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Tax rises could undermine recovery, say MPs


Published: 02 Mar 2021 Update History

Now is not the time to raise tax rates, but “significant fiscal measures” are likely to be needed in the future as part of wider reform of the tax system, according to the Treasury Select Committee.

In publishing the findings of its “Tax after coronavirus” inquiry on 1 March, the committee made a series of recommendations and concluded that revenue raising post-pandemic will be part of a “large-scale and long-term challenge that requires taking a view of the whole tax system”.

Acknowledging the Conservative manifesto pledge to maintain existing rates of income tax, national insurance and VAT, it suggests that potential alternatives for raising revenues include freezing income tax thresholds and a moderate increase in the rate of corporation tax, preferably balanced by supportive measures such as enhanced loss relief.

The committee recommends introducing a temporary three-year loss carry-back scheme, which would provide tax refunds to businesses profitable up to three years before the pandemic.

In line with evidence provided to the inquiry by ICAEW’s Senior Policy Adviser, Anita Monteith, the committee backs further extending, possibly permanently, the Annual Investment Allowance, which currently offers relief for investments in plant and machinery of up to £1m.

Meanwhile the committee argues that the introduction of windfall or annual wealth taxes, would be problematic, difficult to administer and potentially damage confidence, creating fears that such taxes could be imposed more than once.

Moving away from tax revenue, the committee highlighted several areas where reform is required, including stamp duty land tax, pension relief, capital taxes and the tax treatment of the self-employed and employees.

The report also concludes that following the UK’s departure from the EU the government needs to examine the VAT system, clarifying its objectives and assessing reliefs. It cites Monteith, who in her evidence suggested that the whole principle of exemption needed consideration.

Commenting on the committee’s findings, Monteith said: “This report presents a realistic and thoughtful set of proposals for a post-COVID tax system. The suggestions to reform tax give a lot to work with, and we look forward to seeing the Chancellor’s approach to this in his Budget statement on Wednesday.

“It is notable that the Committee commented that the difference between levels of support possible through the COVID schemes for the self-employed and for people working through small private companies has been driven largely by the structure of the current tax system. This should be kept in mind during planning for reforms.”

Alison Ring, Director for Public Sector at ICAEW, added: “Importantly, the Treasury Select Committee has called for the government to develop a long-term fiscal strategy to stabilise public debt, recognising that the pandemic has only added to the challenges facing public finances that were already on an unsustainable long-term trajectory.”

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