193. How Labour Could Have Avoided Tax Rises

0:00Stuff the manifesto and do what needs to be done. That would be the simplest way to get the growth rate up, but that's not available to Keir Starmer. They're breaking it anyway by proxy. No matter what they say, it is impacting working people. What is available is Theresa May's Chequers deal with the EU. Monzo Business is the proud partner of The Rest is Money. Now, did you know that over 600 ,000 businesses are already banking with Monzo Business? and mine is one of them. To celebrate us teaming up, we've got a special offer for you. New customers get Monzo Business Pro or team for free for the first six months.

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1:59hello and welcome to the rest is money with me steph mcgovern i'm with me robert perston so i just want to pick up now on um a really interesting thought you have robert to do with how things could be different and i think a good lead into this is just looking at where we're at now in terms of borrowing so we've had the latest borrowing figures out so um just to fill you in on that public sector net borrowing was forecast to go up by about 17 billion in June according to the OBR's prediction but actually we've now found out it went up by over 20 billion pounds according to the ONS. So we're borrowing more money it's more than was forecast and now obviously all the chat is again once again is okay what taxes are going to have to go up in the autumn in order to pay for all this.

2:50But interestingly, Robert, you think there could have been another way here and we could actually have been avoiding these tax rises if we'd have just done a better deal with the EU. Tell us what you think. What's driving the very high probability that Rachel Reeves in the autumn budget will have to put up taxes very significantly is that the Office of Budget Responsibility will forecast that the Chancellor is on course to break her fiscal rules. These are forecasts of very big numbers many years away. The margin for error is enormous. It's mad that they have the power to influence really important decisions on things like, you know, how much money is available for schools and hospitals and how much we invest in all the rest of it.

3:43But the big reason why she's going to miss those rules is not the stuff that attracts all the headlines, right? All the headlines have been about the£6 billion or so that she lost when the government did a U-turn on its welfare reforms and when it scaled back the controversial means testing of the winter fuel payment. These were humiliating political U-turns for the government. And of course, they do contribute to the deficit in the public finances, the so-called black hole. But they are not the big driver of that. The big driver of that is how slowly the economy is growing and how lacklustre our productivity growth is.

4:38Because if we were growing more, then the tax revenues would be higher and therefore we'd have more money coming in and have to borrow less. You know, a faster growing economy means people are spending more, companies are generating more profit. You know, when you spend more, you pay more VAT. Incomes go up faster. So income tax goes up. Companies are more profitable. They pay more corporation tax. So the more successful an economy is in terms of boosting productivity, boosting growth, the more revenue there is for the government. And part of the problem for this government is that the Office for Budget Responsibility has actually, in terms of its track record, been the opposite of what Liz Truss used to allege.

5:18It used to allege that it was way too gloomy. In fact, it has consistently been more optimistic than most other forecasters, including the Bank of England, about how fast the economy would be growing and how fast productivity would increase. And therefore, one of the things that one expects to happen before the next budget is that the OBR will almost certainly scale back its growth forecasts. And that will be the big contributor to the black hole that poor old Rachel Reeves is going to have to fill. I would be surprised if she didn't have to find something of the order of£20 billion in the autumn.

6:01Yeah, because of course,£20 billion, if you look at what we faced last autumn, it was£40 billion of tax rises. So, you know, half again is a lot, isn't it? Yeah. And putting to one side a debate that we'll come back to, which is, you know, what is the best way of raising that money? You know, there's a lot of pressure from the left of the Labour Party for it to be a wealth tax. You know, there are very considerable fears that she will yet again reduce tax breaks from various parts of the pension system. I think that there is a chance that she might widen the scope of VAT, but cut the headline rates to 17.5%.

6:40She could just about claim that she's not breaching her manifesto, because the manifesto says we won't increase VAT. Stuff the manifesto, man. It's a joke, But it is a lot of extra tax that people will pay. The issue for me is, was there a way that she could have avoided this black hole at all? And yes, there was. They would argue they are taking steps to increase the growth rate, whether it's planning reform, whether it's investment. But the problem with these approaches to increasing the growth rate is they take years to feed through to our rate of growth, our productivity and our living standards.

