Tax: Church Action for Tax Justice Reports
The Lord Bishop of St Albans
To ask Her Majesty’s Government what assessment they have made of the reports by Church Action for Tax Justice (1) Tax for the Common Good, published in February 2019, and (2) Fair Tax Now, published on 4 January 2021.
The Lord Bishop of St Albans
My Lords, I thank all those speaking in this evening’s debate. I am no expert on tax, but it does not take an expert to see that there are some deeply entrenched tax inequalities. This 2019 report by Church Action for Tax Justice, and its 2021 report, Fair Tax Now, are more relevant than ever, not least with the financial impacts of the Covid-19 pandemic being felt in all parts of society, and with Her Majesty’s Government’s commitment to “levelling up”.
The proposals laid out by Church Action for Tax Justice seek not to harm wealth generation, but to level the playing field and facilitate a fairer tax system that ensures that those with the deepest pockets do their duty to the societies that provided the context in which they were able to amass their wealth. This is a vast topic, so I will make a couple of preliminary comments and then suggest four of the most important areas that must be addressed.
Democracies rely on the population accepting that taxes are broadly equitable, yet there is now a consensus that, for example, many international online companies are not paying their fair share of taxes in this country. At the same time, there is a delicate balance between encouraging the generation of wealth and ensuring that the burden of social costs is shared as equitably as possible.
Of the four most important areas to be addressed, the first is tax havens. For the United Kingdom, tax avoidance remains a major problem, with the annual tax gap estimated at £31 billion per annum. However, even more damaging is the infrastructure enabled by the UK that allows tax avoidance on a global scale. The presence of tax havens, whether they be British Overseas Territories or Crown dependencies, combined with their close connection to the financial might of the City of London, facilitates an international network that syphons money out of nations and into these jurisdictions, with their low tax, weak legislation and easily exploitable loopholes. Noble Lords may recall that the British Virgin Islands was the most popular tax haven mentioned in the Panama papers.
While I am pleased that the British Overseas Territories and Crown dependencies have all committed to publish public registers of beneficial ownership by 2023, these territories will remain lucrative places to those seeking to avoid paying tax. According to the 2019 corporate tax haven index, four of the top 10 havens globally were UK associated territories: the British Virgin Islands, Bermuda, the Cayman Islands and Jersey. The 2023 changes may go some way towards reducing their use, but the reality is that the City of London and the UK’s associated territories will continue to be at the centre of a network for international tax avoidance. Furthermore, should the Government choose to move ahead with free ports, and essentially create onshore tax havens within the UK, a corporate tax rate race to the bottom may be unleashed.
Secondly, I have some comments about income tax and national insurance. Domestically, we face structural problems in our tax system. It simply cannot be right that, when all tax is taken into account, the bottom 10% of people pay 42% of their income while the top 10% pay just 34.3%. Without doubt, part of the problem is that we have a progressive tax in income tax, along with a regressive tax in national insurance. Rolling up both of those into a single standardised progressive income tax would reduce bureaucracy and contribute towards rebalancing the percentage of income paid in tax. That would only partially solve the issue; it is the lower rates of capital gains tax, most beneficial to those with assets, that reduce the overall tax rate of the wealthiest. Whether by the incorporation of capital gains tax into a single progressive tax or by making capital gains more progressive and in line with general income tax, the current system requires reform to equalise the tax across wealth brackets.
Thirdly, there is council tax, which also fails accurately to account for the financial conditions of those who pay it. I think that a tax based on property valuations from 1991 is parochial and antiquated. The highest tax band, for properties worth £320,000 or more in 1991, fails to take into account changes to regional house prices since then and creates no differentiation between any properties worth more than £320,000: a property now worth £3 million pays equal council tax to a property worth £350,000. Furthermore, it is again designed as a regressive tax that results in the poorest paying a higher proportion of their income on council tax than those who are wealthier. Those on the highest incomes pay just 1% of their income on council tax; the lowest decile, conversely, pays 9%. According to Citizens Advice, it is the most common debt problem faced by families in the UK. At a minimum, it needs updating to reflect modern house prices, alongside the addition of a new higher bracket. Ideally, though, it should go further to better account for income disparities and to equalise contributions.
