Skip to main content

Tax reform needed to address unsustainable public finances, warns Treasury Committee

1 March 2021

The Treasury Committee has published a unanimously-agreed report as part of its inquiry into Tax After Coronavirus.

  • 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

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.”

Further information

Image: CC0