Jam or toast? Tax will be one of the major battlegrounds in the run-up to the election

19 April 2017

Tax will be one of the major battlegrounds in the run-up to the 8 June general election. While the political parties slug it out in public sessions and private meetings, taxpayers – that's you and me – face another period of considerable uncertainty.

We’ve been trying to piece together the way the battle lines are being drawn.

To start with, Parliament will have to clear the decks. There won't be time to properly consider all of the proposals in the draft Finance Bill so Treasury Committee chairman Andrew Tyrie is urging the Chancellor to truncate the Bill. It will be interesting to see which measures reappear in the new Parliament, and which are quietly dropped. This may be the last we see of some of the rabbits which George Osborne pulled out of his Budget hat. My colleague Andrew Hubbard explores this in more detail in his piece in this Tax Brief.

The Labour Party has been quick to announce some of the key features of its tax policy, including plans to repeal the residential nil-rate band for inheritance tax, to compel all companies with a turnover of over £36 million to publish their corporation tax returns in full and to exempt businesses with a turnover of less than the VAT threshold (currently £83,000) from HMRC’s Making Tax Digital regime for quarterly reporting.

High-profile statements from two senior Labour MPs have caused some consternation. The shadow chief secretary to the Treasury, Peter Dowd MP, has set out Labour’s intention to use the tax system to redistribute income from the rich by raising the ratio of tax to GDP. That ratio is currently running at around 38 per cent. Mr Dowd seems set on increasing taxes to beat the 43 per cent record set in 1982/83. Mr Dowd continues to emphasise tax avoidance as the scourge of the UK tax system, disregarding the fact that tax evasion and the shadow economy account for far larger tax losses. We looked at this in our Tax Brief on 29th March, reporting that tax lost to avoidance is now around £2bn, with tax evasion and the shadow economy accounting for tax losses of £11.4bn. 

It is said that voters get the government they deserve: nobody deserves the selective blindness of politicians on both sides of the house who pay insufficient attention to illegal tax evasion and the shadow economy while emphasising only the evils of tax avoidance.

As they draft their manifestos, we can be pretty sure that all the parties will be reminding us of the need for a fair tax system. If recent decades are anything to go by, nobody will nail their colours to the mast by stating exactly what proportion of tax they think should be paid by different demographic groups in a fair tax system.

This brings us to a statement made by Shadow Chancellor John McDonnell. If Labour wins the forthcoming election, Mr McDonnell has pledged to target rich people for higher taxes. By rich people he means those earning more than £70,000 a year. Here we enter very strange territory. Last year, a report by the Resolution Foundation and adopted by the Conservative Party led to great concern for those in the UK who are just about managing. The JAMs, to use the acronym of the time. And here’s the problem: the Resolution Foundation recognised that those who are just about managing may include families with a household income of £50,000. They are just about managing, but benefits and tax reliefs are extremely important to them.

So the Conservatives recognise that families with incomes of up to £50,000 may only just be managing, while Labour regards those with earnings of more than £70,000 a year as rich people to be targeted for higher taxes.

Voters should be pressing candidates for clarity on this, in what promises to be a very messy election campaign.

For more information please get in touch with George Bull, or your usual RSM contact.