee, called for a tax on businesses that grant pay rises exceeding a government-set target (say, 3 per cent), in an effort to curb inflation. Conservative and Labour MPs alike attacked the idea.

Finally both Labour and the Lib Dems are continuing their calls for the energy profits levy to be increased, notwithstanding the government’s decision last autumn to increase it to 35 per cent and extend it until March 2028. Labour’s Ed Miliband has said the rate should increased by a further three per cent and that Labour would close the ‘loophole’ which allows companies to reduce their payment if they invest in British energy projects.

Property and capital taxes – could IHT be scrapped?

Reports suggest the government is considering a big announcement on inheritance tax. Meanwhile Labour is resisting pressure to do more to tax wealth and pressure continues for council tax reform.

Inheritance tax (IHT) is a hot issue politically. It is extremely unpopular – especially on the right – and widely credited with bringing Gordon Brown’s prime ministerial honeymoon to an end, when Shadow Chancellor George Osborne put spring back in the Tories’ step at the party’s 2007 conference with the promise of a big IHT cut funded by a levy on non-doms.

So with the Conservatives looking for a ‘game changing’ announcement ahead of the next election it is, perhaps, unsurprising that they appear to be looking again to IHT. Three sources apparently told the Sunday Times “that there is a live discussion at the highest level of government about reforming inheritance tax” with one proposal under consideration being for Rishi Sunak “to announce his intention to phase out the levy by reducing the 40 per cent inheritance tax rate in the budget in March, while setting out a pathway to abolish it completely in future years.”

Such a policy would certainly be popular within the Conservative Party. Ranil Jayawardena, chairman of the Conservative Growth Group, is among those to have voiced support for the abolition of IHT. Anthony Browne, who chairs the party’s backbench Treasury policy committee, said a big IHT cut could have the same political impact as in 2007. Fellow MPs Craig Mackinlay and Marco Longhi also support substantial changes to IHT, with Mackinlay calling for wholesale reform.

Defenders of IHT warn that scrapping it would perpetuate inequality. For example IFS Director Paul Johnson has said that scrapping IHT “would increase the advantage of those whose parents were already wealthy”.

Such a move would be divisive, galvanising some on the right in support but many on the left in opposition. It could tempt homeowners in London and the south east of England back to the Conservatives but might be weaponised against them in other parts of the country. Former Treasury Minister (and MP for a northern seat) Simon Clarke said: “If we are choosing our priorities for tax cuts, income tax should surely trump inheritance tax every time”.

Labour is treading carefully. The party’s response to the rumours was to describe them as “an unfunded tax cut of £7.2bn per year”. But Labour’s spokesperson did not explicitly promise that the party would oppose it. The Telegraph speculated recently that Keir Starmer was hesitant to reveal his stance on IHT because he risks either “alienating the most ardently socialist of his party” or “alienating those traditional voters of the Red Wall who voted for Boris Johnson”. The proportion of voters in ‘Red Wall’ seats in the north and midlands who will be liable for IHT is pretty small, but as is often noted, people significantly overestimate their likelihood of having to pay.

The official government reaction to the story has also been carefully worded, mixing criticism of IHT with downplaying the likelihood of cuts. Defence Secretary Grant Shapps described IHT as “particularly punitive and unfair” but noted that the Chancellor had said only a week earlier that he “doesn’t see room for tax cuts.” An anonymous government source said while it was “too early to speculate”, scrapping IHT was being looked at “as something that might get in the manifesto”.

There has also been speculation around other capital taxes. In June, Mel Stride, the Work and Pensions Secretary, suggested that some taxes including “the upper rate” of capital gains tax (CGT) and “the upper levels” of stamp duty land tax, could be cut in the near future, when resources allow. Conversely, rumours are circulating that the Treasury is considering raising CGT on property, with the aim of “closing the wealth inequality gap,” as reported by the Guido Fawkes blog. (However the blog also quotes a ‘Treasury source’ dismissing the suggestion.)

CGT was put into the spotlight in April after Rishi Sunak released a summary of his tax affairs, which showed that his tax rate was only 22 per cent because most of his earnings came from capital gains. Labour’s deputy leader Angela Rayner criticised a tax system in which “the Prime Minister pays a far lower tax rate than working people”. However she declined to say whether Labour would increase CGT, saying that the party would spell out its plans ahead of the election. Shadow Chancellor Rachel Reeves had said the month before that: “I don’t have any plans to increase capital gains tax.” Reeves spoke warmly of “people who have built up their own businesses who maybe at retirement want to sell that business”.

Labour has ruled out implementing a wealth tax if they win the next election. In an interview with the Sunday Telegraph in August, asked about the prospect of any form of wealth tax, Reeves said: “We won’t be doing that.”  Labour sources added that the denial also applied to “any form of ‘mansion tax’”, which has also been discussed as an option by the party in recent years.

