Opinion: Fairer taxes

You don’t have to talk to many people about tax these days before someone brings up how unfair it is that some of the biggest international companies and brands seem to be able to find ways of getting out of paying any.

And at the same time, many people are themselves feeling the financial squeeze in their own budgets.

So in preparing new tax policy for the party to debate at autumn conference, we have worked to create a fairer balance: a tax system which helps those on low and middle incomes, and ensures that the richest companies and individuals pay their fair share.

We’ve based it all on the principles of creating a tax system which is fairer, promotes prosperity, is simpler and plays its part in protecting the environment.

In government, we have of course already delivered our 2010 manifesto commitment to raise the income tax threshold for every individual to £10,000. You may like me by now have heard this so many times that it doesn’t really register any more. But we should remember that this is something that Liberal Democrats and Liberals and Social Democrats we have not been able to do for nearly a century: propose something in our manifesto which neither other party did, and then gone in to government and done it, directly taking 2.7 million low-earning people out of paying income tax altogether, and giving many many millions more a tax bill that’s £700 lower every year. Almost everyone you know is paying a good bit less in tax because we’re in government.

This has been both effective in helping people and politically successful for us as a party. So we are now proposing to go further and say that we would like to get to a position where no-one in full time work on the minimum wage (currently around £12,300 a year) would pay income tax. This would again take several more million people earning below this level out of paying income tax, and provide a further cut to many millions more low and middle earners above the threshold.

A small number of companies and individuals do give the impression that they think paying tax is optional for them. We are clear that both companies and the people who run them are part of our society, and that that means they have to pay their fair share like anyone else. There are many specific changes to rules that can be made to make this more difficult, and we have proposed some, but an approach which will be effective in ensuring everyone pays their fair share won’t be about individual specific rule changes.

We have therefore proposed a General Anti-Avoidance Rule, which would outlaw any move taken simply to try and avoid tax. This would build on the Coalition government’s first step of the Anti-Abuse Rule which came into force this year, and prevent aggressive tax avoidance even more tightly. It would be supported by a pre-clearance system for people making legitimate changes who fear they might be caught by it, along the lines operated in various other countries.

We also propose various other things to tackle international corporate tax avoidance, including country-by-country tax reporting, increased disclosure of intercompany transactions, and publication of tax settlements. The investment which our Ministers have supported in HMRC has demonstrated a good return in extra tax yield, and we support continued investment here, which both raises revenue and helps ensure everyone is playing by the same rules.

With so many working people feeling the squeeze, we think that the contributions of the wealthiest individuals and companies need to change. We have therefore proposed continuing the existing party policy for a mansion tax of 1% of the value of a property over £2 million. About one quarter of 1% of properties would be liable for this. The biggest tax relief the government gives is for pensions, and more than half of the value of this (58%) goes to just the richest 10%. In this context we have proposed limiting tax relief on pensions to a pot of £1 million (which would still allow people to save 15% of a very substantial salary every month for their entire working life before they would be affected).

We also think that our current rules which allow large companies to offset interest payments against tax are excessively generous. This has created a structural incentive to debt rather than equity financing which both contributed to the problem of excessive debt and leveraging in the run up to the 2008 financial crisis, and has also allowed some companies unfairly to almost entirely wipe out their tax liabilities. We have proposed to tackle some of these problems by restricting interest deductibility in a way which makes the system fairer and simpler too, while not affecting small and medium-sized businesses.

If that all sounds a bit detailed, then one high profile question which will conference will explicitly vote on options for, will be what the rate of income tax should be on incomes over £150,000. Option A says that this should stay at the current rate of 45%; option B says that it should rise to 50% after the next election, subject to a review concluding that this would raise additional revenue.

We have proposed various further measures to simplify the tax system, including making contacting HMRC easier, and having personal tax returns pre-populated with data that HMRC already hold, to make completing them easier.

Liberal Democrats have consistently argued that the balance of taxation needs to shift away from taxing income, towards taxing wealth. We make the case strongly for a land value tax as the most important way of achieving this. This would have a number of benefits, including: helping reduce tax avoidance (as land can’t be moved abroad!); dampening speculation in the property market (if introduced at a national level); helping restore regional balance to the UK economy; and incentivising development of under-used sites, stimulating the construction industry especially in building new houses, and so supporting the economic recovery.

