If I were a Conservative Chancellor of the Exchequer, I’d want a tax system that delivers growth and doesn’t hold back families and businesses from achieving success. These would be my seven priorities:
1. An end to marginal rates that punish work
A marginal rate of 50% is unacceptable, but there are social workers earning £50k paying marginal tax rates of 80%. No Conservative should stand for this:
Many of the problems can be immediately fixed with abolition of the child benefit taper (and the Child Benefit High Income Charge) and the personal allowance taper. The cost is likely less than HM Treasury has historically believed, given the widespread taxpayer response of controlling working hours and/or making additional pension contributions. The residual cost could be covered by a small change to the rate and/or thresholds for the highly paid (e..g. by slightly lowering the additional rate threshold).
The impact of student loan repayments on marginal tax rates should be reviewed, together with the impact of the benefit system on marginal rates.1A subject where I have no expertise, so I’ll say no more than this.
2. Fix a VAT system that holds business back
No Conservative should accept a VAT threshold which abundant evidence suggests is a brake on the growth of small companies:
There is a well-known solution to this that is both neat and plausible: to increase the threshold. That would, however, only make the problem worse – the threshold would become a brake on the growth of larger companies. The real answer is to drop the threshold, and use the revenues raised to reduce the rate of VAT for everybody.
The practical difficulty for small and micro businesses shouldn’t be understated, in terms of both financial challenges and compliance headaches. The threshold should be frozen for now, with a review and consultation on the way forward, ready for legislation in Finance Act 2024.
3. Slash the rate of inheritance tax for the middle class
UK inheritance tax is anomalous: the 40% rate is one of the highest in the world; but it raises the same revenue as other countries with a rate of 20%. No wonder three-quarters of people think it’s unfair.
Time to fix both problems. Small business and small agricultural holdings should continue to be protected, but there’s no reason why the middle classes should be paying twice the effective rate of inheritance tax as the seriously wealthy:
The answer: radically cut the rate, paid for by capping exemptions and reliefs.
4. Make full expensing permanent
Last year, the Government introduced “full expensing” – up-front tax relief for investment in plant and machinery. There’s a powerful argument for this – the UK tax system currently has a bias against business investment.
The problem is that, for essentially bureaucratic reasons, full expensing was introduced as a temporary three year measure. Currently it only has two and half years left. This renders it pointless – no business is going to base its long term investment planning on a relief which will disappear by the time spades hit the ground. The Tax Foundation, which has campaigned for full expensing in the US and UK, says this means full expensing currently has no long term impact on UK growth. A missed opportunity.
The Chancellor should have the courage of his convictions, and make full expensing permanent. Then challenge Rachel Reeves to say that Labour will keep it. A long term bipartisan commitment to maintaining full expensing would give business the confidence to invest, boosting wages and economic growth.
5. Abolish one pointless tax every year
Every Conservative Chancellor should seek to emulate Nigel Lawson, who abolished one tax every year.
The first to go? Stamp duty – not SDLT, but the ancient tax on documents, which still works in much the same way as it did in 1671.
Stamp duty costs business a small fortune in compliance, and likely raises little or no actual revenue. We have modern taxes on securities and land, and we don’t need anything else. I wrote more on that here.
6. Simple simplification
Everyone agrees the tax system is too complicated. But that complication is itself an obstacle to simplification. The Office of Tax Simplification had less impact than many hoped because its recommendations were often too politically difficult to implement.
So we need to look for ways to simplify the tax system which are more modest but still high impact. One is to identify “fossils”: remnants of another area which now serve no real purpose other than complication and cost.
I identified five fossils when going through one simple example transaction. There are many more. Even some entire taxes.
So the Finance Bill should contain a power for tax rules and even entire taxes to be repealed by Regulations, where the OBR agrees that this can be done without a material loss of tax revenue. HMRC and HM Treasury could create a small team working on this full time.
7. Protect the public from tax scams
Tax avoidance used to be the preserve of the wealthy. When it failed – as in recent times it almost always did – the taxpayers could afford to pay the bill.
These days, the wealthy are mostly too well-advised to buy tax schemes. But there’s a largely unregulated industry flogging dodgy tax schemes to people with modest earnings and assets. When it goes wrong, the advisers disappear, often leaving the taxpayers with life-changing bills. It’s a scandal – a mis-selling scandal as much as a tax scandal.