Lastly, I will say a word about corporation tax and VAT. Over the past 30 years the taxes that impact the poorest have steadily increased, such as VAT or council tax, while those that impact the wealthiest have gone down—for example, corporation tax and capital gains tax. Between 1975 and 2020 the relationship between VAT and corporation tax has virtually inversely correlated, with VAT going up and corporation tax going down. Although the EU set a base standard rate of 15% VAT, the UK has had 20% VAT since 2011, while continually reducing corporation tax during the same period. Now that we are no longer subject to the EU’s VAT requirements, perhaps the Government might consider slightly rebalancing corporation tax and VAT to deliver a fairer settlement to citizens and business alike.
I hope I have laid out quite clearly that, far from being some radically redistributionist document, the proposals from Church Action for Tax Justice seek only to induce fairness in the tax system and prevent the heaviest burden falling on the poorest. Much is said about the future now that we have left the EU. Some of us fear that it may give licence to people to change in ways that further divide our country in terms of people’s wealth. My hope is that we will take a lead in our world to think how we can use this opportunity creatively, so that everyone in our society has fair responsibilities and fair rewards for all that they do.
The Deputy Chairman of Committees (Lord McNicol of West Kilbride) (Lab)
I call the next speaker, the noble Lord, Lord McKenzie of Luton. Lord McKenzie? No? We will move on to the next speaker, and if we can reconnect with the noble Lord, Lord McKenzie, we will bring him back in after the right reverend Prelate the Bishop of Portsmouth. I call the noble Lord, Lord Holmes of Richmond.
Lord Holmes of Richmond (Con) [V]
My Lords, tax, a temporary aberration, has proven more than somewhat sticky. Of itself, this is neither positive nor negative. I welcome the opportunity to take part in this debate, congratulate the right reverend Prelate on securing it, and welcome the two reports from Church Action for Tax Justice. Indeed, tax for the common good has to be what we are aiming at.
The Covid crisis has affected the relationship between citizen and state—taxpayer and tax collector—as with so much else in society and our economy, with HMRC being an effective means of financial support for many people. There is a real opportunity here to reimagine tax: real time, data-based, embedded far more in our daily experience, rather than something mysterious and distant, with the constant fear of the crown-embossed envelope landing on the doormat.
Many of us are used to dealing and interacting with our banks and grocers digitally, often via apps—why not similarly deal with the tax man? In saying this, I am in no sense undermining the significance of the pernicious forces of digital and financial exclusion, which need to be urgently addressed. But imagine a trader coming out of Covid. If HMRC reverses too quickly from financial support to debt collector, what should she do when faced with her VAT and other bills or paying the electric? As with any other debt, it should start with an effective relationship and connection, maybe via an app, with understanding and flexibility on both sides.
All the data already exists in our current banking and payment system to be able to operate a taxation system in real time for the benefit of all. It is encouraging that the Chancellor of Exchequer has nodded his support towards stablecoins and, indeed, central bank digital currency. Imagine central bank digital currency which could carry with it its taxation status, effortlessly operating an efficient, effective tax system for the whole UK. We could potentially have an effortless domestic and international, cross-border taxation system. When added to smart ledgers and DLT, the opportunity is extraordinary. Would my noble friend the Minister agree that, when it comes to tax transformation and tax for the common good, we not only have the technology but that tax in this new, transformed, technology-driven world does not need to be taxing?
The Deputy Chairman of Committees (Lord McNicol of West Kilbride) (Lab)
I will try the noble Lord, Lord McKenzie of Luton, again. Lord McKenzie?
Lord McKenzie of Luton (Lab) [V]
My Lords, we are asked to join a big conversation on tax, focusing on the unfairness of much of our current system. We have heard about some of that, including some of the international dimensions. Our starting point at this juncture is that taxation is, or should be, about a common good—not a necessary evil. Judgments about fairness are not just about tax rates; they are about accessibility of the benefits in the tax system and for whom they were designed. The Low Incomes Tax Reform Group has just published its practical steps, which note that tax and associated social security systems could be made to work better for those on low incomes.
The church reports are right to identify as unfair the benefits for those who can, depending on the circumstances, organise their income in such a way as to take advantage of a capital gains regime or, indeed, a more favourable income regime, with deferral in appropriate circumstances. In introducing this debate, the right reverend Prelate focused on council tax, and I agree entirely about the nature of its unfairness. I wonder whether the hangover from the poll tax is an inhibiting factor in addressing it more rigorously.
