Chancellor Rishi Sunak should not raise taxes in the Budget on Wednesday because doing so would risk undermining the UK’s economic recovery from the Covid downturn, MPs have said.
The Treasury select committee, chaired by Mel Stride, a former Conservative financial secretary, said expert testimony it had received indicated that now was not the right time to increase taxes. However, “significant” fiscal and revenue raising measures would probably be needed in the future, the committee said.
Sunak is expected to raise some taxes, including that on corporations, on Wednesday as he takes his first steps towards restoring order to the public finances.
While the MPs urged the chancellor to refrain from fiscal measures, they expressed approval for a “moderate” rate rise on corporation tax. However, the MPs warned against a “very significant” increase, arguing that this would be “counterproductive”.
Over the longer term, the committee urged wholesale reform of the UK tax system, singling out several priorities for extensive change that are likely to be highly contentious. These include pensions tax relief, stamp duty, council and capital taxes, and the tax treatment of the self-employed and limited-company directors.
“In some ways the pressures on the public finances and on tax yields present the government with an increased opportunity for substantial and structural reform of the tax system,” the report argued.
For instance, the MPs pleaded with the government to “urgently reform the entire approach to pension tax relief”. The report noted that it had cost £20.4bn in 2018-19 and was “regressive” in the benefits it provided, particularly to higher earners.
Stamp duty was another tax that should be treated as “a priority for reform”, the MPs said, because it was “causing damage to the economy” by affecting when and how often people bought homes. Meanwhile, the report stressed that council tax valuations had not been changed since 1991 and found “strong arguments” in favour of reform.
The reform of capital taxes — including inheritance tax and capital gains tax, both of which have recently been subject to reviews by the Office of Tax Simplification, a statutory body — presented a “compelling case”. However, the committee was not convinced of arguments for windfall taxes on business or a wealth tax on individuals’ assets, saying these would be difficult to introduce and could be as seen as retrospective.
Meanwhile, the committee expressed a “strong” belief that “major reform of the tax treatment of the self-employed and employees is long overdue”. It concluded that the different ways in which the self-employed, contractors and limited company directors were being taxed compared to employees was “steadily eroding the tax base”.
Though the report highlighted areas for change, it did not make detailed suggestions on what such reforms should look like. Instead, it suggested that the government introduce a strategy for what it wants to achieve from the tax system and identify high-level objectives.
The committee recommended that the government should also take the opportunity to set out its vision for value added tax, now that the UK has left the EU and no longer needs to follow its law in this area.
John Cullinane, tax policy director at the Chartered Institute of Taxation, described the report as “the most substantial report on tax reform ever produced by a parliamentary committee”.
“We call on the government to show similar ambition in taking forward tax reform over the rest of this parliament,” he said.
The Treasury has been approached for comment.