Following the launch of the Treasury committee’s enquiry into the tax system after coronavirus, Croner-i expert Glyn Fullelove sets out the issues, from wealth and digital taxes to the nature of employment and the three-person problem
On 17 July 2020, I chaired the launch event for an enquiry into the UK tax system after coronavirus to be undertaken by the House of Commons Treasury Committee. The terms of reference for the enquiry are very wide.
They include considering the overall burden of taxation the UK economy can bear without undesirable harm to economic growth, what the long term pressures on the UK tax system are and more detailed matters such as the right balance between the taxation of work, savings/pensions and wealth, and whether ‘windfall taxes’ have a role in the post-pandemic tax system.
The full terms of reference can be read here.
Committee chair Mel Stride MP introduced the enquiry. He argued it was the right time for such an enquiry for three reasons:
- it was a long time since there had been any fundamental reform in the UK tax system;
- the pandemic was going to leave the country with significantly elevated debt levels which would have to be dealt with, and tax would have to play a major part, in his view; and
- the pandemic had affected groups such as the young and the low paid in particular, and how the tax system dealt with that needed to be considered.
Specific areas he was concerned about were the taxation of digital companies and the differences in taxation between the employed and the self employed.
He was also very aware of how there was an increasing accumulation of wealth in the hands of a relatively dwindling number of individuals; while he was not suggesting a wealth tax, it needed to be looked at.
Finally, the effectiveness of tax reliefs needed to be reviewed; although some were in place for good reasons, collectively they cost the exchequer a great deal.
Angela Eagle MP, a Labour member of the Committee, said that there were bound to be philosophical differences in how taxation was viewed between the Conservative and Labour members on the Committee.
She wanted to see the enquiry deal in practical solutions that were possible to introduce; she remembered the Mirlees report and commented that tax reform had to go beyond intellectual foundations to be practical.
Nevertheless, it was clear that she shared Stride’s concerns around the pressures of technology and demographics on the tax system, the need to reform the taxation of the digital sector and the value of tax reliefs.
On the question of tax reliefs, she was concerned to identify which incentives were the ‘wrong ones’. She also floated the idea of a ‘solidarity wealth tax’ to partly meet the hole in the public finances caused by the pandemic, although she made it clear that she was not advocating any particular policies at this point; what mattered was to consider what was possible in the future.
I asked both MPs to go into more depth on certain points, in particular around the ‘three-person problem’: three people doing essentially the same work for a business; one an employee, one self-employed, and one working through a personal services company. While each might cost the business the same amount, what they took home would be substantially different as they would be taxed on three different bases.
There was agreement that this issue needed to be addressed. Stride noted that this was a strategic issue facing the tax system; the shift away from conventional employment was reducing the tax base. He was hoping a cross-party effort could be made in this parliament to tackle this.
Eagle said it was important to ensure there were no perverse incentives in the system such as favouring incorporation over employment. However, we had to ‘think out of the box’ rather than tinkering with the system; the National Insurance Contributions system did not deal with the society we have now.
Stride added that the current system came with a huge amount of compliance aggravation, and that there was a huge prize to be gained from resolving this issue. However, he agreed with Eagle’s comment that reform had to be practical; and in circumstances where money was tight, fundamental tax reform was difficult.
Greater public debate
There were additional contributions from Gemma Tetlow (Institute for Government), Sam Mitha (formerly of HMRC) and Heather Self (Blick Rothenburg). Tetlow expanded on the pressures of the tax system from external factors including the growth of digitalisation; she said there known inefficiencies in the system, of which the taxation of self employment was one; and that known upward pressures on public spending created challenges for the tax system.
However, tax reform was politically difficult, and she hoped the enquiry would create greater public debate around what reforms were necessary.
Mitha said the enquiry should look at foreign tax systems as models for effective incentives to increase productivity; he agreed the ‘three-person problem’ needed to be addressed, and argued that the system had to be reformed to remove anomalies that affected the low paid in particular.
Self suggested the committee should come up with a ‘road map’ of principles that the government could follow. She also agreed with the need to solve the ‘three-person problem’ and said that was an example of a ‘clear fault line’ driving perverse behaviours, and that HMRC knew of others. From personal experience she cautioned against windfall taxes.
What was perhaps most noticeable from the event was the measure of agreement from all participants on a number of issues – the need to at least look at taxing wealth, a continuing focus on the digital sector, and a desire to deal with the ‘three-person problem’. It will be interesting to see how this plays out through the committee hearings.
Of particular interest from the tax professionals’ point of view will be whether the committee recommends that any legislation arising from changes it does suggest should be subject to greater outside scrutiny; this may be crucial in ensuring that anything that is suggested actually works.
The closing date for submissions to the enquiry is 28 August 2020. The launch event can be viewed on the CIOT’s website
About the author
Glyn Fullelove ACA CTA is Croner-i’s senior tax writer and president of the Chartered Institute of Taxation