Inheritance tax has become virtually voluntary. At a time when the national finances have been laid bare by the pandemic, with an expected deficit of something like £400 billion, surely it is time to consider a wealth tax, about which we have now heard from the Wealth Tax Commission, the governing body.
The Tax Justice Network Briefing describes circumstances in which, through technicalities, taxpayers are able to minimise and lower taxation charges that operate internationally and in overseas jurisdictions. It is suggested that the benefits of doing so could amount to something like $500 billion, although that seems a somewhat simplistic figure. This can involve the use, as described, of tax haven jurisdictions, taking advantage of financial secrecy and helping to mask the true ownership of funds. We are told—we have heard it again this evening—that the Crown dependencies and overseas territories are up to their necks in these activities and are central to tax avoidance and evasion. I think that the Minister has committed to making some changes—
Baroness Sanderson of Welton (Con)
I am sorry but perhaps I may remind the noble Lord of the three-minute speaking limit.
Lord Field of Birkenhead (CB)
My Lords, I am immensely grateful to the right reverend Prelate for securing this debate—it could not be better timed—and for the work that Church Action for Tax Justice has done and for the way it is establishing a new agenda here. However, to be reminded that we have three minutes rather puts me in mind of Dr Johnson—I mean Dr Johnson and not our current Prime Minister—saying that to be hung in the morning concentrates the mind wonderfully.
I have three points to make, besides endorsing all the comments, bar one, of the right reverend Prelate. Might I please caution not to easily roll up national insurance with income tax? National insurance needs to be reformed. It needs to be made progressive, along the lines that the right reverend Prelate spoke of, but it is a means by which people can feel that they contribute to their welfare state. It gives them a sense of ownership, which crediting people does not.
I turn to the three issues that I would like to raise. One reinforces the point that I have already made: it could not be a better time for this debate. At the last election, where I fought to be returned again in Birkenhead, I quietly said to myself—and rejoiced—that the Government’s main driving force would be the levelling-up programme. But that cannot be taken seriously unless we look at all, or practically all, of the Government’s domestic programme. I think that the job of the Government—and if not them, then us—is to bring together a comprehensive programme of reform for levelling up, but that cannot be done without considering taxation, both direct and indirect.
Secondly, I make a plea for gaining flexibility to vary tax rates. When I was part of the Blair Government —for that short but happy period of time—the Government took powers to allow them to experiment with welfare reforms. They did not have to be national; they could be regional or local. I say that merely to remind the Government that that might well be an approach that they would wish to see in the areas that they are most anxious to level up.
In doing that, immediate things come to mind. Would variations in various tax rates encourage employers to take on more people? The question should be: how do we gain that? Thirdly, what are the general tax principles we might bring to bear on this subject matter? I suggest two. One is to ask: is it proper, fair and just to levy direct taxation on incomes below the level that the Government believe is the minimum necessary to keep body and soul together? The second is to ask, as the right reverend Prelate did: how do we make sure that indirect taxation does not wipe out any other good that Governments try to do?
I am grateful to be able to contribute to this debate, but I hope very much that it is the first of a whole series.
The Lord Bishop of Portsmouth [V]
My Lords, I am delighted that my good friend and close colleague the right reverend Prelate the Bishop of St Albans secured this debate. I congratulate him on bringing these reports from Church Action for Tax Justice to wider attention. I urge the Government to assess and act on them.
I particularly endorse the right reverend Prelate’s drawing attention to the often pernicious interaction of income tax and national insurance so-called contributions. The reality is that such “contributions” are no such thing. These are two direct tax systems working alongside each other, but crucially not together, and often unfairly. This is exacerbated when the impact of other taxes, such as council tax, is factored in.
I cannot claim now, as my time as an economist is long past, anything other than an amateur understanding of the economic impact of direct taxation. However, it is abundantly clear that, whatever the very modest merits claimed by the noble Lord, Lord Field, the interaction of these taxes—some progressive and others regressive, with varying conditions—causes a confusing and inequitable impact on the take-home earnings of those on low and modest incomes. This is an impact on those who can least afford it and are least able to absorb it.
