• Now is not the time for tax rises or fiscal consolidation, but significant fiscal measures, including revenue raising, will probably be needed in the future
• Government’s tax lock manifesto commitment will come under significant pressure
• Moderate increase in corporation tax could raise revenue without damaging growth
• Government should prioritise reforming stamp duty land tax
• Government should introduce temporary three-year loss carry-back for trading losses and increase investment incentives for business

The report can be read via the following links

• Read the report summary
• Read the conclusions and recommendations
• Read the full report: Tax after coronavirus (pdf version here)

The Charity Tax Group (CTG) worked with CFG, NCVO and IoF to prepare a joint response to the inquiry. The response outlines a number of core principles that should underpin any reform of taxation going forward. As a minimum, existing charity tax reliefs should be protected and tax compliance and administration simplified. We highlight the importance of protecting valuable existing business rates and VAT reliefs, future-proofing tax systems and legislation and call for improved collaboration and dialogue between HMRC and the charity sector. The charity sector also makes a specific call for a Gift Aid Emergency Relief package to help ensure charities have sufficient funds to play a leading role in the COVID-19 recovery. CTG also submitted a supplementary response sharing the results of its VAT research.

Importantly for charities the report notes:

VAT

There is no evidence in favour of replacing VAT with a retail sales tax. The increased flexibility that the UK Government has to set VAT rates is welcome recognising that the VAT system is complicated and that the zero and reduced rates, together with the exemptions, create economic distortions. However there is recognition that in political terms simplification through removing exemptions and zero rates is likely to be very hard to deliver. The Treasury Committee does not recommend any significant changes to the scope of VAT. The Government should, following consultation, set out principles and objectives for the VAT system now that VAT is free from EU law. This should include a framework within which new reliefs can be assessed or existing ones withdrawn. The Government should ensure that the principles balance revenue raising, economic growth and other objectives, such as improving the quality of the environment and “levelling up”.

Business rates

The Committee believe that the business rates system needs reform and welcomes the current Government review and encourage it to make significant reforms to improve the overall functioning of the business rates system for the long term.

Tax Strategy and Simplification

The Committee believes that a tax strategy setting out what the Government wants to achieve from the tax system and identifying high level objectives would have much merit. It proposes that any such strategy should include principles for:

• The role of the tax system in meeting fiscal goals
• Securing a neutral tax system which treats similar activities in similar ways, including fair taxation of different structures of work
• Ensuring that taxation is progressive and fair to future generations
• Meeting climate change goals for net zero and other environmental objectives whilst giving consideration to those who are on lower incomes
• Ensuring growth of business and employment, including a new business tax roadmap to provide investment certainty for business and a five to ten-year strategy for corporation tax rates
• Reducing the tax gap
• Indirect taxes such as VAT which were previously covered by EU law which no longer applies
• Reducing compliance costs, especially through appropriate tax simplification. 

The Committee supports the current tax policy making process and believes that the OTS has an important role to play in identifying how the tax system might be simplified. The Committee supports plans by HMRC to digitise and improve tax administration noting that if tax reform is to be successful, it is important that HMRC has the capacity and funding to carry out reform and is not hindered by out of date systems.

The Committee does not believe that there is currently a need for a tax commission.

Report summary

The public finances are on an unsustainable long-term trajectory, primarily due to projections of rising age-related spending based on existing Government commitments, which has been exacerbated by the fiscal impact of the coronavirus pandemic. Witnesses to the inquiry said that now is not the time for tax rises or fiscal consolidation, which could undermine the economic recovery. However, the public finances are increasingly exposed to rises in interest rates. Significant fiscal measures, including revenue raising, will probably be needed in future. This is a large-scale and long-term challenge that requires taking a view of the whole tax system, how it can be reformed, and how it can raise revenue in a way that minimises economic damage as well as effectively supporting public services, which in turn can promote growth. The Treasury Committee has made a series of recommendations in its report:

