Tax: Church Action for Tax Justice Reports

Lord McNicol of West Kilbride Excerpts

Thursday 21st January 2021 Grand Committee

[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?

--- Later in debate ---

[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.

--- Later in debate ---

[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.

Committee adjourned at 7.13 pm.