‘We will not raise the rate of income tax, VAT or National Insurance’ says Boris Johnson in his personal guarantee at the beginning of the Conservative party manifesto.
When this manifesto was published, there was initial surprise among tax people for two reasons.
First, if a government finds itself in urgent need of raising more taxes, increasing the rates of established taxes is a quick and simple way of achieving this. So why would a party which wishes to take power when the UK economy faces a period of significant uncertainty reduce its fiscal capacity in this way? Electoral promises may help secure victory in the polls, but how should the new government then position itself if victory has been won at the price of frittering away fiscal capacity?
Second, haven’t we been here before? As the Cameron/Osborne government discovered, the credibility of the ‘triple lock’ commitment not to raise income tax, National Insurance or VAT rates quickly comes under strain as people see stealth taxes being used to boost the amount of tax they pay as a percentage of GDP.
The classic example of this was George Osborne’s new personal tax dividend allowance and associated changes to tax credits. While announced as an allowance, with all that implied in terms of tax reductions, for many people it amounted to a tax increase which breached the income tax part of the triple lock. The Treasury calculated that this 'allowance' would raise an additional £2.5bn tax for 2016/17 alone.
So, if the Conservative party is successful at the polls on 12 December, what else do we know about their tax policy which might give some comfort that stealth taxes won’t reappear in the Chancellor’s armoury?
There’s no absolute assurance but, for starters, we know that the plan to cut the rate of corporation tax from 19 per cent to 17 per cent from 1 April 2020 has been put on hold. The manifesto also confirms that a Conservative government would implement the digital services tax.
The manifesto commitment to redesign the tax system so that it boosts growth, wages and investment while limiting arbitrary tax advantages for the wealthiest in society raises as many questions as it answers but one thing seems very likely: under a new Conservative government, the valuable entrepreneurs’ relief is likely to be restricted or abolished.
As laid out in the manifesto, the main plank of Conservative tax policy will be to introduce a new anti-tax avoidance and evasion law. While the most dramatic aspect of the new law – doubling the maximum prison term to 14 years for individuals convicted of the most egregious tax frauds – is unlikely to add significantly to prison overcrowding, the effects of three other aspects of this new law may be much more widely felt.
Against the background of the UK tax gap of around £35 billion, the new law will create a single, beefed-up anti-tax evasion unit in HMRC which covers all duties and taxes, from individual errors to deliberate non-compliance. The prospect that innocent errors, tax avoidance (which is legal even if it may be unacceptable) and tax evasion (illegal and soon to carry a maximum prison term of 14 years) will all be dealt with within a single part of HMRC equipped with powers to tackle the most extreme tax evaders will fill with dread the hearts of innocent taxpayers who are trying to do their best to pay the correct amount of tax under an increasingly complex tax system.
The narrative in the manifesto contains an element of rough justice. But hard cases make bad law. The challenge for HMRC, presumably equipped with considerably greater resources to staff this unit, is to ensure demonstrable fairness for all taxpayers whose files they consider. It is critically important that the tax gap is reduced. That requires people who should have paid their taxes to now pay them. But HMRC must retain the respect of the tax-paying and advisory communities. Treating people who have made innocent errors as if they were tax evaders is not the way to do that.
The risk of that happening is increased by the next aspect of the new law, which will consolidate existing anti-evasion and avoidance measures and powers. If the Conservative party is successful in forming the next government, then we urge the new Chancellor to issue a statement on the intended scope and operation of this new law at an early date.
The new law will also be supported by a package of anti-evasion measures, including measures to end tax abuse in the construction sector, crackdown on illicit tobacco packaging and further measures to prevent profit-shifting by multinational companies to avoid paying taxes.
If I was to try to draw a simple (possibly too simple) distinction between the tax policies of the Labour party and the Conservative party it would be this: Labour plans to tax the wealthy to provide support for low-income groups. The Conservatives plan to tax the baddies to spare the goodies from tax increases.