Tax: Church Action for Tax Justice Reports

Baroness Penn Excerpts

Thursday 21st January 2021 Grand Committee

[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.