Accountants share their proposals to balance the books, post Covid-19.
As we head towards the first post-lockdown budget, attention is turning to how the country pays for the Covid-19 pandemic.
Analysis from the Institute of Fiscal Studies (IFS) suggested that the Government may be preparing the largest tax rises in over 25 years. The IFS also pointed to further pressures beyond Covid-19 alone, such as the effects of an ageing population and the increasing burden on health and social care services. It revealed:
- Government borrowing could be £50billion lower than originally forecast.
- Government departments such as further education, local government, prisons and courts are likely to face £2bn worth of cuts.
- Spending on local services other than health, defence and schools would increase at a lower rate than previously planned.
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Ahead of next week’s Budget and Spending Review, we asked accountants what changes they would make to the tax system to help balance the books. We also asked Phil Hall, AAT Head of Public Affairs & Public Policy, for the association’s perspective.
Target areas with tax relief such as pensions, ISA gains and furlough scheme
James Paull, head of incentives group, Andersen LLP
There are potentially three main areas you could look at, including the big three (income tax, NI and VAT), making changes to existing smaller taxes or introducing a wealth tax, but each of these have disadvantages:
NI and income tax would raise a lot of revenue. But they are blunt tools that takes directly from the pockets of people who are struggling.
Making changes to smaller taxes, such as Capital Gains Tax or treating carried interest as income, would be quite an easy sell ideologically: it affects fairly well-off people. However, it would raise less revenue. Such taxes are generally easier to avoid – for example, CGT could be avoided by holding onto assets that might otherwise be sold – and they can distort behaviour.
Regarding a wealth tax, you wouldn’t need a huge tax rate to raise a very material sum of money. But a blanket wealth tax could be seen as double taxation as assets are bought out of taxed earnings. There are also problems with valuation and liquidity, as lots of wealth is tied up in homes and businesses.
I’d look at areas where tax relief has been given, such as pensions and ISA gains, and seek to claw some of this relief back as a one-off levy such as:
- Easy to value as investments for pension funds are valued daily.
- The scheme can pay so there will be no liquidity issues.
- Previously been tax relief on pension contributions, so this may be fairer than alternative measures.
- It would need to be a one-off levy rather than an annual fee.
- But given market volatility this should have limited impact.
- Consideration could be given to some additional tax relief when pension is drawn down.
- These are tax-free and implementing a one-off tax on these would be relatively simple to administer.
- This would be done at fund level so no administration for the taxpayer.
- Windfall tax on pandemic-related profits – Some people and companies such as online retailers, PPE manufacturers etc have done extremely well, so it would be a kind of levy on super profit generations.
- Furlough – Similar to how the student loan mechanism works, you could potentially claw back furlough scheme costs by an additional tax charge to businesses once earnings are above a certain level.
Verdict: Look at areas where there has been tax relief and you can easily quantify the amount of tax payable.
Introduce tax bands for corporations
Lee Murphy, Managing Director, The Accountancy Partnership
An efficient way to fund Covid recovery through the tax system would be the introduction of ‘tax bands’ for corporations, which will increase the rate of corporation tax paid by the highest earners. This would be an opportunity to also reduce the lowest rate of corporation tax paid to the globally agreed minimum of 15%.
This would mean that as well as increasing the tax collected from bigger businesses, it will act as an incentive for start-ups, or for businesses moving to the UK. This will likely generate more tax revenue overall, and help businesses reach the higher rate thresholds, eventually generating more tax income from them too. In addition, this would lead to more jobs, better infrastructure and growth of talent.
Verdict: Introduce tax bands for corporations to increase the rate of corporation tax for highest earners.
Make it more beneficial to hire permanent employees to generate more tax revenue from payroll
Damian Connolly FFA managing director, Sakura Business Solutions
As an accountant, I understand very clearly that people don’t generally ‘love’ paying tax, however I think there is an awareness now that certain things DO have to be paid for. I think taxing employees and employers further is the wrong thing to do, it is already expensive to employ people, pay their NI, pension, holidays etc. We already have an issue in society where people are falling into ‘self-employed status’ and not workers entitlements. Employment should be encouraged through the tax system and not the other way round!
