To cut or not to cut... that is the question

With some uncertainty weighing on business investment and public services under increasing pressure, is it time for a rethink on tax? With the Budget just a couple of weeks away, Daniel Lyons, Deloitte’s head of tax policy, shares his thoughts. 

You’re never going to please everyone, and tax is no different. Take Theresa May’s announcement last week that fuel duty will be frozen for the ninth year running. Fist pumps at the fuel pumps from some; others baulked at a missed opportunity to boost the country’s coffers.

Setting the UK’s fiscal course is a tough ask. It’s even harder with compelling arguments coming out of both the raise and reduce camps.

On 29 October, the UK will hear the first Monday Budget since 1962 and the first, since 1945, to be delivered in October.

A taxing issue

Brexit, a health service facing unprecedented demand and social care under strain. Calls to remedy the inter-generational divide and local councils in need of more support. All these have one thing in common – they bolster the case for tax hikes.

The Government collected close to £700 billion from tax and National Insurance contributions (NICs) in 2017/18, a record haul that means tax revenues now make up 34 percent of our GDP. But is it enough?

Philip Hammond has stated that higher spending on the NHS will mean taxpayers putting more in the pot. What isn’t yet clear is how.

The tax-lock pledge of 2015 proves there’s little appetite to touch the Big Three; income tax, NICs and VAT. Then there are generous promises to increase the personal allowance to £12,500 by 2020, raise the higher rate threshold and cut corporation tax to 17 percent.

With the news that eight years of austerity is coming to an end, people are anticipating more pounds in their pockets. Deloitte’s recently published annual State of the State report shows public tolerance for spending cuts has waned, with a third of those surveyed saying they have been affected ‘a great deal’ or ‘a fair amount’. It does, however, suggest that 62 percent back higher taxes for better public services.

The timing of Theresa May’s announcement on austerity – just days after a thumbs-up for motorists – fuels expectation that this Budget will be kinder to families. So, will that lead to a lighter touch on the trusty ‘sin’ taxes? Maybe not.

Are sins wearing thin?

Chancellors of all political hues have relied on the sin taxes – they’re a moral penalty on the addictive or polluting. It’s a bit like checking down the back of the sofa, it’s a pretty sure bet for unearthing a pound or two.

Duty on cigarettes has climbed every year since 1978 and, in 2017/18, added £9.4 billion to the public purse. And while there’s a grudging acceptance that tax discourages consumption, people are becoming increasingly sensitive to constant price rises.

Coming at a considerable cost to the Exchequer – £38 billion over three years – the fuel freeze could be viewed as a hollow gesture if pockets are hit from other angles.

Public reaction isn’t the only reason to question reliance on sin taxes. For not only are we living longer lives, we’re living greener and healthier ones. The Office for National Statistics points to a 30 percent fall, between 2000 and 2017, in the number of smokers, especially as more young people switch to vaping. By 2022/23, tobacco duty revenues will fall to £9 billion.

And although fuel duty is off limits for another year, we’re seeing a similar trend in the automotive industry. Despite remaining static, fuel duty amounted to £27.9 billion in 2017/18 so it’s still a significant contributor. But, according to Department for Transport data, in 2016 the average new diesel car was estimated to be 55 percent more efficient than in 1997, and more electric and hybrid models are hitting the road.

Design and technology are evolving all the time. Ultimately, vehicles will become greener, more efficient and, crucially, less taxable.

Casting the net wider

So, if the Big Three are untouchable and existing sin taxes are losing their value, where will the money come from?

As the Chancellor sets his sights on the internet companies, demands for some kind of levy on digital services and advertising are getting louder. There’s talk of pension tax relief coming under threat. The think tank Resolution Foundation has called for Council Tax reform, mooting the idea of higher taxes on wealth instead.

Should a greater tax burden be imposed on savings, capital and investments? What about removing prominent tax breaks such as Entrepreneur’s Relief, which can be claimed by individuals or trustees selling all or part of their businesses? Or

rethinking stamp duty. Taxing nicotine rather than tobacco. Extending the soft drinks levy so it covers all sugary foods.

Intelligent Tax can be a harbinger of growth. Well-targeted, successful reliefs include the tonnage tax, introduced in 2000, which has been credited with reversing the fortunes of the UK shipping industry. Film tax relief, which supports qualifying British movies, has been estimated to generate £12.49 for the UK economy every time £1 of relief is granted. Increasing the generosity of capital allowances, particularly for industrial buildings, would enhance UK competitiveness.

Whatever the result on 29 October, there will be winners and losers. But despite coming two days before Halloween, it might well be short on shocks.

For all Deloitte’s predictions and views on the Budget, head to our dedicated Budget website and follow me on Twitter.