• Raising tax revenue quickly and at a large scale is likely to require higher contributions from one or more of income tax, national insurance, and VAT. Any increases in the rates of these taxes were ruled out in this Parliament by the Government’s ‘tax lock’ manifesto commitment. It is clear to the Committee that the manifesto commitment of the Conservative Party will come under pressure under the current circumstances. The commitment not to increase the rate of income tax does not preclude it from adjusting income tax thresholds. The Committee notes that the Government could raise revenue simply by freezing income tax thresholds, and that such a change would cause minimum economic distortion. Increases in national insurance contributions may be especially difficult given the probable impact on jobs, at a time when increasing employment is likely to remain an economic priority.
• Corporation tax, which is currently 19 per cent, is the fourth largest source of tax revenue, and is not covered by the ‘triple tax lock’. A moderate increase in the rate could raise revenue without damaging growth, especially if balanced with fiscally appropriate measures for business, such as enhanced loss relief and more generous capital allowances. However, it is clear that a very significant increase in the corporation tax rate would be counterproductive.
• There was widespread agreement in evidence that stamp duty land tax (SDLT) is economically inefficient, causing damage to the economy by affecting when and how often people buy homes. The Government should prioritise reforming SDLT and should, if possible, set the tax at a level that optimises revenue while encouraging home ownership.
• The Government should support businesses by introducing a temporary three-year loss carry-back for trading losses in both incorporated and un-incorporated businesses. This would allow losses made during the pandemic to be set against up to three previous profitable years, generating a tax refund. It would help those businesses which have shown that they were previously profitable recover from losses imposed by the impact of the pandemic. The Government should also look favourably on a further extension, and possible permanency at the existing level, of the Annual Investment Allowance, which provides tax relief for expenditure on most plant and machinery.
• Introducing a windfall tax on profits that have resulted from the pandemic would be problematic for numerous reasons, such as identifying sectors to which any such tax should apply, but that is not to say that it would be impossible to introduce a windfall tax in certain circumstances in the future, if that was the political choice made. The Committee would not recommend an annual wealth tax as the development and administration of it would be extremely challenging. But the political arguments for some form of wealth tax would become stronger if the wealth to income ratio were to increase considerably. Despite more support from witnesses for a one-off wealth tax, which could raise significant revenue, there were significant reservations that such a tax imposed once can be imposed again, and that such a tax might be seen as retrospective.
• Pension tax relief is estimated to cost £20.4bn in 2018-19. Given the regressive nature of the benefits accruing to individuals from the current arrangements on pension tax relief, especially those in the top earnings decile, the Government should urgently reform the entire approach to pension tax relief.
• The Chancellor has said that “it is now much harder to justify the inconsistent contributions between people of different employment statuses.” The Committee strongly believe that a major reform of the tax treatment of the self-employed and employees is long overdue. The current system is confused, unfair and unsustainable. The review should incorporate the benefits which accrue upon payment of NICs and other taxes as well as the level, the incentives, and the interaction of such taxes. It should look as far as is possible to eliminate the so called ‘three-person problem’ altogether.
• The Committee recognises the challenge of net zero and agrees that tax has a part to play in achieving this goal. However, carbon taxes are unlikely to form a major part of the long-term tax base or stabilisation of the public finances, as they are designed to complete the transition to net zero. The Government should develop a tax strategy to meet net zero. This should include tax measures to incentivise the behavioural changes needed to achieve net zero while at the same time providing short term support in the tax system for pump-priming green innovation and balancing the need to protect those on low incomes.
• The Government should set out a tax strategy for what it wants to achieve from the tax system and identify high level objectives.

Chair’s comment

Commenting on the report, Rt Hon. Mel Stride MP, Chair of the Treasury Committee, said:

“Tax is often an area of significant disagreement between parties, so I am particularly pleased that the cross-party Treasury Committee has unanimously agreed this report for our Tax After Coronavirus inquiry.

“With our public finances on an unsustainable long-term trajectory, our clear message is that Budget 2021 is not the time for tax rises or fiscal consolidation, which could undermine the economic recovery. But we will probably need to see significant fiscal measures, including revenue raising, in the future.

“We’ve made a series of recommendations around the reform of taxes as well as a call for a clear tax strategy to underpin future decisions. We also identify some specific areas where revenue might be raised.”

