How tax could change and what the effects could be for AAT members

Head of tax at BPP Professional Development Michael Steed looks at possible tax trends in the next few years and how they might affect AAT accountants.

Q: There is a lot of anticipation of tax changes in the UK. Where do you think tax will go in the next few years?

A: There are quite a few possible changes in the wind, but let’s first look at the background against which these changes may happen.

Nearly all Governments will make decisions about the broad mix of direct and indirect taxes that they levy. The difference between them is that you have no choice over direct taxes.  They are there, like it or not. Good examples of direct taxes are income tax, NICs and corporation tax.

The critical point about indirect taxes is that you only run into them when you spend. If you don’t spend, then you don’t pay them. The classic indirect tax is VAT. Excise Duties are broadly indirect taxes too, for example alcohol duty, tobacco duty and air passenger duty.

Q: OK, so how much will the Treasury get in the 2021/22 year?

A: According to the Budget Red Book covering the 2021 Budget, the Government’s income in the current year to March 2022 will be £820bn, and out of this, the three big hitters are income tax (£198bn), VAT (£151bn) and NICs (£147bn).

Q: What about corporation tax?

A: Much less at £40bn and excise duties raise about £48bn.

Q: So what can we conclude from this?

A: These big hitters will not be going anywhere. They are very important parts of government income. There will always be adjustments and the 2021 Budget announcements that corporation tax will rise by 6% in April 2023 for companies with profits of more than £250,000 is a way of squeezing the lemon to maximise tax take.   It’s politically quite astute as individuals don’t directly feel this.

And you don’t even have to raise taxes to raise more government income. As we saw in the March 2021 Budget, simply freezing income thresholds and allowances over time will effectively put money into the Treasury; for example, a basic rate tax payer getting a pay rise that puts that person into the higher rate band. If the higher rate threshold is frozen (as it has been until 2026), then it becomes progressively easier for that person to slip into higher rate tax.

Q: Then doesn’t that mean that the Government is getting in more money, so there’s nothing to worry about?

A: Not really, that’s just one side of the coin. The other is expenditure. The same Red Book revealed that the cost of servicing the national debt in the current year is estimated at £45bn, so that’s more than corporation tax brings in. And the trend for interest rates on government borrowing is rising too, so it becomes yet more expensive to service the debt.

Q: So how does Covid-19 affect all this?

A: Clearly a huge impact for everyone and one that will have a knock-on effect on the Government’s finances. So far, the Government has spent enormous amounts supporting jobs and businesses. The net borrowing in the year to March 2020 was £55bn and in the year to March 2021 was £394bn, a massive increase. This needs to be paid back, and the interest on it has to be serviced.

The other factor in Covid-19 is the stagnation of economic growth in the economy in 2020 and the dip into recession as the economy went into reverse. But it’s not all gloom; as we come out of lockdown, the figures suggest that there is £50bn of pent-up consumer demand waiting to be unleashed, which will deliver a major stimulus into the economy, so spending will rise accompanied by VAT receipts. 

Q: So how does Budget 2021 help us all?

A: I thought that it was a very carefully managed balancing act to keep confidence in jobs and business with extensions to the furlough and the SEISS schemes, grants and loans, and the clever use of fiscal drag (freezing thresholds and allowances) to indirectly raise money over the next five years until the freezes are reviewed in April 2026.  

Q: If the Government wanted to raise more taxes, what options do they have?

A: Well the choice is quite wide, but to look at a straightforward example, capital gains tax (CGT) rates are significantly lower than income tax rates. There’s no economic reason why this should be so. Ask any economist.

NICs are very skewed too. Class 1 NICs require payments from both the employer (13.8%) and the employee (12%), but a self-employed person pays a tiny amount of Class 2 and only 9% on main profits. This needs evening up and that’s before you’ve started to talk about the gig economy workers, whose position for employment law is now well-established (as “workers” with some employment rights), but their tax position needs addressing. It’s just hanging in mid-air – are they effectively employees, self-employed or somewhere in between? It seems odd to have a tripartite system for employment law and only a bipartite system for tax.    

Q: Anything else?

A: Yes, lots of possibilities, including more grip on internet giants like Facebook and Amazon, so they pay more tax where they have users. The wheels are slowly turning in the right direction, with the 2% Digital Services Tax in Finance Act 2020, for example, and not only in the UK government, but others too are looking at this. It is surely right that they pay a fair whack of tax in countries where they do business and have users. The classic model for corporation taxes around the world has been based on physical presence, but that is outdated in the 21^st century.

Q: So all up, how will all this affect AAT accountants?

A: I think it will be steady as she goes for a while, but there will always be changes that we need to be aware of, for example, the proposed changes to MTD to bring income tax into the MTD net from April 2023. That will have a major impact on accountants and their clients.

Michael Steed is co-chairman of the ATT's tax Technical Steering Group and columnist for Accounting Technician magazine.