We also propose a return to a system which takes inflation into account in taxing capital gains, and then does so at the same rates as the top slice of an individual’s income.

We have been keen to support small businesses. The coalition has in fact already enacted some of the specific measures which we consulted on in the spring. We have now proposed some further measures to help them, in making it easier for them to calculate and pay their tax, as well as potential further help with the costs of getting started and growing.

We have supported greater devolution of taxation to Scotland and Wales, in line with the Silk Commission for Wales, and the proposals made by the Scottish Liberal Democrats.

Finally we have proposed various measures to ensure that tax plays its part in protecting the environment and incentivising environmentally friendly behaviour. These include tax incentives for investing in the green economy and for people who improve their home’s energy efficiency, updating car tax (VED) so that it continues to incentivise less polluting vehicles, and pushing for various international changes which would help to tackle emissions.

We think this is a package which will make Britain a fairer place, while also supporting prosperity and a more balanced economy, and promoting key Liberal Democrat objectives such as greater devolved control and protection of the environment.

Of course all of this will be going as a proposal to conference, where it will be open for debate and amendment and vote by representatives in the usual way. Some of these proposals seem sure to provoke discussion, and I look forward to hearing people’s views and alternative ideas in the run-up to and at conference.

* Jeremy Hargreaves is Vice Chair of the Federal Policy Committee and a member of the Federal Board.

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26 Comments

  • Simon McGrath 5th Aug '13 - 9:31am

    “We have therefore proposed a General Anti-Avoidance Rule, which would outlaw any move taken simply to try and avoid tax”
    Like ISAs you mean ?

  • Nonconformistradical 5th Aug '13 - 10:38am

    ‘“We have therefore proposed a General Anti-Avoidance Rule, which would outlaw any move taken simply to try and avoid tax”
    Like ISAs you mean ?’

    Fair point. The current system allows the better off to increase the amount they shelter within ISAs every year while the less well-off cannot afford to do so – they may not be able to put anything away at all.

    Perhaps there should be an upper limit to the total amount a taxpayer is able to hold in ISAs at any one time?

  • Why waste time, money and effort with this ridiculous Mansion Tax – what the hell is wrong with talking about what we really want – Land Value Tax.

  • Daniel Henry 5th Aug '13 - 10:52am

    Looks very promising.
    Am looking forward to reading the paper.

    Simon, the anti-avoidance proposals mentioned sound very similar to that amendment you summated for at the last conference. I think you know perfectly well what it’ll involve. Sometimes I think that you just want to be argumentative! :p

  • Jeremy :
    The big corporations, ‘not paying enough taxes’, begins at the point that they hold their head office in (say), Luxembourg or Southern Ireland. I propose an idea, that I accept is a bit blue sky, and only someone with a better understanding of tax structures, could say if it has wings or is a non-starter.

    HMRC expects a company to hand over the VAT it has accrued through sales at 20%. But what if the VAT system were modified so that a company making sales in the UK, but NOT based in the UK, had to pay VAT at (say), 22%.?
    So using two fictitious companies :

    Coffee House Joe (UK based), pays 20% VAT to HMRC, on its UK sales.
    Americana Coffee ( Luxembourg based), pays 22% VAT to HMRC, on its UK sales.

    This could create two benefits:
    1. That extra 2% on sales is much more transparent for HMRC purposes, and is therefore much less ‘avoidable/ hide-able?’
    2. It incentivises an offshore company to move here ( + increased UK jobs), in order to save the extra 2% VAT, and better compete, with its UK based rivals.
    I’d be interested to hear from you or anyone else, that might be able to deconstruct the idea, to see if it has any merit?
    Thanks

  • Simon McGrath 5th Aug '13 - 12:08pm

    @Daniel – its more that I think the world is not simple and am not sure how in reality an anti avoidance rule would work. Its easy to say that there is good tax avoidance and bad tax avoidance but when it comes down to individual cases it can be far more diffcult to differentiate.

  • David Cooper 5th Aug '13 - 1:04pm

    @Joe Otten
    “Has the party now lurched so far to the left under this Clegg fellow that 40p is no longer even an option? ”

    I sympathize with your wish to eliminate the higher rate of income tax. Taxing income is more damaging and less progressive than taxing property: in the UK property wealth is more far concentrated than income. Our obsession with income rather then property tax loads the cost of running the state onto those who need to work rather than those who are already sitting on vast piles of wealth.