The report Fair Tax Now illustrates this by powerfully comparing how the average tax on income borne by an NHS nurse and a person earning £10 million a year favours the multi-millionaire. However, there is also very significant unfairness in the tax treatment of those on low and very modest incomes, particularly in the marginal tax rates they face. No payments of national insurance and income taxes are paid on earnings up to £9,500 a year, so then a 12% national insurance rate kicks in. Income tax at the basic rate of 20% is added above £12,500 a year, giving a marginal tax rate of 32%. If you are fortunate enough to earn more than £50,000 then income tax rises to 40%, but the national insurance component of direct tax on income falls to 2%. The marginal tax rate on income of 50% and above is not an extra 20% as popularly claimed, but only an extra 10%. There are many other injustices and there is not nearly enough clarity. We need less inequality and injustice. I urge the Government to address this urgently.
Lord Hendy (Lab) [V]
I congratulate the right reverend Prelate the Bishop of St Albans on securing this debate. I wholeheartedly endorse the reports Tax for the Common Good and Fair Tax Now. If we are to rebuild a sustainable and just economy and end the blight of inequality, the evil of tax-dodging by powerful corporations, facilitated by accountants and lawyers, must be ended. For the reasons set out in those reports and by other noble Members in this debate, we need to make taxes of all kinds less regressive and to tax wealth, property and inherited income properly. We need to work internationally to prevent national competition on low taxation and end the blight of tax havens.
One thing that Covid-19 has shown those of us who, unlike the right reverend Prelate the Bishop of Portsmouth, are not economists is that Governments are not dependent on tax income to balance public expenditure in a notional account book. It is now clear that they have other sources of spending for the public good, especially in times of low inflation. But tax has functions beyond simply raising revenue for the Government. Most particularly, it is a means to reduce inequality—the most appalling blight on our society, as the reports make clear. The consequences of economic inequality on every aspect of life were drawn to our attention a decade ago in the work of Wilkinson and Pickett, and are strikingly reiterated in the latest of the reviews by Sir Michael Marmot and his team, Build Back Fairer: The COVID-19 Marmot Review. The adverse impact of inequality on the economies of the world has been pointed out time and again by the OECD and the International Labour Organization.
In the UK, the share of national income going to workers has been relentlessly declining for 40 years, as company profits and dividends to shareholders increase at the expense of wages and salaries. In 1976, 65.1% of gross domestic product went to wage earners; by 2019, wage share had slumped to 49.2%. After a year of lockdown, we can be sure that the scales have tipped yet further against—[Inaudible.]
The Deputy Chairman of Committees (Lord McNicol of West Kilbride) (Lab)
I think we had some interference on the noble Lord, Lord Hendy.
Lord Hendy (Lab) [V]
[Inaudible]—I am ending now—forward to redress the growing and dangerous levels of inequality in the UK and across the world. I ask Church Action for Tax Justice to keep up the good work.
Lord Harries of Pentregarth (CB) [V]
My Lords, I congratulate the right reverend Prelate on his excellent opening speech. Most people recognise that a system of incentives is both inevitable and right. If a person works hard, they should be rewarded for that work. If they work over many years to obtain qualifications, it should be reflected in their salary. Most people also recognise that there is an element of sheer luck in human life which cannot be eliminated. But what people deeply resent at the moment is not inequality as such, but the gross and growing inequality that is such a sharp feature of the modern world.
When someone gets a bonus that is more than an average person’s lifetime earnings; when they get that bonus even when their company has failed; when they employ a battery of lawyers to find a way of not paying their taxes; when they quickly switch their money from one tax haven to another, people feel that there is something fundamentally wrong and unfair. Over 80% of the British public believe that legal tax avoidance is morally wrong. I shall put it in a sentence: it undermines social solidarity. Let us be clear: a tax system that works depends on that sense of solidarity.
The amount of money hidden away is absolutely enormous. Between $8 trillion and $35 trillion sits offshore, enabling its wealthy owners to avoid paying tax. Developing countries, which face problems from Covid-19 on a scale unimaginable in the richer nations, are deprived of up to $200 billion every year by tax avoidance. The Danish, Polish and French Governments have refused corporate bailouts for corporations registered in tax havens. Could the Minister say whether Her Majesty’s Government have taken, or are contemplating, any similar steps?
