The Treasury Committee’s “Tax After Coronavirus” inquiry is looking at how to improve the taxation system after the pandemic.
Here, experts from across the tax profession highlight 10 areas they expect to change
- Chris Sanger, global government and risk tax leader, and UK tax policy leader, EY
- Genevieve Morris, partner, Blick Rothenberg
- George Bull, tax consultant, RSM
- Guy Smith, senior tax manager, inTAX
- Helen McGhee, senior associate, Jospeh Hage Aaronson
Under normal circumstances, our experts would wholeheartedly welcome the opportunity to engage with a system-wide shake-up.
But these are not normal circumstances.
The coronavirus (Covid-19) pandemic is an unprecedented modern-day crisis. It has seen governments around the world deploy previously unthinkable levels of fiscal and monetary scaffolding to firstly underpin societies and economies, and secondly, it is hoped, to help them get back on their feet as quickly as possible.
None of which comes for free. Governments are borrowing big and at some point they will need to service the debt accrued. As such, an inquiry into the UK’s tax system in light of the crisis is unsurprising.
Or is it?
Why review now?
A government conducting a tax system review at a time when it desperately needs to increase revenues has the potential to be short-sighted, at the expense of long-view fundamental reforms. “There is a time and a place for tax reform, and getting the timing right post-global pandemic and in a recession will be critical to its success,” says Genevieve Morris, partner at Blick Rothenberg. But now is not the time for raising taxes, she suggests. “Instead, the government needs to look at what it can do to stimulate growth and investment.”
Economists, by and large, agree that we don’t need to increase taxes to pay for Covid-19 at the moment because government debt is so cheap, and as such a large amount of continued borrowing is the way to proceed for now.
Throw the real possibility of a no-deal Brexit into the mix and the waters get even mirkier, says Guy Smith, senior tax manager at inTAX. “Businesses are finding it hard enough to survive at the moment without substantive tax change as well.” Nevertheless, the inquiry is happening and input is being sought. So, in a perfect world (imagine!), what would tax experts like to see from a post-Covid-19 UK tax system reform?
The big themes
1 – Simplicity and automation
Chris Sanger, global government and risk tax leader, and UK tax policy leader, EY: “Tax post Covid-19 needs to be a combination of efficient collection, effective incentives and easy administration.”
Genevieve Morris, partner, Blick Rothenberg: “The tax system needs greater simplicity, it also needs greater automation, particularly for corporation taxes.”
2 – Clarity and leadership
George Bull, tax consultant, RSM: “Overlaps between work being undertaken by the Office for Tax Simplification, the Treasury Committee and the Public Accounts Committee may yield conflicting recommendations and incoherent or muddled decision-making when tax changes are amalgamated into a future budget. “Observers of the UK tax scene will know how easy it is to get to the wrong place for all the right reasons. With several government or parliament-initiated projects currently underway, clear vision, tough negotiating skills and strong leadership will be required if the UK is to have a post-coronavirus tax system fit for purpose in the 21st century.”
3 – Climate change
Bull: “Tax increases to achieve climate change objectives. Under the Climate Change Act 2008 and the 2019 climate emergency resolution, the UK government has a statutory obligation to act to reduce the UK’s contribution to global warming. It is widely recognised that tax is already playing a role in this – a role which will increase dramatically as further changes are made in the shift from purely moneybased taxation to carbon-based taxation. As timescales are tightening, businesses urgently need a roadmap so that they can begin to plan for these tax changes. Unfortunately, there still seems to be a long way to go in the development of policy.”
4 – Tax evasion
Guy Smith, senior tax manager, inTAX: “HMRC has dramatically reduced the number of people it attempts to prosecute for tax evasion and that needs to be reversed. Over recent years a trend has emerged of HMRC preferring civil settlements compared to criminal prosecutions. Until people can see tax evaders being regularly successfully prosecuted, not just predominantly for VAT fraud, but across business sectors for tax as well, the deterrent message will not get through. Naming and shaming deliberate defaulters on GOV.UK has not proven to be the embarrassment and restraint on evasion that might initially have been hoped for.”
5 – Tax relief
Morris: “The huge number of tax reliefs needs to be reviewed, the best need to be kept, reviewed and simplified. The rest need to be abolished. The tax system needs to be straightforward, so everyone can pay the right amount of tax. Tax reliefs are hugely attractive and can encourage growth and investment, but they need to be clear and easy to understand. “R&D relief is an excellent relief, yet can be hard for businesses to access as the rules are complex. There are also different rules for subcontracted expenditure, large and small companies. We should be encouraging innovation and making R&D more accessible would hopefully encourage more businesses to innovate.”
Sanger: “With commitments on rates, changes may well be seen in the reliefs embedded inside the taxes. Reliefs (and indeed all elements of the tax system) are always worth keeping under review, but they should be reviewed on their merits and not merely as revenue raisers because rate changes have been eliminated.”
Smith: “I think the Treasury needs to respond to the problems on the high street. Personally, I do not believe the high street will ever return to what we have known. People have got used to the convenience and ease of shopping online. Rather than throw money at trying to support jobs on the High Street, I feel tax reliefs targeted to help people start up their own businesses and enterprises supporting new green technology initiatives are the way forward.”