The denials come despite growing pressure from some Labour MPs and campaigners on the left for some kind of wealth levy. Tax Justice UK claims that a 2 per cent wealth tax on the wealthiest 350 people in the UK could generate £16 billion per year. The head of the TUC, Paul Nowak, said Labour should consider using wealth taxes to help repair public services. More than 200 ‘Patriotic Millionaires’ have signed a letter urging world leaders to introduce wealth taxes to help tackle “extreme inequality”. Former Labour leader Jeremy Corbyn has expressed support for a wealth tax and the left-wing pressure group Momentum called Reeves’s ruling out of a wealth tax ‘shameful’.

In Scotland this summer, Humza Yousaf, the SNP First Minister signalled his support for the idea of a Scottish wealth tax, saying the measure ‘can’t be ruled out’. The Scottish Parliament does not currently have the power to introduce a Scottish wealth tax, but a Scottish Government spokesperson said ministers wanted the power devolved, so that the “taxation of wealth could be redesigned to work effectively in a modern, Scottish-specific context”. This power is unlikely to be agreed to by the current Westminster government and even a future Labour government may be reluctant to do so. But Yousaf’s call may cheer some SNP activists ahead of their conference.

More surprisingly the Financial Times reported earlier this month that Levelling Up Secretary Michael Gove had hinted that he would favour a wealth tax. At an FT event Gove suggested raising additional money from those acting in a “rentier fashion” — extracting income from assets, rather than working. “One of the questions in my mind is how do we make sure that we reward opportunity, aspiration, work and creativity and then find a way of extracting what we need for public services from those who operate in a rentier fashion,” he said. He revealed he had sent Chancellor Jeremy Hunt an email on the issue.

The debate on property tax reform continues to rumble at a low level, notwithstanding proposals for council tax reform in Scotland and Wales (see below). Grumbling over the fact that 1991 valuations are still in place in England continues. The lobby group Fairer Share continues to campaign for council tax to be replaced with a proportional property tax based on values that are updated annually. This call was endorsed by a number of Conservative MPs in a parliamentary debate in May, and is also backed by the Resolution Foundation, in their new report.

Resolution Foundation are also arguing for the higher threshold for residential stamp duty land tax (SDLT) to be made permanent and the rate on more expensive properties cut. Labour, meanwhile, are looking at increasing the SDLT surcharge — currently at 2 per cent — which overseas buyers have to pay on property purchases. Plans being drawn up by the party would also include the introduction of restrictions on the sale of new-build properties to overseas investors. The idea of hitting non-UK residents with higher taxes — either SDLT or a “penal rate of council tax” — has reportedly been looked at by the government too, according to a report. But the FT states that the proposal was quashed by the Chancellor amid fears that it would “freeze” the property market and raise little money.

More significantly, Labour are proposing to replace business rates. They have yet to set out what they would replace them with, but in her conference speech a year ago, Rachel Reeves said they would introduce a ‘fairer system’ which means that businesses would get revaluation discounts straight away, rather than waiting years for their money back. Labour have said that their replacement for business rates would “incentivise investment and level the playing field between high street businesses and global giants”. They have said they would ‘review the option of a land value tax on commercial landlords’ as an alternative to business rates. If this is where the party ends up it would put them in a similar place to the Lib Dems, who propose what they call a ‘Commercial Landowner Levy’.

Finally, the government is continuing to look at the tax treatment of cryptoassets. This includes a proposal that cryptoassets will only be liable to CGT when they are exchanged or sold.

Sales taxes and duties – little appetite for substantial VAT reform

The well organised retail lobby continues to make its voice heard in the tax debate, with calls for the return of VAT free shopping for overseas visitors and for more support for the ‘high street’. The government continues to hold the line on VAT exemptions.

Despite lots of talk about how Brexit would open up opportunities for VAT reform, debate on the tax has been limited, with little prospect of significant change. While there is ongoing pressure to introduce more exemptions, such as on suncream and audiobooks, the government has so far not conceded any ground.

The highest profile political debate on VAT right now is on whether overseas visitors should be able to shop tax-free. Representations to the Chancellor from retailers, business leaders, and Conservative MPs urging him to reconsider his position have so far been resisted. They argue that scrapping VAT-free shopping for tourists is based on outdated Treasury analysis and that its reinstatement could boost the UK economy by over £10 billion per year. MPs debated the issue in Westminster Hall recently, with backbenchers pressing the government to reintroduce the scheme.

Another VAT issue worth watching is the treatment of platforms. Uber recently argued that they should be exempt from VAT because their drivers are classed as self-employed. However, HMRC holds a different view and is chasing Uber for an extra £386 million in VAT after a High Court ruling last year determined the company’s drivers were employees.. Uber paid HMRC £615 million in November, but the tax office has disputed the way the company applied a tax simplification measure intended for tour operators. 