Following on from that, will the Government commit themselves, working with the new US Government, to prioritise low-income countries in the base erosion and profit shifting, or BEPS, initiative of the OECD/G20 countries to reform global tax rules? At the moment, low-income countries are the biggest losers of tax revenue as a result of profit shifting by multinational corporations, losing 9% of total revenue as opposed to only 3% for high and middle-income countries. Will the Government commit themselves to a stance at the BEPS discussions which would prioritise low-income countries and encourage the new US Administration to do so? To that end, would they be prepared to offer technical assistance to those low-income countries in the analysis of their income and tax data to explore approaches that might best help them? I know that the Tax Justice Network stands ready to undertake such work if commissioned to do so. Would the Minister at least be prepared to look at what it proposes?
Baroness Ritchie of Downpatrick (Non-Afl) [V]
My Lords, I congratulate the right reverend Prelate the Bishop of St Albans on securing this important debate.
There is absolutely no doubt that there are major tax and welfare inequalities. If the Government are serious about their levelling-up agenda, to minimise and eliminate those inequalities they need urgently to look at tax reform, to ensure that it is less regressive and more progressive, and at welfare reform, to ensure that the current inequalities are eliminated, with a particular focus on universal credit.
I also commend the campaign organisation Church Action for Tax Justice, which published two reports containing proposals on creating a fairer tax system, many of which I find myself in total agreement with.
This debate is very apposite at the moment, in that the whole Covid pandemic has compounded the situation, with rising levels of poverty, the growing use of food banks and many people out of work, and the uncertainty of whether that work will exist several months down the road, whenever we are on the other side of the vaccination implementation programme and, we hope, the pandemic withers away. However, there is absolutely no doubt that those inequalities have to be addressed through reform of the taxation system and of welfare. Both go hand in hand.
Other organisations as well as Church Action for Tax Justice have referred to these issues. Only last week, in its most recent report, the Commons Public Accounts Committee stated that
“Quirks in the tax system”
have meant that groups of workers, including freelancers and self-employed people who recently moved on to company payrolls or who work on a series of short-term employment contracts with gaps in between, have been ineligible for furlough payments, and thus that needs to be looked at as well. The chair of the committee, Meg Hillier, asserts that
“out-of-date tax systems are one of the barriers to getting help to a significant number of struggling taxpayers who should be entitled to support.”
In conclusion, can the Minister advise us when the Government will hold the consultation on tax evasion measures this year, which was promised by the Financial Secretary to the Treasury in July 2020?
Lord Sikka (Lab) [V]
My Lords, I refer to my interests in the register. I congratulate the right reverend Prelate the Bishop of St Albans for initiating this debate. I support the reports by Church Action for Tax Justice.
Curbing tax avoidance and evasion is vital for building a just society. The Government talk about it, but have delivered far too little. HMRC has stated that, during the last decade, it failed to collect around £350 billion in taxes because of avoidance, evasion and errors. Other models of the tax gap estimate the amount to be between £58.6 billion and £122 billion a year—that is around £1 trillion over a decade.
One explanation is that the Government are too soft on the tax avoidance industry. On numerous occasions, courts have adjudged tax avoidance schemes, manufactured by big accounting firms, to be unlawful. For example, the Supreme Court, in the case of HMRC v Pendragon plc, considered a KPMG mass-marketed avoidance scheme as “an abuse of law”. Despite strong judgments, no big accounting firm has been investigated, fined or prosecuted, although they are awarded plenty of taxpayer-funded contracts. Can the Minister tell us why these firms continue to be indulged? Can she name even one instance where the Government have fined or prosecuted any big accounting firm for peddling unlawful tax avoidance schemes?
There is little transparency in tax avoidance. Company accounts are often opaque and there are no disclosures about the use of avoidance schemes to artificially reduce tax obligations, even though this harms stakeholders. For more than a century, Companies Acts have been used to redraw the boundaries between public and private information. Not so long ago, turnover, gross profit, reserves, director remuneration, audit reports, fees paid to auditors for non-audit work—and much more—were considered secret.
Despite opposition from big business, legislators sought to curb darker practices through transparency. However, this logic has not been applied to tax avoidance. Large companies should be required to file their tax returns and related documents at Companies House. The cleansing effect of public sunlight can curb some of the darker practices and empower citizens to take action and selectively boycott businesses engaged in rapacious practices. Surely the Minister is not going to oppose transparency—or is she?