Instead, I would try to address the employment versus self-employment issue: providing certainty for those who act like an employee day-to-day and making it advantageous for employers to employ people. This will generate more tax revenues and quicker (payroll taxes are received much earlier than income tax) to pay for the costs of Covid-19.
Verdict: Make it more beneficial for employers to hire permanent employees to generate more tax revenue from payroll.
Introduce a one-off wealth tax and windfall tax on big winners of pandemic
Phil Burnell, director, Spark Accountants
I would look at several options, including a one-off windfall tax on the big winners of the pandemic: Amazon, Facebook and Google don’t pay their fair share of tax.
Other viable options might include:
- Raising income tax basic rate banding by 1%, higher rate banding by 1% and final bracket from 45% to 50% for 12 months.
- Raising VAT by 2%.
- Charging NI to everyone still working. Currently, anyone over state pension age does not pay national insurance even if they work.
- Introducing a wealth tax so people can use their capital assets (e.g., home or cash savings or other assets) to help fund social care.
I would also:
- Exempt pandemic-hit sectors (hospitality and hairdressers, for example) from any VAT increase.
- Reduce the rate of VAT charged on energy supplies from 20% for business and 5% for big business to help subsidise the current energy prices rises.
- Freeze pensions increases for 12 months, saving a large amount of money and spreading pain across all generations.
- Scrap the increase on employer’s NI on all SMEs and keep corporation tax at 19% for all SMEs.
- Introduce more incentives to business owners, reducing dividend tax to 0% for all earning under £50,000. The tax system should be used to incentivise people to work and create wealth which is not currently the situation.
Tax breaks also need to be introduced for sectors struggling with skills and staffing (e.g., providing grants for new lorry drivers or temporarily exempting lorry drivers from IR35 legislation).
On a broader issue, I would simplify the tax system. There appears no real modern reason to have income tax and NI. This could be simplified by having one single tax.
Verdict: Introduce a windfall tax to big winners of the pandemic while providing tax breaks to pandemic-hit sectors.
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Don’t create new taxes, reform existing ones, and broaden the tax base
Phil Hall, Head of Public Affairs & Public Policy
The best way to pay off national debt is to grow the economy, but the tax system has a very important role to play too. After engaging with our expert tax panel, undertaking member surveys and carefully considering a range of options, last year AAT made a number of recommendations for tax reform to help pay off the hundreds of billions of Covid-19 related debt but also in the interests of greater simplicity and fairness.
AAT does not support a Wealth Tax as it is unlikely to raise substantial funds; existing taxes could be better refined to achieve a more effective result e.g. CGT and IHT; and it could also discourage wealthy investors coming to the UK to invest and create jobs. Likewise, a windfall tax isn’t favoured as the costs are likely to be passed on either directly or indirectly to the already hard-pressed consumers it is supposed to benefit, in the form of higher prices.
AAT would like to see the NICs based broadened to include working pensioners – something we have long campaigned for – long term reform of the triple lock and a comprehensive review of pensions tax relief. A radical reduction of exemptions and reliefs in relation to Inheritance Tax (especially Agricultural Property Relief, and Business Property Relief), simplification of Capital Gains Tax, VAT reform (abolishing the reduced VAT rate, the zero-rate and VAT exemptions including obscure exemptions such as the 4% agricultural rate).
We also believe it is worth looking at Council Tax, an outdated and highly regressive tax based on property prices in April 1990. The best solution would be a complete revaluation and for this to occur every five years to help future proof the tax. Unfortunately, Government seems unlikely to do this, so a more realistic change might be to introduce three or four additional bands for the most expensive properties. Doing this would only require revaluations of approximately 150,000 properties, would raise some much-needed revenue and undoubtedly be fairer.
Verdict: Avoid populist calls for wealth and windfall taxes, reform CGT, IHT and VAT and broaden the tax base where possible.
Annie Makoff is a freelance journalist and editor.