7:28And, you know, understandably, the Office for Budget Responsibility, even though it would accept that these sorts of measures will increase the growth rate, it doesn't expect them, completely rightly, to increase the growth rate much before the next election. So the interesting question is, was there something that the government could have done to significantly increase the race of growth of the UK economy as perceived by the Office for Budget Responsibility. And yes, there is one sort of big thing they could have done. And it was to have been much, much bolder when it came to renegotiating the terms of trade with our biggest overseas market, the European Union, because what they actually negotiated, you know, when it came to food, fisheries, added on their own, the government's own calculations, just 0.2 percent to national income.

8:39GDP in five years' time, which is a rounding error of no economic significance and does nothing, almost nothing, to increase confidence in the short to medium term that we're going to become more prosperous. However, there was a deal that would have increased UK growth way more than that, way more than that, that would not have involved the government breaching its promises in again in its manifesto. I know you hate manifesto promises. The reason why I'm saying stuff the manifesto is because they're breaking it anyway by proxy. So, you know, all this stuff around, oh, we're not hitting working people.

9:24Well, they are. There are companies having to let people go because of the increase in costs of employment. So really, they are hitting working people, no matter what they say. It is impacting working people. So just stuff the manifesto and do what needs to be done to make all of our lives better. So I think you've obviously hit an incredibly important question, which is if the government is breaching the manifesto in a slightly sneaky way by putting up national insurance for employers, whether voters become more disillusioned by parties or governments that put their hands up and say times have changed we've got to do something different or an underhand breach that allows politicians to claim in a way that many would say is dishonest that they haven't really breached so that's i mean this issue of trust in politicians is really really important but what i'm saying here is let's just say they don't want to do an explicit breach of the manifesto.

10:19And in the manifesto, it says they can't rejoin the single market and they can't rejoin the customs union, which would be the simplest ways. If we rejoin the customs in the single market, that would be the simplest way to get the growth rate up. And the OBL would immediately increase its growth forecast. And almost certainly if we rejoin the single market or the customs union, there would be no black hole in the public finances and she wouldn't have to raise taxes. But that's not available to Keir Starmer or Rachel Reeves. What is available to Keir Starmer and Rachel Reeves is Theresa May's Chequers deal with the EU, which was a quite complicated deal, but in practice, semi-replicated membership of the European single market and gave us some customs flexibility, but some elements of the customs union.

11:11And the most important point about it is this, that it was calculated at the time, officially, that it would increase the growth rate of the UK economy relative to the hard Brexit we did by 2.2%, compared to the 0.2 % that the government has just negotiated, right? And actually, if they'd gone back to the EU and said you were prepared to do the Theresa May deal a while back we want that now maybe the EU would have said that was then this is now but I doubt it if if it didn't breach any of the EU's red lines then it can't possibly be breaching them now so if they'd been bold and asked for that deal that again would have meant that in the autumn on my calculations there would not have been any kind of black hole in the public finances.

12:14And she could have got away without putting taxes up. So I suppose the simple way of saying what's irrational about this government's approach is this. Whatever taxes they put up in the autumn will be unpopular. Right. Because everybody knows that when you put up taxes by 20 billion pounds, whoever pays for them, you're taking money out of the economy and the economy slows. Taxes are never a free lunch, right? Even if you're not paying them, you will pay something of a price for somebody else paying those taxes because there's money being taken out of the economy. Keir Starmer would say that doing a deal of that ambition with the EU, you know, would alienate, would upset a lot of people who voted for Brexit because Nigel Farage and others would stand up and say that this is rejoining the EU by the back door.

13:15Well, all the opinion polls show that now a significant majority of British people think that leaving the EU was a mistake. So the political backlash really wouldn't be as great as they fear. So what they've done is, in failing to be bolder with their trade negotiations, they are going to have to pay a big, both economic and indeed political price. So in summary, Starmer should have done a better deal with the EU and we wouldn't face all the shitty increase in taxes we're going to face in the autumn. But on the plus side for you and me, Steph, is we've got weeks of being able to talk about which are the worst taxes to put up and which are the better taxes to put up.

14:01But whether that's a dividend for Keir Starmer, I very much doubt. I guess we are where we are. And as you say, there's still loads to talk about it. And one of the things that I think is my big beef is all the avoiding and evading of tax that goes on. So after the break, we're going to talk about that. And we've also got our monthly Monzo small business segment too. So we'll see you in a couple of minutes.