    However there is a matter of priorities. We should raise the threshold for income tax to the level of a full time minimum wage, which helps everyone and would boost consumption. We need to eliminate employer’s national insurance, which is a tax on employment . Eliminating the top rate of income tax would be welcome, but cannot be a priority.

  • Geoffrey Payne 5th Aug '13 - 1:30pm

    There is no mention of the Local Income Tax. If that is because we will support LVT instead then that is good. Otherwise, why is there no mention of it? Surely we are not supporting the Council Tax?

  • jenny barnes 5th Aug '13 - 1:47pm

    You may like me by now have heard this so many times…
    without the commas it makes little sense. Or you could recast the sentence.
    I’ve heard this many times; I expect you have too. .. for example

  • jenny barnes 5th Aug '13 - 1:51pm

    sigh
    You may COMMA like me COMMA by now have heard this so many times…
    web manager – is there some weirdness around pointy brackets on this site? (clue, yes)

  • jedibeeftrix 5th Aug '13 - 2:00pm

    taxatation is plenty ‘fair’ already.

    rich people pay roughly 32%
    the middle class pay roughly 32%
    the poor pay roughly 32%
    people in poverty pay little tax.
    companies pay LOADS of tax via employee salaries and capital gains.

    all i want is for the government to spend only what will be tolerated in taxation, which is about 39% of gdp, you can keep the proportions as they are.

  • Jeremy Hargreaves 5th Aug '13 - 2:05pm

    Thanks all for comments.

    Several ask for some more detail, and I understand that all the papers for conference, including this one, are due to be published today. I hope people will take a look at the full version of what the paper says in these areas and then say what they think.

    VAT on building refurbishments: we have in fact proposed something very similar to what Peter suggests here, also linked to the important issue of improving energy efficiency in homes. More generally on VAT, and this relates to what both Peter and John Dunn say, VAT is origin a European tax, and so what the UK can do is quite constrained by arrangements at that level. This is not to say that we can’t push to change those – and we do argue for this in several areas – or that we can’t make the best use of the flexibility there is, and this is a proposal to do that too.

    More generally too, we have argued for quite a lot of action at international level to tackle tax avoidance by multinationals, which is of course the level much action must be at if it is to be effective.

    VAT generally is riddled with inconsistencies can sound highly entertaining when described (the one that always sticks in my mind is something to do with fish being VAT exempt ‘except where used for ornamental purposes’), but in practice it is very difficult to address these without really just ‘moving the line’ between different categorisations, thereby creating new anomalies. Silly though all this sounds, it probably doesn’t have much of an impact on the day to day lives of real people, so is not an area we have focussed much energy on.

    LVT: I think the group are clear on the need for LVT, and the paper makes the case for it strongly (rather more strongly than some would have liked). Replacing business rates with it should be at the forefront of this. In discussion with some of LVT’s most fervent supporters, this includes a proposal that a full review should take place at the start of next Parliament about how it should be implemented. The final decision by FPC was that this should cover all aspects of it, including it replacing business rates. Some disagree with the latter point, but this was FPC’s view about what it wished to propose to conference.

    I agree with Simon that differentiating between “good” and “bad” tax avoidance is not always as easy as you think – and in the paper we talk about tax avoidance not intended by Parliament – if something is specifically built into the system like ISAs then clearly it is. But we do think an Anti-Avoidance Rule can be made to work, crucially with a functioning pre-clearance system, which is a vital part of this proposal. Other countries have this too (off the top of my head including Belgium and Canada, and I think either Australia or NZ too (may be wrong about the last one)).

    We did specifically consider limiting ISA holdings as nonconformistradical suggested, and we consulted on this. However the responses to our consultation on this were very helpful. In order to be an incentive to save you do have to allow more than one year’s savings, and although there are a few, in reality the number of people who have more than a small number of years’ ISA allowances saved in them, seems to be very small, so the extra yield from this would be very small indeed (and overall ISAs are not one of the big areas of tax relief).

    Thanks very much for comments.

  • Peter Davies 5th Aug '13 - 5:07pm

    “In order to be an incentive to save you do have to allow more than one year’s savings”. ISAs have a very middle-class definition of saving as something long term for the comfortably off. They specifically exclude the two types of saving which deserve most state encouragement: “putting a bit aside for a rainy day” (because ISAs cannot be accessed when you receive a financial shock) and “saving up for things before you buy them” (unless this is really going to take a long time).