Conclusions and recommendations

The scale of the public finances challenge

1.The pandemic will leave behind a large increase in the public debt and, possibly, a rise in ongoing borrowing into the medium to longer term. However, low interest rates have helped to open up fiscal space, and our expert witnesses said that now is not the time for tax rises or fiscal consolidation, which could undermine the economic recovery. However, the public finances are left more exposed to rises in interest rates; and witnesses told us that economic growth, inflation and measures to lower interest rates probably could not on their own be relied upon to stabilise or reduce the public debt. Indeed, interest rates increasing from current low levels would put further pressure on the public finances. Significant fiscal measures, including revenue raising, will probably be needed in future. (Paragraph 26)

2.The Financial Secretary to the Treasury is right to point to the uncertainties in the economic and fiscal forecasts. However, the Government would be prudent not to focus on the OBR’s upside scenario at the expense of failing to prepare for its central and downside scenarios. We re-iterate our earlier conclusion that “the Chancellor should, at the next fiscal event, set out an initial roadmap of how he intends to place Government finances on a sustainable footing.” (Paragraph 27)

3.The public finances are on an unsustainable long-term trajectory. This is due primarily to projections of rising age-related spending based on existing Government commitments. This situation is being exacerbated by the fiscal impact of the coronavirus pandemic. Even in the most optimistic scenario, the current and future UK Governments face a dilemma: if public spending and revenues are not to diverge without limit, either the former must be restrained or the latter must be raised. (Paragraph 41)

4.The Office for Budget Responsibility has been stating that the public finances are on an unsustainable long-term trajectory since 2011, but the Government has not done enough to engage with the issue. The Government should routinely produce a more extensive and considered response to the Fiscal Sustainability Report than the 300-word statement it provided in 2020. Such a response should set out a strategy for how and at what level the public debt could and should be stabilised. To support this process, the Committee intends to carry out full scrutiny of the biennial Fiscal Sustainability Report in future, as it did for the first time in 2020. (Paragraph 42)

5.The evidence submitted to this inquiry generally supports the proposition that the UK is able to raise taxation as a share of GDP and raise additional tax revenues. However, there is also a need for reform of the tax system. (Paragraph 49)

6.The public finances are on an unsustainable long-term trajectory that has been exacerbated by the coronavirus pandemic. Additional tax revenue could make a contribution to addressing this. But the tax measures that are most politically palatable in the short term are often not those that minimise distortions to economic activity in the longer term. This is a large-scale and long-term challenge that requires taking a view of the whole tax system, how it can be reformed, and how it can raise revenue in a way that minimises economic damage as well as effectively supporting public services, which can in turn promote growth. As part of its recovery from the coronavirus pandemic, the UK has an opportunity for a comprehensive review and reform of the tax system. (Paragraph 50)

Support for business

7.We recommend that the Government should do as its predecessors have done during previous crises and support businesses by introducing a temporary three year loss carry-back for trading losses in both incorporated and unincorporated businesses. This would help those businesses which have shown that they are previously profitable recover from losses imposed on them by the impact of the pandemic. (Paragraph 56)

8.The Annual Investment Allowance is valued by business and it appears well targeted to promote growth in small and medium-sized enterprises. As with all tax reliefs there is likely to be some deadweight cost; but we urge the Government to look favourably on further extension and possibly permanency at the existing level, which would provide welcome certainty to small and medium-sized enterprises. (Paragraph 62)

Windfall and wealth taxes

9.Some firms and sectors have seen a significant increase in turnover as a result of the pandemic, and some witnesses made arguments in favour of a windfall tax on the profits which have resulted. There are downsides to a windfall tax, including its potentially retrospective nature. There would also be complexities, including the difficulties of identifying sectors to which any such tax should apply, ensuring that such a tax is fairly targeted at firms which have benefited excessively within those sectors, and identifying the element of a firm’s profits which could be reasonably attributed to excessive profits generated by the pandemic. For these reasons, introducing such a tax would be problematic, but that is not to say that it would be impossible to introduce a windfall tax in certain circumstances in the future, if that was the political choice made. The Treasury would clearly need to conduct a thorough assessment of its feasibility and of the revenue which it might raise. (Paragraph 70)

10.We believe that the development and administration of an annual wealth tax would be extremely challenging, and we note that other countries have abolished such a tax in recent years. We would not recommend an annual wealth tax. It is recognised though that were the wealth to income ratio to increase considerably, the political arguments for some form of wealth tax would become stronger. (Paragraph 84)

