The budget’s been scrapped so let’s use the time to think about how to improve tax
It can’t have come as a massive surprise to many that, as coronavirus surges once again, the chancellor has cancelled the autumn budget. With so much uncertainty around the state of the country’s finances, the logic goes, now would not be a good time to make tax changes.
One thing is certain, the tax system as it stands is not playing its full role in levelling up or delivering a green recovery. And so, as well as dealing with the immediate consequences of the pandemic, the government should be using the extra time it has bought to think carefully about how a future tax system should work. Instead of hurting those on low incomes and increasing waste and emissions, tax could be used in a smarter way to bring about social and environmental benefits.
VAT: an obvious place to start
Our new report, Added value: improving the environmental and social impact of UK VAT, sets out three areas where early changes could kickstart a wider process of reform. Value added tax (VAT), the UK’s tax on consumption, seemed like the obvious place to start. It is one of the most important sources of government revenue, expected to raise nearly £140 billion in 2019-20. But the way it is applied is also discouraging activities that will lead to more secure jobs and a greener, healthier society. At the same time, it encourages activities which damage our environment, make us unhealthy and suppress job creation.
It is in the spotlight at the moment because Rishi Sunak has shown a willingness to vary it to boost the economy, and because Brexit will allow more flexibility around how it is applied. Our three recommendations are:
1. End the huge fossil fuel subsidy for household gas use
The five per cent VAT rate on gas and other domestic heating fuels is costing the Treasury over £2 billion a year in lost revenue, and the benefits mostly accrue to the better off, who use more energy. Ending the subsidy and – crucially – pairing it with appropriate redistribution and targeted help for the least well off, will not only help to meet the UK’s legally binding net zero target, it will also address the levelling up agenda.
2. Make VAT for building repairs the same as for new build
VAT on the repair and renovation of buildings is currently 20 per cent but new build is zero-rated. This is discouraging the upgrade of old buildings in favour of demolition, which isn’t great on a number of counts: it loses familiar community landmarks forever, squanders the carbon spent during construction (the lion’s share of a building’s carbon footprint) and misses the opportunity to quickly create new housing. To solve this, building repair and renovation should be zero-rated, to bring it in line with new build. This would end what the government’s Building Beautiful, Building Better Commission called “the unnecessary and ecologically unacceptable destruction of adaptable and durable buildings, and their replacement by short-lived glossy boxes”.
3. Cut VAT on repairs
Repairing things is often prohibitively expensive, which leads to unnecessary waste. The UK is one of the worst countries in the world for generating mountains of electronic waste, second only to Norway. This isn’t what people want. Our research with the Centre for Industrial Energy, Materials, and Products (CIEAMP) has shown that nearly two thirds of people are frustrated that they cannot get broken items mended. Brexit will allow the UK to set its own VAT rate on repair services. Zero-rating it would stimulate the repair industry, be highly popular and would boost employment at a time when new job opportunities are desperately needed. Our research with WRAP a few years ago showed that expanding the repair sector could support 34,000 new jobs while there was potential for 346,000 new jobs in remanufacturing, at various skill levels and right across the country.
These changes should just be the start of a long overdue process to overhaul the tax system, to make sure it can support the sort of society we want to see. And, while the budget isn’t going ahead right now, the Treasury’s net zero review is continuing behind the scenes. Two of this review’s explicit objectives are to identify “mechanisms to create an equitable balance of contributions” and to maximise “opportunities for economic growth as we transition to a green economy”.
There are plenty – and I mean plenty – more changes that will have to happen to meet those very laudable aims, but we think the three ideas we’ve outlined in this report are the simple first steps that should be taken on what will be a long and ultimately rewarding journey.
[Image courtesy of No.10 Flickr account, Creative Commons CC BY-NC-ND 2.0]