Lord Bhatia (Non-Afl) [V]
My Lords, Church Action for Tax Justice campaigns for taxation reforms. In its 2019 report, Tax for the Common Good, it argued that the current tax system was not being used to its full potential as a tool to improve fairness in society. It also argued tax should be perceived as a public benefit rather than as a burden on taxpayers, saying that:
“Growing levels of inequality and the threat of climate change are among the greatest challenges faced by today’s world, while the UK still lives with austerity measures which have seen living standards plummet and undermined trust in our economic system. Responding to these crises requires public spending … and it requires that we rethink our use of natural resources.
Yet in rich and poor countries alike, it is still too easy for large companies and wealthy individuals to avoid paying their fair share of tax. And too often, tax is seen as negative: a burden to be minimised. We can tell a different story about tax: that it allows us to contribute to services and infrastructure shared by all, and that paying it is not just a duty but a privilege.”
The report proposes several reforms of the tax system, including increasing taxes on wealth and reforms to inheritance tax. It also argues that the Government should consider replacing council tax and business rates based on the value of property with a new tax based on the value of the land the property is built on; changing the way businesses are taxed through increasing corporation tax; creating a financial transaction tax; creating a new tax targeted at the providers of digital services, such as Amazon; and using taxation as a means of addressing climate change, such as through new taxes targeting carbon consumption. The report also suggested the introduction of taxes on other resources, such as plastics used in packaging.
The report also recommended that the UK should co-operate with other countries on the issue of tax avoidance, including through establishing an automatic information exchange to enable tax authorities in different countries to better share information on income-generating assets held by foreign citizens holding companies within their jurisdiction. There should be country-by-country reporting of financial information, requiring companies to state where their economic activity occurs, and public registers of beneficial ownership for all jurisdictions, including the UK Crown dependencies. The report argues that this would ensure that the ultimate owners of shell companies are identified and required to pay the right amount of tax. The United Nations should get global taxation rules so that all nations are involved in decisions—
Baroness Sanderson of Welton (Con)
My Lords, I remind the noble Lord of the three-minute speaking limit.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, Tax for the Common Good is a great analysis of the nature of taxes in the UK, and if it does not prick consciences, it should. Time restricts me to two areas in which I have been active. On page 4, we are reminded that tax is to provide revenue which funds quality public services and infrastructure for everyone.
We have been through a time of austerity that has cut deeply and unfairly into social funding, and we do not have the quality of services we should. I do not underestimate the terror that Treasury folk faced at the time of the financial crisis—I was looking into the abyss, too, so I know how it feels now as well—but we cannot forget the poorest people because they have less voice. And, although welcome, it is regrettable that universal credit seemed to get a temporary boost only when new, better-off cohorts of people became reliant on it because of the pandemic. It is the unanimous conclusion of the Lords Economic Affairs Committee report into universal credit—not a soft-touch committee —that cuts went too far. The biggest shame is how we can ever say that the future is being taken care of when one-third of children live in poverty: it is cruel, short-sighted and not the path to prosperity.
My second point is that we should stop hiding corporate activity and wealth. Page 7 reminds us about automatic information exchange, country-by-country reporting, public registers of beneficial owners and OECD rules, including BEPS. These are measures I have fought over many years to get this far, first in the EU and recently in your Lordships’ House, and I am bitterly disappointed that further steps are always delayed or thwarted, with corporate interests rallying threats about how disasters will befall if information is made available—almost always without real evidence. It is not evidence just because someone says it in a consultation reply, or bends the ear of Ministers or Commissioners. I took on corporate excuses in the final negotiations to get country-by-country reporting for banks into EU legislation, forcing through a sunrise clause that took effect unless harm was proven by a certain date—and harm was not demonstrated.
So, as these issues come around again, call the bluff, switch the burdens of proof and let us make progress. Will the Government do that?
Baroness Sherlock (Lab) [V]
My Lords, I thank the right reverend Prelate the Bishop of St Albans for opening this debate so well and noble Lords for some cracking short speeches. I thank Church Action for Tax Justice for both reports. As an Anglican priest, the first report got me at the introduction by referring to the hard time that tax collectors get in the Bible. To be fair, in New Testament times tax collectors were more like a cross between gangsters and wartime collaborators.
It is now time to rehabilitate those who collect tax, and to make the case for taxation as a mark and means of our shared common life and our willingness to be responsible, one for another. Rehabilitation depends on taxation being fair and being seen to be fair. I cannot do domestic taxation in three minutes, so I will say two quick things. Levelling up has to address income and wealth, and you cannot look at personal tax without also looking at social security.
