Sharon Blain, Tax Director at PwC, says local councils may well seek to have more control over tax-raising powers.

It is entirely possible that we will see a further divergence in the tax position across the UK’s nations and regions.

At the moment, the decentralisation of the UK tax system is a work in progress.

Since 1997, several taxes have been brought into the control of devolved administrations, some fully (land transaction tax) and some partially (income tax).

With VAT, National Insurance, Corporation Tax and Income Tax there are significant political and practical constraints to further devolution. Given the current political landscape, we are unlikely to see major changes to these in the short term.

But there remains an appetite for change, both in the devolved administrations and at local government level.

Short-term options for more change

In the short term, divergence in two areas can be expected.

Firstly, devolved administrations will continue to use their existing powers to create separate tax environments to suit local circumstances, such as the divergence in income tax rates in Scotland.

Secondly, they may seek to use their power over local taxes (such as business rates and council tax) to focus on local priorities, including economic growth or the reduction of inequality.

Local powers

The choice of making changes to local taxes or introducing new ones (such as tourist taxes or workplace parking levies) rests with the devolved administrations, so we should expect further divergence here.

On the flip side, the introduction of new taxes (such as the proposal in Wales to introduce a vacant land tax) does need agreement from the Treasury. In this context, the path of least resistance – making changes that do not require engagement with the Treasury – will likely be more attractive.

With increased attention on local issues and concerns, it follows that devolved governments and local councils may well seek to have more control over tax-raising powers.

Urging caution

Further devolution of taxation is inevitable and offers the potential for regions to have greater control. I do not think that we’re far off seeing regional tax setting in England.  If anything, it’s a natural consequence of our current direction of travel. However, I worry greatly that this will be at the expense of simplicity.

Brian Palmer, AAT Tax policy advisor

What taxes have been  devolved so far?

How much devolution has taken place so far?

Scotland

• Stamp duty land tax, landfill tax, and income tax (except for the personal allowance).
• Air passenger duty and the aggregates levy.

Wales

• Partial income tax powers (as of April 2019 – UK income tax rates will be reduced by 10p in each band, on top of which the Welsh Government will set its own Welsh rate of income tax for each band.
• Stamp duty land tax and landfill tax (2018).

Northern Ireland

• Plans to devolve corporation tax have been postponed indefinitely due to the collapse of power-sharing in Belfast.

English local authorities

• The UK Government wants all revenue from business rates to be retained by local government, but there is no confirmed timeline for full implementation.

In Summary

Over the medium term, there is likely to be further delegation in the field of taxation. But the major challenge remains leaving the EU, so it will be a case of evolution, not revolution.

Read more on tax as part of our #AATPowerUp Tax 2020 campaign for September and October;

• Power up your tax knowledge with AAT
• How the UK can straighten out taxes and raise more money
• 5 ways HMRC could plug the tax gap

Jacek Szufan, manager, VAT service delivery at TMF Global, predicts the UK’s tax future post-Brexit

Tax is one way the UK will continue to attract inward investment after we leave the EU.

It’s a tactic that has been put to good use over the past decade.

Corporation Tax has fallen from 30% in 2007 to 19% at present, with a further reduction planned for 2020. Moreover, Corporation Tax is one of the instruments the UK Government can adjust independently, as rates are not yet harmonised by the EU.

So, whether or not Brexit happens, opportunities exist to help make the UK more attractive from a corporation tax perspective.

VAT is straightforward

The UK’s VAT system has also been relatively free from excessive administrative complexity, which helps with its attractiveness.

This is borne out by a Tax Foundation study that analysed the number of hours businesses spend on complying with VAT, in which the UK ranked fifth among all EU countries.

The recent introduction of Making Tax Digital should make this compliance process even simpler. (Editor’s note: some argue that VAT should be further simplified after we leave the EU.)

Maintaining a balance

It remains to be seen whether the UK will decide to adopt an aggressive stance to structuring taxation in the event of a no-deal Brexit.

Norway and Switzerland may give the best clues as to what awaits us outside the EU. These countries stand outside the bloc but are connected to the EU in many ways, and manage to maintain a balance in their relationships when it comes to the economy and taxation.

Better or worse

The UK is still the fifth-largest economy in the world and the second-largest in the EU, and many will be watching closely to see whether the UK is better or worse off after leaving the bloc.

Undoubtedly, there will be concerns that the UK could introduce lower taxation and a more accessible tax system to attract business investment.

EU member states should be reassured by the fact the UK has been instrumental in setting up measures against tax avoidance. The OECD’s base erosion and profit shifting initiative being the best example to date. This is why the UK is likely to tread very carefully, so as not to disrupt the balance that it helped to introduce on the international scene.

Summary

Like many other countries, the UK has struggled with some loopholes in its tax system, but there are not enough to classify it as a ‘tax haven’, and that is unlikely to change any time soon.

Read more on tax as part of our #AATPowerUp Tax 2020 campaign for September and October:

• Power up your tax knowledge with AAT
• How MTD for income tax will shape the digital landscape
• How green taxes will shake up life in the UK
• 5 ways HMRC could plug the tax gap

Complicated tax systems waste time and money and create hassle for everyone.