14:25welcome back to the rest is money time now for our small business barometer brought to you by monzo business so of course this is where each month we look at the challenges and opportunities for small and medium-sized businesses and you know not forgetting that together they employ about 60 % of the UK workforce. So not to be underestimated. And today we're going to focus particularly on the retail side of things for small businesses, you know, and how I guess the high street's changing. The changes have been off the charts. And the thing which is obviously absolutely changing retail at the moment is the way in which small businesses and big businesses are thinking about how to deploy AI, particularly to help customers find the products, you know, to sort of, in a sense, curate shopping for customers.

15:20It's all absolutely gripping. I think the key for me, and obviously we've talked about my business, Gootopia, which is the slime experience business where kids come in and do workshops in how to make slime and they can do different textures and scents. But what's been really interesting for us is our first outlet was in a kind of the Arches in Brixton, the railway arches. So fairly kind of, for want of a better phrase, run down retail bit. But it didn't matter because the whole vibe of Slime is kind of, you know, it's skewy and dark and all of that. But from there, we then moved into this really fancy shopping centre where we were next to like H &M and John Lewis.

16:01But we found that actually that didn't work as well because even though the shopping centre were really grateful, we were bringing in more footfall because parents were able to drop their kids off to do a slime workshop while they popped to buy a few bits so we provided that experiential stuff that high streets and shopping centres are desperate for it was too expensive so you know and we got we got really good rates to begin with because the the shopping centres wanted us to be there but it got harder and actually now we've we've changed our proposition a bit and moved into more other kid areas so we've partnered with gravity which is a big kids experience place and we're working with them in various centers so up in leeds we've got a couple now in cheshire we've got one opening this weekend in warrington and we've got about 10 outlets now but we've definitely been changing and having to modify as we go because of how much the the retail sector's changed and that need for experiential versus the cost of being in some of these places too the other thing that obviously one has been struck by which i enjoy and i was going to ask you whether you've done any of this but it's also the growth of pop-ups over the last 10 years there are these container parks where people set up sometimes a temporary retail outlet in a container or they just take a shop on a very short lease oh we've got loads of them up north but have you ever done a pop-up just just you know move move in for three months we've done we've done a few pop-ups and has that gone well?

17:33Yeah, it has. It works really well, actually. So we did a pop-up in Leeds for a bit and that worked really, really well. I mean, one of the things that has also massively changed, of course, is, you know, increasingly when you go into a shop, they absolutely don't want cash. I mean, obviously, politically, this has become quite a big issue. You know, there are campaigns against phasing out of cash. But what do you think of that? Yeah, I think it does feel like currently there's still a place for cash, but I don't know how much longer we're going to need it because it's so much easier now with banking and paying.

18:10And, you know, obviously this is supported by Monzo, who we use for our business banking. And it does make it a lot easier and more efficient and more traceable than physical cash. But I know it will annoy a lot of people out there if I say cash is dead. So I won't go that far. Of course, you know, in a world where HMRC are, you know, now insisting on, you know, digital filing of taxes, you know, frankly, just in a world where it makes sense, whoever you are as a business, just to be able to keep track not only of your tax liability, but of all of your overheads. you know there's obviously advantages in all your transactions being electronic because it's so much easier to process them and analyze them yeah i agree uh right we should wrap things up now thank you very much to our business banking partners monzo business for supporting this part of the show you can join me and over 600 000 other businesses already banking with monzo uh you can sign up for an account today only sole traders or limited company directors in the uk can apply.

19:23T's and C's apply. Now, one of the things that you've been giving a lot of thought to, particularly since we had Dan Needle on the programme, is this phenomenon of small businesses not paying their fair work of tax. Talk me through that. Yeah, so we've talked before about this gap, this tax gap between what is paid and what is owed. and you know it's estimated to be about 46 billion pounds now and we heard didn't we when Labour put their manifesto out when they got into power that they reckon they could claw back about five billion pounds of that but I am fascinated by the breakdown of this in terms of who is it who's not paying the right tax and when you look at the numbers here about 28 billion pounds of it So the majority of it is small businesses not paying the right tax.