The Government should criminalise unregistered mass-marketed tax schemes (including “refund” schemes such as those discussed here). Promoters (and their directors and owners) should be liable to penalties of twice the fees collected. I’ll be writing more about the details of this soon.
Photo by Andrew Parsons, Crown Copyright
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1A subject where I have no expertise, so I’ll say no more than this.
10 responses to “Seven priorities for the Autumn statement”
Is it fair to include student loan repayments within the marginal tax rate? I agree that student ‘loans’ are closer to tax than a loan. However, higher repayments do take you closer to paying the balance off and reduce the interest you pay. So, if you think that you are likely to repay in full at some point, will you be disincentivised to work by SL repayments in the same way you will by tax? Arguably not, because either higher repayments now possibly reduce your overall SL repayments and so are a good thing.
It is a fine point and I can see arguments both ways! Perhaps it depends how realistic, and how near, paying off the balance really is?
Crystal ball gazing to work out your marginal tax rate. Probably adds further weight to your main argument.
I also suspect that your single earner on £59k with three kids would prefer cash in her pocket rather than repaying SL!
I think Rachel Reeves already did. Concerning VAT for small traders, it is indeed a mighty mind-musher. Most decorators (for example) would more easily drink a can of paint than submit a VAT return. Ditto the CIS scheme. (I went on the HMRC one-day training course in Bromley years ago and left more baffled than ever.) We have customers to please, kids to collect, vans to drive through traffic and accounts in the form of three hundred scraps of paper somewhere under the drivers’ seat. And yet… and yet… a universal VAT system would be delicious for many reasons. First, as you say, it would help growth; second, it would stop having to cheat by saying your brother did the job; third – and most important – it would level the playing field between the serious traders and the cowboys. Perhaps there is a technological solution? One of the biggest helps the Government could offer business would be a free payment system, but that’s another argument. The payment operators could transfer the VAT element direct to HM Gov; the resulting receipt being confirmation of the contract for the customer. Less of the “Give us £100 to fix that roof, Luv” and more of the automatic 2year workmanship guarantee! Needs work, but there’s the future.
Along with cutting income tax rates, Lawson also kept the much higher standard rate of VAT (almost doubled from 8% in 1979, and increased further by two subsequent Conservative governments), and he also aligned the rate of capital gains tax with his new two-tier marginal income tax rates – which for many meant an increase from 30% to 40%.
Well, you got a couple of the items you identified. Perhaps there will be more in a spring budget
Full expensing has been made “permanent” after 2026, although we’ll have several fiscal events before then so who knows how permanent that actually is. Alongside the “permanent” £1m annual investment allowance, that looks quite attractive.
And the chancellor abolished one tax, or at least a small part of one, in the form of Class 2 NICs. Although this is a retread – the abolition was previously announced by George Osborne in the 2016 budget before being delayed and then abandoned in late 2018. Let’s hope they’ve got the interaction with benefits and pensions right this time.
I am looking forward to hearing more about proposals to tackle mass-marketed tax schemes (including “refund” schemes).
There are many unregistered refund firms in the field of stamp duty land tax, though it might not be a “scheme” they are marketing, rather firms encourage people to amend their self-assessed tax return on dubious grounds. For example, where a house or flat has been bought which requires repair, on the ground that it counts as “non-residential property”. The case law indicates that this treatment is only available in extreme cases.
Really don’t understand why people seem so keen on full expensing. Does no one understand deferred tax accounting? Large companies are primarily focused on profits (i.e. EPS, driving share price), not cash – and once you account for deferred tax, full expensing has zero impact on post tax profits. Small companies are more cash focused – but they’ve already long enjoyed ‘full expensing’ up to £250k (& sometimes more), which is usually more than they’re able to invest. So who really cares about full expensing? Medium sized manufacturing businesses? They’re a negligible part of the UK economy. Private equity backed businesses? Maybe, though they are generally laden with debt to extinguish much of their cash tax obligations. Who are these elusive big winners from full expensing? I’m genuinely puzzled.
Aren’t large (especially listed) businesses valued based on the net present value of future cashflows? In which case earlier cashflows = higher share price.
Joe – that’s the theory, but in practice analysts are calculating that NPV based on earnings (per the P&L) rather than cash per the cash flow statement. And then the key metric is the PE ratio, again based on earnings rather than cash. So it is all about earnings, not cash.