I will make four quick points from the reports. First, we need to be willing to call out unscrupulous corporate tax practices. The 2021 report calls for:
“The implementation of the provisions in the 2016 Finance Act that would enable public country by country reporting, plus the UK no longer blocking the OECD from publishing aggregate country by country data”.
Can the Minister respond to that, please?
Secondly, the tax system needs to be fair to all types of trader. The UK now has a digital services tax, but big firms are simply passing on the extra charges to customers, such as advertisers or marketplace sellers. Ministers see the DST as a stopgap measure until the OECD agrees a global solution, but that is not happening tomorrow. When do the Government plan to review the DST and will they commit to closing the loopholes that have been found?
Thirdly, there needs to be action on environmental taxes. These can be key to tackling the climate emergency. What work has been done in government to assess the different options? Is this something that is likely to feature on the agendas of our G7 and COP meetings later this year?
Finally, there is the matter of international tax rules and how and where they should be agreed. My noble friend Lord Collins of Highbury is leading a review of the UK’s policy in and towards the UN and its committees and subsidiaries. However, even without major reform, the UK could wield huge influence on international tax co-operation and many other issues. We were a founding member of the OECD, have a leading role at the UN and have some of the highest allocation of voting powers of the financial institutions. Despite that global Britain mantra, too often the UK is absent from the world stage at the moment. What steps will the Government take to seek better and swifter action on international tax co-operation? I look forward to the Minister’s reply.
Baroness Penn (Con)
My Lords, I congratulate the right reverend Prelate the Bishop of St Albans on securing this important debate and thank noble Lords who have spoken for their thoughtful contributions. From listening to those contributions it is clear that many noble Lords agree that resilient, fair and responsive taxation is an essential public good. I am glad to have this opportunity to update the Committee on the Government’s work to ensure that our tax system continues fully to serve society.
However, I will start by saying a few words on the impact of Covid-19. The pandemic has affected tax revenues, but it has also highlighted the agility of our tax system to cope with unprecedented circumstances. Businesses in sectors worst affected by the crisis have benefited from VAT cuts and a business rates holiday, while our time to pay system has given financially distressed individuals the opportunity to postpone tax deadlines. The Chancellor will, in due course, take a decision on any role tax may play in returning the public finances to a sustainable footing at the Budget on 3 March. I hope, therefore, that noble Lords will understand that I cannot speak any further on that today.
However, I will say a few words about the philosophy that underpins our wider tax policy. At last year’s Budget the Chancellor reaffirmed the Government’s ambition to build an even fairer and more sustainable tax system that helps people and families with the cost of living, funds the first-class public services they expect and creates an environment for business to succeed. However, when designing future tax policy we need to remember that the UK economy of tomorrow will be different from that of today. That is why, over the course of this Parliament, the Government are also focused on creating a tax system that is better prepared to meet the challenges and opportunities of the 21st century.
I will talk briefly about the Government’s work on this front, particularly in relation to areas covered by the Tax for the Common Good report. First, I turn to tax avoidance, which was raised by many noble Lords. This is an issue that is quite rightly highlighted in this document, and it is a scourge on our society, which is why we are taking significant action to ensure that companies pay the right amount of tax on their UK profits. In fact, noble Lords may recall that, at last year’s Budget, we announced a new strategy to tackle unscrupulous promoters of tax avoidance schemes. I remind noble Lords that, at 4.7%, the tax gap in the UK is at its lowest ever recorded rate, falling from 7.5% since 2005-06.
However, we also recognise that tax avoidance is a global problem, with global implications. As a result, the UK has also been helping to lead international efforts to address gaps and mismatches in the global tax system. This includes our work at the forefront of the Organisation for Economic Co-operation and Development’s base erosion and profit shifting project, which seeks to prevent company profits being transferred to low- or no-tax locations. I reassure the noble and right reverend Lord, Lord Harries of Pentregarth, that a key part of that work is ensuring that low- and middle-income countries benefit from the steps taken, not just OECD members.
I will correct a concern of the right reverend Prelate about free ports: rather than a race to the bottom, the tax offer that has been designed for them will drive growth and investment, advancing the levelling-up agenda across all four nations of the UK that noble Lords will have heard the Government talk so much about.