20:18You know, when we say small businesses, we're talking about companies with a turnover of less than 10 million and employing fewer than 20 people. So small businesses here. And this came from Dan Needle's work, you know, on this think tank he heads up called Tax Policy Associates. 40 % of small businesses not paying the right corporation tax. Feels insane, doesn't it? And this is a gap which grew during the pandemic. So while the government have got better at getting money back from other businesses, like the gap for large businesses now is only about£6 billion that they're not paid. £28 billion not being paid by small businesses.

20:54So explain to me how small businesses are evading, actually in this case, avoiding. Because if it's a tax gap, this is illegal what they're doing. And so I suppose the question is, is it incompetence on their part or is this deliberate fraud? Well, it's a mix of things, basically. So obviously, when we're talking about small businesses, there'll be businesses like your kind of sole traders who will be taking a lot of cash in hand and therefore avoiding the tax that they should be paying on that. But on the more extreme cases you have got, and this is what Dan Needle talks about, you've got these kind of schemes, these arrangements, these different setups where small businesses are actively not paying tax, which is the scary thing.

21:50Actually, and you've had experience of this, haven't you, with someone you know? Yeah, quite close to home recently, I came across an example of tax dodging by a smallish business. And as I understand it, what happened in this case is quite widespread. So kid, my boy, had been doing some contract work in education and the agency that he was working for used what's known as an umbrella company when it came to payroll. and my boy smart looked at his payslip and he just thought this is weird it's just it just it wasn't a normal payslip um because there were bits where effectively said there was no tax being paid and he didn't like it and so he went back and challenged it um and he was told it was all fine and then he happened to look on the hmrc website and discovered that literally within the last day or two, this so-called umbrella company had been put on a list of companies that were doing improper things when it came to payroll.

23:06And broadly, what they were doing was they were splitting pay into two chunks and then loading sort of basically unallowable expenses into one chunk of the pay to reduce the tax liability. And to be clear, HMRC have just said this is straightforwardly not appropriate. I actually then did talk to Dan Needle about it. And he said, look, this is a very widespread, and he says improper practice. But the other thing he points out is as soon as these companies get found out by HMRC, they wind themselves up and do a bunk. They declare themselves bankrupt and there are no assets for HMRC to seize. And then they just set up in a different guise.

23:50The bit of it that obviously needs to change is that employers who use these tax services need to get more savvy. Too many small businesses, particularly when they're facing cost pressures, you know, they are suckered into schemes that are just wrong and inappropriate. Yeah. And, you know, we've talked recently about the pressures on small businesses. And for a start, we're not saying this is all small businesses, but there was some research wasn't allowed from the Federation, which represents small businesses, saying that the number of small businesses in the UK is shrinking for the first time in years.

24:27So they found that nearly a third of small businesses are saying that they expect to either close, shrink or sell off their business in the next few years. Because of the state of the economy, because of the tax burdens, they're saying it's a lot more volatile now than it was even during the pandemic. And so and planning stuff is virtually impossible. So it is really tough for small businesses. But the other thing that have you seen this thing that's happening in retail called phoenixing? And this is shocking and there should be something to stop this. So this is where you'll see this. The legal owner of a shop changes every few months and then the old owner will vanish without paying their taxes.

25:11and it's called phoenixing. So the landlord doesn't change, but the owners of the retail unit or the business in that property changes. And then it means they can just run off without paying the tax. And there's no, currently there's no legal responsibility for the landlord to enforce the payment of taxes by their tenants. So the landlords don't care because the tax implications don't impact them. They're just bothered about letting out the units that they have. but it means that people can just get away with not paying their taxes. Yes. But the problem, as we all know, is in a low growth economy, and particularly when living standards are so under pressure, you know, too many people get desperate and the normal ethical distinctions that we make get a bit blurred.

26:03And so I'm not in any sense justifying people not paying tax that they should be paying. but we shouldn't be surprised that in a time when the economy is under pressure, people are doing improper things. Yeah. Right. We should probably wrap things up there, shouldn't we? Thank you very much for listening. If you want to send in any questions or just give us some ideas of what you want us to talk about or to explain or analyse, email us, restismoney at gmail.com or send them through our social media pages and we'll get them. and just to reinforce that if you as a business owner have an interesting story about either the pressures you face or the opportunities you see out there do let us know so goodbye from me and me bye