6 – Balance of taxation
Morris: “If wealth has been created, it has likely been created through income and gains that have already been taxed. Where is the fairness to then tax it again? Will it encourage people to spend more, if it does it may help raise VAT, but for the super-rich and internationally mobile, it will likely drive them away from the UK altogether.”
7 – Digital and multinational businesses
Morris: “Multinational businesses and the taxation of the digital economy are already on the agenda, already being taxed in a number of different ways. What the government should not forget is the huge amount of VAT these businesses are collecting on HMRC’s behalf on the sales they are making. Don’t drive these businesses away by trying to over-tax, or make tax so complicated, they decide it’s not worth staying in the UK.”
8 – The tax gap and MTD
Smith: “According to HMRC, the PAYE tax gap is 1% compared to 13% for Self-Assessment. Self-Assessment is where the challenge lies, both in terms of education and evasion. The roll out of Making Tax Digital (MTD) for income tax from April 2023 and corporation tax from April 2024 will effectively mean businesses, landlords and companies also record their transactions closer to real time, rather than simply producing a set of accounts at the year end, with the inevitable exercise of trying to remember historical events from the trading year. MTD will naturally help reduce evasion from nonintentional mistakes, but there will remain a hardcore element who will deliberately attempt to evade tax.”
9 – Potential wealth tax and broader base
Helen McGhee, senior associate, Jospeh Hage Aaronson: “We are constantly being told that the top 1% of earners pay 30% of the income tax take, but this hides a more complex picture. Many wealthy people pay very low effective tax rates – we are told that 1 in 10 people earning over £1m pay only an 11% effective tax rate on income, which is the same tax rate as an employee earning £15,000 a year. With this distortion in mind, I quite like the LSE concept of an Alternative Minimum Tax that would charge tax on the total amount of income and capital gains a person reports, before applying any deductions or reliefs.
“If everyone earning more than £100,000 is required to pay at least a 35% tax rate on their income and gains, we could raise around £11bn, which is equivalent to 2p on the basic rate, or 5p on both the higher and additional rates. “A wealth tax that looks like that would be less contentious than removing any tax breaks on pensions and/or property or any mooted windfall taxes on multinationals and foreigners. For the long-term we need to hit a broader tax base and this will require difficult political decisions, which this government is unlikely to have to make, as big rises will be nudged until after the next general election.”
10 – Windfall tax or new levy
Morris: “I do not support a windfall tax – businesses that make larger profits already pay more tax, just like people who earn more pay more tax than people who earn less. To a business, tax is a cost and costs need to be managed. A windfall tax on these businesses could lead to them making decisions to cut costs elsewhere (e.g. staff head count, particularly with greater automation), which would ultimately reduce the tax take.
“However, I would not be surprised if the government introduces a new levy, something similar to the apprenticeship levy, or even just increases the levy. This separate fund can then be used to help support new job creation and fund training. In an increasingly AI world, the robot levy may not be that far behind.”
Taxes in need of a rethink
Capital gains tax
According to Blick Rothenberg partner, Genevieve Morris, capital gains tax (CGT) needs reforming, noting there are already too many different rates depending on the type of asset you are selling – business asset, non-business asset, property.
“I’m a supporter of business asset disposal relief and did not support the cut in allowance to £1m, but accept this was politically necessary,” she says. “There should be two rates of capital gains tax – one that is attached to active business investments (10%), and one to passive investments, such as listed shares, property etc (30%).”
Helen McGhee, senior associate at Joseph Hage Aaronson agrees, noting that “not many people actually pay it”, and that increasing the yield would require increasing the number of people who pay it. “Otherwise you risk making a lot of changes with a very uncertain and limited return,” she says.
The main and most contentious area regarding rates is how gains are taxed in relation to other types of income, McGhee adds. “There will be pressures to equalise rates of CGT and income tax, but it should not be forgotten that the fiscal distinction between the two is there for a reason. Capital is the right to receive income, it is not actual income and there is inherent risk involved in capital returns. Companies already pay the same rate of corporation tax on income and capital, so there is precedent for alignment.
“An obvious area for reform would be to scrap CGT uplift on death, particularly where there is IHT relief – i.e. this uplift means someone inheriting an asset is treated as acquiring it at its market value on the date of death, rather than the amount it was bought for and the recipient can then sell it shortly after death without paying CGT. If the asset benefits from agricultural or business property relief from IHT there is no IHT and no CGT payable. This requires a comprehensive review of IHT as well as CGT – in fact many want to see IHT and CGT merged.”
Basic income tax and NIC
“The basic rate of income tax will need to rise, coupled with an increase in the personal allowance to ensure the poorest in the country are not impacted, but the tax burden needs to be shared,” says Morris. “I fully expect to see NIC for the self-employed become aligned with employee NIC.”
About the Tax after coronavirus inquiry
The Treasury Committee’s inquiry will look at what the major long-term pressures on the UK tax system are, what more the UK can do to protect its tax base from globalisation and technological change, and whether such pressures should be met with tax reform.
It will be open to evidence until Monday 7 December 2020.
Neil Johnson is a freelance business journalist who contributes regularly to trade publications and member organisations, covering employability, recruitment, business trends and industrial analysis.