I will respond to the issue, raised by the right reverend Prelate, of overseas territories and Crown dependencies, which have full control over their own fiscal matters. They have the right to set their own policy to support their economies within international standards, and they have the right to determine their own tax rates. However, all Crown dependencies and overseas territories with a financial centre have made commitments to implement global standards on tax transparency.
There is no doubt that digitisation is a tax challenge for every nation. We are working hard to find a global solution through the adoption of many of the BEPS recommendations, such as corporation interest restriction rules, which raise approximately £1 billion a year, and hybrid mismatch rules, which are expected to raise £900 million between 2016-17 and 2020-21. At home, we are examining how we can ensure that high street businesses are not left at an unfair disadvantage by the switch to online payments through a review of the business rates system. On digitisation in relation to operating our own tax system, as raised by my noble friend Lord Holmes of Richmond, I totally agree with him. In our recently published 10-year tax administration strategy, we set out our plans to make a fully digital tax system that operates in as close to real time as possible.
We have heard from a number of noble Lords about the role of taxes on earnings, such as income tax and national insurance, and taxes on wealth, such as capital gains tax, as well as the interaction between those different systems. Noble Lords are correct that individuals can be subject to different tax treatments depending on whether they are employed, self-employed or working through a company structure. The OBR has noted the implications of these differences in tax treatments for individuals, who can pay very different amounts of tax while doing similar work. The Government have already taken action to reduce this disparity of treatment; for example, by reforming the taxation of dividend income, including by reducing the dividend allowance to £2,000 from £5,000. Furthermore, corporation tax has remained at 19%, rather than being reduced to 17% from April 2020, as had previously been planned.
Our approach to taxing income, earnings and wealth is an incredibly important question that we will continue to consider. The noble Lord, Lord Field, made an important point on the wider role that different taxes can play and the link between contributions and public services, as well as the public’s view of that wider link. I disagree with the noble Lord, Lord Hendy, who said that tax is not an important part of funding our public services; I think it remains an essential part of that part of government.
The Government are committed to a fair tax system in which those with the most contribute the most. That is why the income tax system consists of three progressive rates of tax, which sit above an internationally high personal allowance. The income tax system is highly progressive: the top 1% of taxpayers are projected to pay over 29% of all income tax in 2019-20.
The Government are also proud of their record of reducing tax for working people. The personal allowance has increased by more than 90% in less than a decade, which means that a typical, basic-rate taxpayer pays over £1,200 less in income tax compared to 2010-11. As with all aspects of the tax system, the Government will keep income tax policy under review and any decisions on future changes will be taken as part of the annual budget process, in the context of the wider public finances.
Further, on the point of the progressivity of the system, in 2020-21, households in the lowest income decile will receive more than £4 in public spending for every £1 they pay in tax on average. In addition to the above changes, in April 2020 the Government increased the national insurance contribution primary threshold and lower-profits limit to £9,500, which will benefit 31 million individuals. The combined impact of income tax and NICs changes between 2010-11 and 2021 means that a typical basic-rate employee is over £1,600 better off, as I have said.
Noble Lords also touched on the issue of climate change. As the noble Baroness, Lady Sherlock, will be aware, the Treasury is carrying out a review into the transition to a net-zero economy. As a part of this work, we are exploring how we can harness the taxation system in the fight against global warming. In December, we published an interim report exploring the fiscal implications of the switch to net zero. This analysis will inform the final review document, which is due to be published later this year.
I hope that I have communicated some of this Government’s work to create a fairer and more sustainable tax system. It was a wide-ranging debate, covering work at home and internationally. We are committed to a tax system that helps people and families with the cost of living, funds first-class public services, and creates an environment for businesses to thrive. I am sure noble Lords will agree that these are laudable goals, and we are making strong progress towards them.
I finish by reassuring the right reverend Prelate on his fears on our path having left the EU. I think those fears are unfounded, and instead I endorse some of the hopes that he expressed for our path in coming years. Having left the EU, this Government’s core agenda is about levelling up across the UK. A well-functioning, fair tax system will be a key part of that.
The Deputy Chairman of Committees (Lord McNicol of West Kilbride) (Lab)
That completes the business before the Grand Committee this afternoon. I remind Members to sanitise their desks and chairs before leaving the room.