Dan Neidle's tax reform scorecard bingo
Chancellor Rachel Reeves, Downing Street | Image by: ZUMA Press, Inc. / Alamy Stock Photo
8 min read
We’ve been readied for pain but, as Rachel Reeves mulls her taxation options with the infamous Treasury ‘scorecard’, Dan Neidle gives his form guide on the runners and riders
This is the first Budget for many years in which everyone expects there to be significant tax increases. That prompts two big questions. What will the increases be? And will that be all that this Budget has to offer? Or will the Chancellor also take the opportunity for pro-growth tax reform?
Tax reform
It’s been a long time since we’ve seen really significant tax reform. The United Kingdom’s tax system is creaking, and too often actively holds back growth. Chancellor Rachel Reeves has a rare opportunity to change this. Here are some options:
• Reform the corporation tax base. Full expensing was a positive step, but it only applies to some assets. We should give tax relief for all investment; but the quid pro quo has to be ending the bias towards debt, by making interest non-deductible.
• Reform property tax. Stamp duty is hated and stops people moving house. Council tax is too high for people in modest houses, and too low for people in high-value houses. Business rates share responsibility for the decimation of the high street. The answer is to abolish the lot, and replace them with a modern land value tax (LVT), based on the undeveloped value of land. LVT is supported by economists across the political spectrum, but no chancellor has dared to approach it – will Reeves be different?
• Reform VAT. There is compelling evidence that the £90,000 threshold acts as a brake on the growth of small businesses, as they manage turnover to stay under the threshold. Reducing it so everyone except hobby businesses are taxed would reduce avoidance and evasion and, in the view of many people across the political spectrum, increase growth.
• End high marginal tax rates. The interaction of tax thresholds and benefit withdrawal can lead to marginal tax rates exceeding 60 per cent or even 70 per cent for some taxpayers, particularly at £60,000 (where child benefit starts to taper) and £100,000 (where the personal allowance starts to taper and childcare subsidies disappear). Reforming these thresholds could remove disincentives to work and boost productivity.
• Radical simplification. Our tax system bears the scars of a 70-year arms race between HMRC and tax avoiders. But the war is over. The attitude of the courts, and modern anti-avoidance rules, means that classic tax avoidance is dead. It’s time to recognise this and repeal the hundreds of pages of rules that are no longer needed.
• Abolish stamp duty on shares. The UK’s 0.5 per cent tax on share transactions is the highest of any major economy. It holds back the FTSE and increases the cost of capital for businesses. Thanks to higher capital gains tax (CGT) revenues and increased growth, abolition would plausibly cost less than the tax it raises. Is this a “Nixon goes to China” moment, where only a Labour chancellor can take a step that appears to benefit the City? In reality, it would benefit all of us.
• Reform HMRC. Labour’s manifesto proposed £900m of additional HMRC funding to help close the tax gap. I fear that’s insufficient. Underlying many recent HMRC failings are sclerotic governance, insufficient senior staff, poor training of junior staff, and the difficulty of retaining talented personnel when the private sector pays so much more. Solving these problems won’t be easy or cheap; but, unsolved, HMRC’s problems will get worse.
• Abolish withholding tax. We have a highly complicated system for withholding tax on interest payments. It creates a bureaucratic hurdle for ordinary businesses seeking to borrow but is easily avoided by people pushing profits out to tax havens. End withholding tax on most interest payments; enforce a new, tougher, withholding tax on payments to tax havens.
• Enable long-term planning. We’ve seen far too many changes to the corporation tax rate and rules in the last few years. It’s much harder to plan long-term investment when you don’t know what the after-tax return will be. Whatever Rachel Reeves does on 30 October, she should be clear that that’s it, and the rules won’t change significantly for the rest of the Parliament.
Tax rises
With the usual post-election tax rises ruled out, Reeves is left scrabbling around to find a series of small measures. Here are some possibilities, in roughly descending order of plausibility:
1. Limit pension tax relief (£3-15bn). The numbers here are big, and most pension relief goes to people on high incomes. But pensions tax gets complicated very quickly, and anything that impacts private sector defined contribution pensions but not public sector defined benefit pensions looks unfair. One alternative might be to end the national insurance exemption for pension income.