They lead to more errors and higher costs, less understanding, and ultimately lower compliance. Some would also argue they deter overseas investment.

So could we do better?

Change is possible according to Bill Dodwell, the tax director of the Office of Tax Simplification (OTS). Here’s how.

Simplify or replace?

Some argue in order to have a tax system fit for the 21st century, it’s necessary to start again.

The Mirrlees Review from the Institute for Fiscal Studies set out thinking along those lines.

However, as the Office of Tax Simplification (OTS) has pointed out, making major changes to the tax system in the UK would itself increase complexity through the transition.

It’s not the way to go.

Working with what we’ve got

Steps to achieving a simpler tax system in the 2020s need to work with the existing tax system.

The Personal Tax Account needs to become the main interaction between taxpayers and HMRC.

This requires investment – but the prize is a system that would be simpler and less costly for both HMRC and taxpayers.

Let HMRC collect more information

One of the big steps needed is to mandate greater information reporting to HMRC.

Taxpayers would derive huge benefit if they could see all their income sources and, where relevant, expenses, in one place.

Some data will need to be supplied by taxpayers but much will come from employers, banks, pension companies, charities and platforms and other engagers of the self-employed.

Simplifying tax for the self-employed

Self-employment has grown in popularity over recent years. Around a third of income tax-payers now complete an annual tax return.

Filing a tax return works for many. However, some of those working freelance or in the gig economy might welcome alternatives.

For example, they could find it better to report information and pay tax to HMRC periodically or on the completion of work assignments, rather than only through self-assessment.

The OTS has just launched a study on aspects of reporting and paying tax.

The outcome for taxpayers should be easier understanding of their income, tax liabilities and tax credits – as well as the ability to share data with other software and apps, such as budgeting software. 

AAT accountants oppose change
AAT members disagree about the best approach to simplification. A survey of Licensed Accountants said the OTS’s proposals would increase work, add complexity and bring few benefits.

Read what members say here.

HMRC should set out the vision

This vision needs a roadmap from HMRC into which data providers and others can contribute.

We will need to move to use of a single reference number to link everything accurately, such as the National Insurance number. 

That way, everyone can understand what data will be needed, the format, and when it will be required.

In summary

We can achieve that over the coming decade – with the right ambition and investment.

The promise of lower costs, less work and higher recovery make it a goal worth pursuing.

Read more on tax as part of our #AATPowerUp Tax 2020 campaign for September and October:

• Power up your tax knowledge with AAT
• How MTD for income tax will shape the digital landscape
• How green taxes will shake up life in the UK
• 5 ways HMRC could plug the tax gap

Photo by Immo Wegmann on Unsplash.

Taxing smokers, drinkers and drivers just doesn’t bring in the money it used to. We look at five big moves the Government could make to plug the tax gap.

Taxing the British public used to be easy.

For decades, governments could squeeze cash from smokers, drinkers and gamblers by slapping them with ‘sin taxes’. Environmental levies cajoling industry to switch to greener energy solutions also boosted national coffers. The likes of stamp duty, congestion charges and fuel taxes also irritated people, but they generated finances that could be pumped into healthcare and infrastructure.  

However, the UK’s tax revenues have been drying up.

The £35 billion tax gap

Healthier lifestyles have seen HMRC collect less money from ‘sin taxes’. For example, we’re incentivised to drive cleaner cars, rather than taxed, and we’ve been obeying. This rising eco-consciousness means factories and power stations use less fossil fuels, which makes for a happier environment, but less ‘sin taxes’ for HMRC.

The British housing market is also at its weakest point in a decade – not good for stamp duty fans.

This and more has resulted in the UK’s rising tax gap – the difference between what should be paid to the government in taxes and what’s actually being received.

HMRC indicates the shortfall is £35bn – the nation’s highest tax burden in 50 years, according to the Taxpayers’ Alliance.  

So, the UK needs more money. But where will it come from? Here are some of the tax solutions currently being proposed…  

1. Taxing multinationals & tech firms

For: HMRC estimates large UK and international firms owe them £27.8bn in unpaid tax, with US multinationals accounting for 17% (£4.6bn).

Although a new digital services tax (introduced in April 2020) will tax 2% on the revenues of search engines, social media platforms and online marketplaces, many feel it’s too modest. The government claims this tax will raise an annual £400m but this is just a small fraction of the pot of gold available.

Against: It could irk the tech titans, who may move their HQs to the continent – an increasing possibility, post-Brexit. It could also cause problems for British workers employed by these firms.

2. Revising UK property taxes

For: Landlords and overseas owners of UK property are taxed lightly compared to other countries around the world. This was highlighted recently when American hedge-fund billionaire Ken Griffin bought two London homes for £195m. The amount of council tax he’ll pay on both properties? Just £2,842 a year. Then, there’s the thorny issue of stamp duty.

AAT has previously recommended that stamp duty liability switches from the buyer to the seller, which would not only help first-time buyers, but also save taxpayers £670m a year.