  • “ISAs cannot be accessed when you receive a financial shock”

    Yes they can.

  • Peter Davies 5th Aug '13 - 7:41pm

    Only on instant access cash ISAs. The tax-free returns on the best of these are less than the after-tax returns on the best standard instant-access accounts.

  • An ISA is a way to encourage people to save for their retirement, behavior which can help all taxpayers. Maybe I’m not quite as smart as Simon so perhaps he can explain how this is similar to companies avoiding tax by all manner of schemes.

  • Paul in Twickenham 5th Aug '13 - 11:54pm

    The latest IFS report on “Living standards, poverty and inequality” has a number of interesting graphs, but I would draw your attention to figure 3.17 http://www.ifs.org.uk/comms/r81.pdf which shows that between 2012-2015 the only income group that will have positive income change as a consequence of tax and benefit changes will be the highest income decile, while the bottom 2 deciles will be most negatively impacted.

    Further, the authors state “Earnings inequality actually increased between 2007–08 and 2011-12; real earnings fell for everyone, but low earners saw their pay fall by more (in percentage terms)”.

    Zero hour contracts for those at the bottom, inflation-busting pay increases and unmerited bonuses for those at the top.

    When Liberal Democrats talk about “fairness”, what exactly do you mean?

  • “we would like to get to a position where no-one in full time work on the minimum wage (currently around £12,300 a year) would pay income tax.”

    £12,300 is based on the October 2013 rate and 37.5 hours a week not 40 hours.

    Why are we not saying up to the rest of the UK living wage (making it over £14,525 a year) and being really radical? Also why can’t we take people out of paying national insurance as well? I believe the current level where a person starts paying NI is £7,748.

    (It should be possible to amend the motion to conference to include removing these people from paying NICs because it is a future aim in 2.1.6).

    @ Peter.Tyzack

    I agree we should have a policy of removing VAT from all building refurbishments and improvements and not just homes that have been unoccupied for 2 years (which I think are the current rules).

    @ Jeremy Hargreaves

    “VAT on building refurbishments: we have in fact proposed something very similar to what Peter suggests here, also linked to the important issue of improving energy efficiency in homes”

    The policy paper has, “Although many energy-conserving items are currently subject to VAT at the reduced 5% rate, renovation work itself is standard rated (therefore subject to VAT at 20%), while the construction of new build housing is zero rated for VAT purposes. Environmentally this is unhelpful, as it disincentivises home maintenance over new build. (7.4.2)

    “Subject to affordability, we therefore propose to reduce the cost of repair, maintenance and improvement work on residential properties by applying the reduced 5% rate of VAT to such work rather than the full 20% rate, on the condition that a proportion of the cost is spent on improving the dwelling’s Energy Performance Certificate (EPC) rating by two grades or more.” (7.4.3)

    This is not zero rating renovation and maintenance work. I don’t understand why we are not proposing this.

  • “VAT on building refurbishments”

    The simplest to implement and police is actually to remove the VAT exemption from new build… In today’s Britain a newly built house is a luxury not an essential.

  • “Only on instant access cash ISAs. The tax-free returns on the best of these are less than the after-tax returns on the best standard instant-access accounts.”

    I doubt that’s true, but anyway the point is that the ISA system itself doesn’t involve any restriction on withdrawing investments – whether they are cash or equity.

  • “£12,300 is based on the October 2013 rate and 37.5 hours a week not 40 hours.
    Why are we not saying up to the rest of the UK living wage (making it over £14,525 a year) and being really radical? Also why can’t we take people out of paying national insurance as well? I believe the current level where a person starts paying NI is £7,748.”

    If you do any of this by raising the personal allowance, you are giving a large tax cut to every basic rate taxpayer. The cost would be huge. Where would the money come from?

    If the purpose is to help the low-paid, that could be done in a far better targeted – and therefore far cheaper – way.

  • Don’t forget that graduates who had the cheek to get an education are taxes 9% extra, for the rest of their working lives.

    That’ll learn them!

  • Its very interesting to look at the differences in the income scale:

    Low earners and those who lost jobs in the recession: Income cuts to social security, Housing benefits cuts, Severe means testing of support. Loss of workplace rights (zero hours contracts, forced unpaid work, threat of destitution), wage falls.

    The high paid: wage increases, plus tax cuts (giving an extra £100,000 per person). No austerity here.

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