2. Ending inheritance tax relief for Aim shares (£1bn). It’s hard to justify that many shares listed on Aim and other alternative markets are exempt from IHT. Entire investment funds have been created solely to take advantage of this and, as a consequence, the relief is becoming more expensive each year. Time to end it.
3. Capping other inheritance tax reliefs (£2bn). There’s a compelling case for exempting small farms and businesses from inheritance tax. That case gets much weaker for larger farms and businesses – the relief could be capped at a reasonably high-level (for example at £5m).
4. Raising the rate of capital gains tax (£1-2bn). The current gap between income tax (45 per cent) and CGT (20 per cent) is hard to defend. A large increase risks losing revenue. A smaller increase makes more sense, ideally combined with a return to “indexation relief” for inflationary gains.
5. Stamp duty on commercial real estate (£1bn plus). High-value commercial properties usually change hands through the sale of special-purpose property holding companies, sidestepping stamp duty land tax. It’s a loophole that should be closed. (Although better to reform land tax altogether.)
6. Research and development tax relief (£3bn). Current reliefs are too hard for legitimate businesses and too vulnerable to fraud. Focus the relief narrowly on significant projects aimed at science and development innovation, with harsh penalties for people making indefensible claims. Create a simple and fast pre-clearance process to provide certainty. The aim should be to provide more generous relief for, for example bio science, engineering, and tech companies, and no relief for anybody else. Simultaneously promoting growth and ending waste.
7. Abolish business asset disposal relief (£1.5bn). This CGT relief, intended to support entrepreneurs, is often exploited beyond its original purpose. That’s not a surprise – the relief was viewed as a bad joke by the civil servants asked to draft it, who rebelliously named it “BAD”. Radically trim it or end it.
8. Reform council tax (£1-5bn). If we’re not going to reform land taxation altogether, the Chancellor could slap on additional council tax bands for high-value property, or add an annual percentage charge for very high-value property.
9. Reinstate fuel duty (£3bn). Fuel duty hasn’t been increased since 2010. There’s a powerful case for reversing this, but an obvious political cost.
10. Review VAT exemptions (£1bn plus). Many of the VAT exemptions/special rates make little sense and should be abolished. The zero rate on children’s clothes should be first to go, with child benefit uprated by 10 per cent so that people on low and moderate incomes don’t lose out. This change alone would yield about £1bn.
And some tax rises I don’t think we’ll see…
1. Reduce the pension tax-free lump sum (£2bn). Upon retirement, a pensioner can take up to £1m of their pension as a tax-free lump sum, saving about £268k of tax. If the tax benefit was capped at £100k, this would raise about £2bn of tax each year. But changing pension rules so significantly after people have saved for decades would be widely seen as unjust.
2. Tax gambling winnings (£1-3bn). The United States taxes gambling winnings. The UK generally doesn’t. Changing the law could raise over £1bn. It would also end widespread avoidance by share traders using spread bets for other than conventional financial products. But (traders aside) would in practice be regressive and likely unpopular.
3. Cap tax relief on ISAs (up to £5bn). Like ending the pension tax-free lump sum, this would be widely seen as unfairly changing the rules of the game.
4. Raise the top rate of income tax. Didn’t raise much when Gordon Brown tried it, and possibly lost money.
5. CGT on death. Capital gains on an asset disappear when someone dies – when the beneficiaries come to sell, they’re only taxed on the gain from after they acquired the asset. The big move would be to charge CGT on all assets at death. The gentler alternative would be to carry the gain over to the beneficiary.
6. Wealth tax (£1-26bn). Despite all the noise from campaigning groups, wealth taxes have historically been failures, and the newer variants aren’t doing any better.
7. Means test the pension. The state pension is worth much more than most people think – buying a £11,500 per year asset in the market with inflation/income protection would cost over £250,000. That’s a big asset to take away from even the wealthiest. Won’t happen.
Dan Neidle is founder of Tax Policy Associates
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