11.Though those who gave evidence were sceptical of an annual wealth tax, there was more support for a one-off wealth tax. It could be used to raise significant revenue. However, amongst witnesses there were significant reservations that a tax imposed once can be imposed again, and that such a tax might be seen as retrospective. (Paragraph 88)

The major contributors to tax revenues

12.The evidence submitted to this inquiry indicates that raising tax revenue quickly and at a large scale is likely to require higher contributions from one or more of income tax, national insurance and VAT, as they currently yield over two-thirds of the total tax take. Any increases in the rates of these taxes were ruled out in this Parliament by the Government’s “tax lock” manifesto commitment. It is clear to the Committee that the manifesto commitment of the Conservative Party will come under pressure under the current circumstances. (Paragraph 93)

13.Based on the evidence we heard and received, we conclude that income tax is more efficient than some other taxes and we do not see a pressing need for reform at this time. The Government’s manifesto commitment not to increase the rate of income tax does not preclude it from adjusting income tax thresholds. We note that the Government could raise revenue simply by freezing income tax thresholds, and that such a change would cause minimum economic distortion. (Paragraph 97)

14.Careful consideration would need to be given to any potential increases in income tax, VAT and national insurance contributions, taking into account the degree to which any increases

• result in additional economic distortions,
• make taxes more or less progressive,
• assist or otherwise with the Government’s “levelling up” agenda, and
• impact on employment.

Increases in national insurance contributions may be especially difficult given the probable impact on jobs, at a time when increasing employment is likely to remain an economic priority. (Paragraph 106)

15.The UK has a lower corporation tax rate than other major economies, and we believe that a moderate increase in rate could raise revenue without damaging growth, especially if balanced with fiscally appropriate measures to help business, such as enhanced loss relief and capital allowances. However, it is clear that a very significant increase in the rate would be counterproductive. (Paragraph 116)

16.Given the regressive nature of the benefits accruing to individuals from the current arrangements on pension tax relief, especially those in the top earnings decile, the Chancellor should urgently reform the entire approach to pension tax relief. (Paragraph 123)

Priorities for tax reform

17.We strongly believe that a major reform of the tax treatment of the self-employed and employees is long overdue. The current system is confused, unfair and unsustainable. The review should incorporate the benefits which accrue upon payment of NICs and other taxes as well as the level, the incentives and the interaction of such taxes. It should look as far as is possible to eliminate the so-called ‘three person problem’ altogether. (Paragraph 139)

18.We believe that if the tax advantages of self-employment were to be reduced, then the tax advantages of running a limited company should be considered for reduction relative to the taxation of employees under PAYE. (Paragraph 142)

19.Evidence to this inquiry is clear that differences between income tax and national insurance contributions create distortions and unfairness. While we have not heard enough evidence to recommend a wholescale merger of national insurance contributions and income tax, the Government should consider what can be done to remove the distortions gradually through time. (Paragraph 146)

20.We believe that when reviewing the burdens of taxation for the employed and self-employed and limited companies, the Government should also review the taxation of pensions and the tax relief applicable to pension payments. (Paragraph 148)

21.We recognise that the digital services tax is a useful step towards capturing some of the profits made in the UK by digital companies. We strongly approve of the Government’s approach in seeking international agreement on taxation of companies providing digital services and, where international agreement is reached, maintaining its commitment to abolishing the digital services tax in favour of any such agreement. (Paragraph 155)

22.We recommend that the Government provide this Committee with an annual report on progress towards reaching international agreement on the taxation of digital services, the yield of the digital services tax and the effects of the tax on digital companies and the wider economy. (Paragraph 156)

23.Based on evidence to the Committee, we believe that there is a compelling case for the reform of capital taxes. (Paragraph 164)

24.We did not hear or receive any evidence in favour of replacing VAT with a retail sales tax. Any contemplation of such a change must be accompanied by more evidence as to the effects it would have, not least on our trade with the EU, which would continue to levy VAT. (Paragraph 169)

