Tax after coronavirus: the Government’s response Contents

1The Tax After Coronavirus inquiry and report

Context of the inquiry

1.The inquiry was launched with a call for evidence in July 2020, in the context of rapidly growing public debt as a result of the essential and unprecedented support to the economy provided by the Government in response to the coronavirus crisis.

2.We have consistently very much welcomed that Government support, although we have pressed for more support for people unable to benefit from the schemes provided for employees and the self-employed. Our scrutiny of Government support is set out in our various reports on the Economic Impact of Coronavirus.1

3.We realise that Government support comes at a cost. It is quite appropriate therefore for the Committee to examine the role the tax system should play in the future and, if increased taxation is necessary, to examine the most economically efficient and most fair ways to raise it.

Our report

4.Our Report was published on 1 March 2021, two days before Budget 2021. The Committee was encouraged that some of the revenue-raising measures announced in the Budget had been foreshadowed in our Report. For example, the Chancellor announced an increase in the rate of corporation tax to 25% from 2023, which aligns with the conclusion in our report that a modest increase in the rate of corporation tax could raise revenue without damaging growth.2 We also noted that a freeze in income tax thresholds would raise revenue while minimising economic distortions, and the Chancellor subsequently announced a four-year freeze from 2022–23.3

5.Recognising that in 2021 the economy needs help to recover from the effects of the pandemic, we concluded that now is not the time for tax rises. Instead we recommended measures to support business, including a three year loss carry back,4 and extending the increase in the Annual Investment Allowance, possibly permanently.5 At Budget 2021 the Government announced the loss carry back and a new time limited super deduction for capital allowances to boost capital investment ahead of the planned increase in corporation tax rates.6 The Committee strongly supports these measures.

6.However, we note that the Government did not extend the AIA, meaning that millions of self-employed businesses and partnerships have no additional incentive to invest.

7.In the report we also evaluated many other areas of the tax system where we believe that the evidence is clear that reform is needed and where significant additional tax could be raised. For example, we recommended that the Government considers reform to pension tax relief, along with reforms to help address the gap that exists between the taxation of the self-employed and limited companies as compared to the taxation of employment, and capital taxes.7 The Government has not accepted these recommendations.

8.We noted that the digital services tax is a useful step towards capturing some of the profits made in the UK by digital companies8 and that the Government has said that it will be abolished if international agreement is reached. We therefore recommended that the Government provide us with an annual report of the progress it has made towards international agreement.9 This need be little more than an update letter to the Committee. We are disappointed that in its response the Government did not agree to this.

9.We made a series of recommendations for tax strategies and principles. We recommended that the Government should create an overarching tax strategy. This would not need to pre-announce specific tax commitments: it could cover instead the Government’s overall approach to major questions such as the taxation of consumption, income, capital, and companies and the overall direction of travel that it will seek to follow in successive budgets, including the role of the tax system in meeting fiscal goals.10

10.We also recommended that the Government should:

11.We are disappointed that the Government did not agree to these recommendations in its response.

The Government response

12.The full response we have received from the Government is published as an Appendix to this report.

13.We did not expect the Government to announce specific changes to tax policy in its response to us: we would expect new announcements to be made in a Budget statement. We do believe however that our Report’s analysis of, and support for, tax reform will be of benefit to the Government, as it may, as a report produced by a cross party committee, help to overcome political barriers to reform. This was recognised by the Financial Secretary, who thanked us for producing the report in his letter and described it as a helpful contribution to the debate on tax policy and the future of the tax system.

14.We welcome the measures announced at Budget 2021 that were recommended in our report. These include the increase in corporation tax, the freezing of personal allowances, the three year loss carry back and the increase in capital allowances.

15.However, the Government has not accepted our recommendations for reform of the tax system or of the tax policymaking process. And, in a number of cases, while the Government does not explicitly reject our recommendations, it does not agree to implement them and is unclear about why. For instance:

16.We request that the Government provides a clearer explanation of why it cannot accept any of the three strategy recommendations listed in paragraph 15, including an explanation of whether it believes that these recommendations are detrimental to the economy, and if so, why.

Balance of recommendations

17.In his covering letter, the Financial Secretary to the Treasury also said that the balance of our recommendations “leans away from measures that would help to repair the public finances in the coming years”. We dispute this, and the Committee was disappointed with this observation. The report clearly provides an analysis of the fiscal position, and it concludes that the public finances are on an unsustainable long-term trajectory that has been exacerbated by the coronavirus pandemic, and that additional tax revenue could make a contribution to addressing this.13 We identified measures—which the Government adopted—for raising many billions in additional revenue. We also evaluated a wealth tax and an excess profits tax, both of which have been proposed as ways of paying for the fiscal costs of the pandemic. Having weighed up the economic and political advantages and disadvantages we did not advocate them, but nor did we conclude that they should be ruled out under all circumstances.14

18.Moreover, we believe that the reforms to the tax system recommended in our report would enable the current and future governments to raise additional revenue from the tax system, should it be needed, while minimising the resulting distortions to the economy. We invite the Financial Secretary to re-assess the revenue-raising opportunities highlighted and recommended in our Report.

1 Treasury Committee, Second Report of Session 2019–21, Economic impact of coronavirus: Gaps in support , HC 454, Treasury Committee, Eighth Report of Session 2019–21, Economic impact of coronavirus: the challenges of recovery, HC 271 and Treasury Committee, Eleventh Report of Session 2019–21; Economic impact of coronavirus: gaps in support and economic analysis, HC 882.

2 Treasury Committee, Twelfth Report of Session 2019–21, Tax After Coronavirus HC 664, para 116

3 ibid, para 97

4 ibid, para 56

5 ibid, para 62

6 HM Treasury, Budget 2021, HC 1226, paras 2.51 and 2.68

7 ibid, paras 123, 142, 146 and 164.

8 ibid, para 155

9 ibid, para 156

10 ibid, para 221

11 ibid, para 181

12 ibid, para 191

13 ibid, para 50

14 ibid, paras 70, 84 and 88

Published: 2 June 2021 Site information    Accessibility statement