Against: Opponents argue reforming property taxes could suffocate the top end of the market and discourage landlords from investing.

3. Raise the pension age and cut benefits

For: Increasing the state pension age is a surefire way to boost revenues. The government plans to increase retirement age for men and women to 67 by 2028, estimated to bring in an extra £11bn from income tax and National Insurance contributions.

With the typical retiree enjoying a household income twice that of working-age adults, many feel pensioner perks should be scrapped too. Politicians have discussed removing winter fuel allowance, along with free TV licenses for over-75s. Less controversially, AAT has suggested raising the eligibility age for free eye tests and prescriptions from 60 to 67, which could yield savings of £1bn.

Against: Political parties are reluctant to cut pensioner benefits, because of their high voter turnout (84% of over-70s voted in 2017’s general election compared with 57% of 18-19-year-olds).

4. More environmental taxes

For: With environmental taxes raising £48.9bn a year (40% paid by households), other eco-taxes aimed at the public have so far been mooted, such as customers paying taxes on any flights taken, plus a 25p ‘latte levy’ on disposable coffee cups.

Against: Eco-taxes aimed at the public tend to be unpopular, as shown by the gilets jaunes (yellow vest) movement in France (who started protesting against rising fuel taxes). Flight taxes would penalise less-frequent travellers, such as those taking one holiday a year. A latte levy could also deter people from visiting the high street, at a time when retailers are struggling.

5. Find more ‘sin taxes’ 

For: Last year the government introduced its sugar tax on soft drinks. Aimed at tackling the nation’s obesity problem, the levy could extend to other products. Earlier this month (September), researchers writing in the British Medical Journal  suggested public nutrition could be improved with a 20% ‘snack tax’ on cakes and sweets.

Meanwhile, with the World Health Organisation declaring red meat a carcinogen, some (such as the Green party) have called for a further tax on meat products such as beef, lamb and pork.

Against: Any levy on snacks or meat would be contentious. As with the sugar tax, the greatest impact of rising prices would be on lowest income groups.

Boris Johnson isn’t keen on them either; earlier this summer he said he vowed to freeze ‘sin taxes’ if he became prime minister.

In summary

Taking money from people’s pockets is never popular. Nor is it easy. There are downsides to all the solutions available to Government. But with a £35 billion hole in its finances, controversy may be a small price to pay to plug it.

Read more on tax as part of our #AATPowerUp Tax 2020 campaign for September and October;

• Power up your tax knowledge with AAT
• How MTD for income tax will shape the digital landscape
• How green taxes will shake up life in the UK

Autumn is the season for tax. With the budget and it’s inevitable changes, as well as the ‘bigger picture’ reforms that promise to change work, business and everyday life. There’s a lot going on.

As part of our #AATPowerUp content series, we will be focusing on tax as a whole. Over the coming weeks, we’ll be providing content to give you an insight into what changes lies ahead for you as an accountant.

Tax over the next decade

Tax is going to be used to change our behaviour in many ways, starting very soon. Even if your job doesn’t directly involve taxation, you are likely to be affected.

• MTD and digitisation – MTD has already got everyone talking about digitisation, but the next phase is going to be even bigger. We look at when it is likely to happen and the practical challenges that need to be addressed.

• MTD for income tax -the next big step on the digital landscape.

• Green taxes – The government has made the environment a priority, and there will be a deluge of new green taxes to change the behaviour of consumers and businesses. If it’s going to work, it’s got to be fundamental. We look at the options.

• How green taxes will change life and business in the UK.

• More tax trends:

• Opinion: How VAT can be reshaped after Brexit?
• Opinion: What are the prospects for more devolved taxes?

Key technical updates

• IR35 in the private sector – HMRC’s IR35 scheme was intended to stop employees being disguised as contractors to get tax breaks. It was highly contentious when it was introduced in the public sector. Soon it will be extended to the private sector. Employers need to be alert to the dangers of higher costs and skills shortages – and the risk of fines for non-compliance.

• How IR35 sent public sector employers off the rails
• What IR35 could cost private sector employers
• IR35 the ticking timebomb (members) – (MyAAT login required)

• Reverse-charge VAT – The CIS reverse charge for VAT will shake up payments and liabilities throughout the supply chain of the construction industry. We’ll explain the changes and what they mean.

• What the CIS reverse charge will mean

Where will the Government get its money?

Threats and opportunities lie on the horizon as the population changes and the UK exits the EU.

• Filling the tax gap – An ageing population is set to cost is more in future. At the same time, tradition duties from fuel and cigarettes could fall. We’ll explore the options to fill the gap.

• How the Government can fill the tax gap

• Simplifying the tax system – complex taxes just create headaches for everyone. Overhauling annual returns and the Personal Tax Account offers significant gains.

• How the UK can straighten out taxes

• How tax will shape up after Brexit – should Britain seize the chance to make Britain more attractive to investors?

• Could the UK become a tax haven after we leave the EU?

Study support

Tax is always one of the more testing areas for AAT students. So we will have study support content looking at some of the areas that pose most content difficulties.

We hope you find this content useful. Feedback is always welcome via social media or our email address: [email protected]

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