25.We welcome the increased flexibility that the UK Government has to set VAT rates—for example we welcome the abolition of the “tampon tax”. We recognise that the VAT system is complicated and that the zero and reduced rates, together with the exemptions, create economic distortions. We also recognise, however, that in political terms simplification through removing exemptions and zero rates is likely to be very hard to deliver. We do not recommend any significant changes to the scope of VAT. (Paragraph 180)

26.The Government should, following consultation, set out principles and objectives for the VAT system now that VAT is free from EU law. This should include a framework within which new reliefs can be assessed or existing ones withdrawn. The Government should ensure that the principles balance revenue raising, economic growth and other objectives, such as improving the quality of the environment and “levelling up”. (Paragraph 181)

27.We recognise the challenge of net zero and agree with witnesses to our Decarbonisation and Green Finance inquiry that tax has a part to play in achieving this goal. However, carbon taxes are unlikely to form a major part of the long-term tax base or stabilisation of the public finances, as they are designed to complete the transition to net zero. (Paragraph 190)

28.The Government should develop a tax strategy to meet net zero. This should include tax measures to incentivise the behavioural changes needed to achieve net zero while at the same time providing short term support in the tax system for pump-priming green innovation and balancing the need to protect those on low incomes. (Paragraph 191)

29.There was widespread agreement among witnesses that stamp duty land tax is economically inefficient, causing damage to the economy by affecting when and how often people buy homes. This in turn has implications for the flexibility of labour markets and for economic activity: a reduction in the volume of house transactions leads to a corresponding reduction in associated economic activity, such as home renovation and refurbishment. The Government should treat stamp duty land tax as a priority for reform and should set the tax at a level that optimises revenue while encouraging home ownership. Any review should take into account the impact of any UK changes on equivalent devolved taxes. (Paragraph 200)

30.We have heard strong arguments in favour of reform of council tax. We encourage the Government to consider how best to reform local taxation, taking account of recommendations from the Housing, Communities and Local Government Committee and we draw the Government’s attention to evidence submitted to this inquiry. (Paragraph 208)

31.As the previous Treasury Committee concluded in 2019, we believe that the business rates system needs reform. We welcome the current Government review and encourage it to make significant reforms to improve the overall functioning of the business rates system for the long term. (Paragraph 211)

Tax strategy and simplification

32.We believe that a tax strategy setting out what the Government wants to achieve from the tax system and identifying high level objectives would have much merit. We recommend that the Government should draw up a draft tax strategy for consultation. We propose that any such strategy should include principles for:

• The role of the tax system in meeting fiscal goals
• Securing a neutral tax system which treats similar activities in similar ways, including fair taxation of different structures of work
• Ensuring that taxation is progressive and fair to future generations
• Meeting climate change goals for net zero and other environmental objectives whilst giving consideration to those who are on lower incomes
• Ensuring growth of business and employment, including a new business tax roadmap to provide investment certainty for business and a five to ten-year strategy for corporation tax rates
• Reducing the tax gap
• Indirect taxes such as VAT which were previously covered by EU law which no longer applies
• Reducing compliance costs, especially through appropriate tax simplification. (Paragraph 221)

33.The tax policy making process instituted in 2010 (and reaffirmed in 2017) appears to be sensibly designed; but concerns have been expressed to the Committee that the Government does not always adhere to it and so risks losing the confidence of stakeholders. If the process cannot be followed, for example because there is not enough time to cover all the stages before a change needs to be implemented, the Government should be open about it and should set out its reasons for doing so. (Paragraph 230)

34.We believe that the Office of Tax Simplification (OTS) has an important role to play in identifying how the tax system might be simplified. It is right that the effectiveness of the OTS and its ability to carry out its functions are now reviewed, and we await with interest the outcome of the review. (Paragraph 241)

35.We support the plans announced by HMRC in July 2020 to digitise and improve tax administration. If tax reform is to be successful, it is important that HMRC has the capacity and funding to carry out reform and is not hindered by out of date systems. (Paragraph 247)

36.Tax commissions may play a role in helping reform particular areas, for example tax reliefs. However, the Government already has an effective tax policy making framework, and an overarching tax reform commission is unlikely to be able to achieve anything that the Government could not do anyway by setting out its tax strategy and by following its tax policymaking process. We do not believe that there is currently a need for a tax commission. (Paragraph 252)