With the VAT threshold frozen at £85,000 until 2026 (having last been raised in 2017), the Office for Budget Responsibility has warned that tens of thousands of small firms could deliberately cut their revenues to avoid needing to levy the tax. Analysis suggests that by 2026, around 44,000 firms will have capped their earnings to avoid extra charges, at a cost to the Treasury of £350 million a year. Small business groups want the threshold raised, but the Resolution Foundation has called for it to be cut to £30,000 to align it with the future threshold for ‘Making Tax Digital’ rules. In all probability, governments of whatever party will take the route of least resistance and keep things broadly as they are.

Should they win the next election, Labour plans to introduce VAT on private school fees, as well as requiring them to pay business rates (though it is unclear whether they plan to remove charitable status altogether from those private schools which have it.) An analysis of the proposals published in July by the IFS assessed that the plan  would raise around £1.6 billion per annum. Education Secretary Gillian Keegan tweeted that it would ‘tax aspiration’ and ‘put pressure on state schools’.

The introduction of an ‘online sales tax’ (OST) has been an ongoing topic of party conference debate – especially as a way to reduce business rates. This is the first conference season since the government rejected the idea. High street retailers will no doubt continue to do what they can to keep ‘support for the high street’ in the minds of politicians. This is a factor in Labour’s plans to replace business rates (see above).

Finally it is worth noting this year’s reform of the 380 year old system of alcohol duty, with the introduction of a simplified (though still not entirely simple) system based on alcoholic strength. Some, including the British Beer and Pub Association and wine specialists have welcomed the reform, but the whisky industry is “furious”. Mark Kent, the Scotch Whisky Association chief executive, explained that the “10.1 per cent duty increase is a hammer blow for distillers and consumers.” No doubt the critics will be more vocal in the debate!

Environmental taxation – parties cautious over green levies

Recent events have raised the profile of climate change as a political battleground, potentially including tax. Political parties are struggling with the challenge of marrying environmental imperatives with ongoing cost of living pressures.

Climate change and policies for net zero are always popular topics on the conference fringe. This year discussions will have added bite, following the recent government announcement rolling back a number of environmental measures. This followed the Uxbridge and South Ruislip by-election at which it is widely believed  the Conservatives held the seat because of the unpopularity of the Ultra Low Emission Zone extension plans of the London Mayor.

The tax implications of the government’s slowdown on climate change measures aren’t yet evident. The main measure currently under consideration is a UK Carbon Border Adjustment Mechanism (CBAM), consulted on earlier this year. While such a levy may put up some prices, it has the support of UK businesses competing with importers they feel are subject to less rigorous environmental standards. It is a rare example of a green measure which both raises money and could prove popular. The main obstacles to its introduction are likely to be practical - and potentially legal – as well as whether it could prove inflationary. But in theory it is a green measure that all political sides can endorse, at least in principle.

The European Parliament has approved its own carbon border tax which will gradually be implemented between 2026 and 2034, coinciding with the phased withdrawal of free allowances in the EU Emissions Trading System. 2026 is also the earliest any UK CBAM would be introduced.

In 2022, the government expanded the tax relief for the installation of energy-saving materials in buildings and has consulted this year on further areas for expanding the relief. Lib Demshave policies including graduating SDLT by the energy rating of the property, and allowing homeowners to offset spending on a range of home environmental improvements. But no major party is proposing an overarching ‘carbon tax’, despite extensive support for this among green campaigners and some economists.

Fuel duty is not officially an environmental tax but is significantly affected by environmental policies. This year’s freeze, and maintenance of the 5p cut, cost the government £6 billion. As the proportion of cars running on petrol continues to decline pressure is growing on the government to set out how it will fill the fiscal hole this is leaving. The Financial Times editorial board recommends implementing a charge on electric vehicles and gradually adopting road pricing. They propose “A flat-rate per mile road use charge for EVs — with non-EVs continuing to face the fuel duty — is a sensible starting point.” 

Scotland, Wales and devolved taxes – tax rises incoming?

In Scotland, speculation persists that the SNP may consider further income tax increases when the Scottish government publishes its budget at the end of the year. There is also pressure on the Welsh Government to increase taxes.

During this year’s SNP leadership contest, now First Minister Humza Yousaf expressed support for trade union proposals to introduce a new tax band between the higher and top Scottish rates of tax.

The proposal for a new 44p rate of income tax would be levied on incomes between £75,000 and £125,140, a measure critics have said would make it harder to attract and retain staff and which the First Minister himself has said could lead to behavioural change. Scottish taxpayers already pay more income tax on incomes over £27,850 than earners with the same level of income elsewhere in the United Kingdom.

This summer saw the Scottish Conservatives and Scottish Labour Party affirm their opposition to further income tax rises. For the Conservatives, Douglas Ross launched a refresh of his party’s economic policy and an aspiration to bring Scottish tax rates back in line with the rest of the UK, while Anas Sarwar, leading a resurgent Scottish Labour Party, claimed  families were being ‘hammered’ by income taxes as he said his party would not increase income taxes any further.

Scottish ministers insist no decisions have yet been taken, but the establishment of a Tax Advisory Group to help advise ministers on the future direction of tax policy, and warnings of spending cuts, suggests that ministers and officials continue to weigh the pros and cons of further divergence as we head into autumn. The First Minister – perhaps to differentiate his party from Labour in ever-tightening opinion polls – has also said he would like the Scottish Parliament to introduce a wealth tax (see earlier section).

An early indication of the Scottish public’s appetite for higher taxes on valuable assets could come when the Scottish Government sets out plans for levying higher rates of council tax on properties in council tax bands E to F. The measure, part of embryonic plans to tackle the thorny issue of council tax reform, has come under fire for not addressing the question of property revaluation, untouched since 1991.

With Wales pursuing its second council tax revaluation of the devolution-era, groups including the Institute for Fiscal Studies and the CIOT’s Low Incomes Tax Reform Group have said that revaluation, if left unaddressed, will fail to tackle the overall regressivity of the system.

In Wales, in recent months, a visitor levy has gathered attention. Some Welsh business owners and families consider this policy a burden, while the Welsh Conservatives label it an “act of economic self-harm”. In contrast, Plaid Cymru argues that revenue generated from the visitor levy could be utilised to provide free school dinners for Welsh children.

Plaid is also proposing an income tax increase of 1p in the pound for people earning over £12,500, 2p on salaries over £50,000, and 3p on incomes above £150,000. Mark Drakeford, the Labour First Minister of Wales, said that increasing income tax will be ‘’powerfully considered”.

Meanwhile work continues to establish 12 new low-tax investment zones across the UK. Four will be in Scotland, Wales and Northern Ireland and the other eight in sites across the north of England and the Midlands.

Other issues – from service levels to voter priorities

Tax administration issues including HMRC service levels and tax simplification remain on the political agenda. The government has been accused of abandoning the workers’ rights agenda.

Poor HMRC service levels continue to concern tax professionals, taxpayers and politicians (see for example the Public Accounts Committee’s report). A recent survey by the CIOT found poor service levels are making it harder to do business. The Telegraph and some Conservative politicians have suggested HMRC’s hybrid working model is partly to blame. Jacob Rees-Mogg, for example, said that: “It is increasingly clear that working from home leads to poorer public services.”

Tax simplification can also be expected to remain on the political agenda, following the abolition of the Office of Tax Simplification. Jeremy Hunt has already pledged to “make progress” on the matter but MPs remain concerned that getting rid of the body established to champion tax simplification suggests ministers are not serious about this objective.

Employment rights remain a significant political dividing line. In last year’s ‘new deal for working people’ document, Labour proposed to strengthen rights and protections for workers including the self-employed, by “creating a single status of ‘worker’ for all but the genuinely self-employed”. Matthew Taylor, who produced a report for the government on employment status, has said  the Prime Minister has so far failed to fulfil the Conservatives’ commitment to improving workers’ rights, telling The Guardian: “There comes a point when repeated delay starts to feel like an abandonment of an agenda.”

Labour has pledged to ‘fundamentally’ reform and simplify Universal Credit if they are in government. Then Shadow Work and Pensions Secretary Jonathan Ashworth, emphasised  the “party’s reform proposals will be fully costed”. The Conservatives said this was “yet more cynical announcements from Labour”. Conservative-leaning think tank Bright Blue has called for the government to introduce a new ‘contribution element’ to Universal Credit to support those who become unemployed.

Following much speculation about the future of the triple lock on pensions it is being widely reported that the Conservatives will remain committed to it. An anonymous Tory ‘source’ quoted in the Daily Mail said: “The rise in wages and inflation has made it a very expensive measure, but the political cost of abolishing it would be higher. Suicidal.” This followed a Lib Dem commitment to keep the triple lock a few days earlier. At time of writing Labour had yet to commit itself on the policy. Organisations such as the Adam Smith Institute have called for the triple lock to be scrapped to save money.

Polling by the Stop the Squeeze campaign has found that only around one in five voters choose tax cuts as a priority for cost of living action. The campaign group summarises that: “Tax cuts are a red herring. Key voters prefer policies on cheaper energy, a higher minimum wage, and lower housing costs to promises of tax cuts. Voters also overwhelmingly think that cost of living support should be funded by taxing the richest in society, although there is work to do to convince them that additional spending on this would not be inflationary.”