Given how much the Chancellor is borrowing and spending, he has already effectively said that taxes will rises for some in future Budgets. Now that UK Government debt levels are closer to EU averages, it is quite possible that overall levels of tax will also rise closer to EU averages in the long term.
However, in practice, the Chancellor is likely to focus short term measures on taxes and spending cuts that do little immediate damage to the economy. For example, cutting pensions’ tax relief could save billions in revenue but not affect individuals’ current spending. Similarly, an increase in corporation tax could be implemented without having an immediate impact on consumer spending. If implemented, this is most likely to be targeted at large companies and/or those who have profited through the pandemic.
It now seems likely that the Digital Services Tax (DST) on large international businesses will continue, if it does, expanding the DST to cover more online businesses is a possibility – they are a sector of the economy that has benefited from the lock-downs.
Raising major taxes such as income tax, VAT and NIC could be counter-productive as they directly affect consumer spending. Taxes on ‘wealth’ could rise as they affect fewer taxpayers, however, there are rumours that the Chancellor has already ruled out a one-off wealth tax as ‘un-Conservative’.
Increasing Capital Gains Tax is a possibility as the Office of Tax Simplification review suggested a number of reforms including increasing CGT rates to align them with income tax rates. It would make sense to reform Inheritance tax alongside any CGT changes as there are many interactions between them - together, they are effectively the UK’s current ‘wealth taxes’. Reform of this scale would be extremely complex and would inevitably have to be implemented in stages.
There are rumours that HM Treasury has modelled the revenue impact of abolishing both SDLT and council tax and replacing them with an annual tax on the current value of a property. This does not mean it will happen - it would be difficult to agree accurate valuations for all properties. But it might be possible to implement this type of reform for business properties as a way to replace Business rates.
At a time when most retail businesses face enormous challenges, not least the fallout from the Brexit trade agreement with the EU, we believe that the current system of business rates is not fit for purpose, is damaging the UK economy generally and is risking the survival of many retailers. Given the circumstances surrounding COVID-19 and the additional welcome reliefs for business rates that have been implemented (such that few retail businesses are currently subject to the charge), we would suggest that, instead of seeking to ‘tweak’ the existing regime, the Government could take the time that this provides as an opportunity to ‘rethink’ business rates with a view to establishing a system that will be fit for purpose.
In this regard, we suggest that the debate over whether the cost should be borne by occupiers or owners highlights the fundamental fact that both have an economic interest in local infrastructure. It would, therefore, seem appropriate for the business rates system to be designed in such a way that the cost is equitably shared by both parties. This could potentially be achieved through a business rates system which taxes occupiers on the rent that they actually pay and owners on the rent that they receive. Such a system may also remove the incentive for owners to simply pass on the cost of their share of the cost to tenants as doing so would increase the amount on which they themselves are chargeable.
A system of this nature linked to actual rents would generally eliminate the need for complex valuations whilst at the same time achieve the direct linkage of the charge to the actual circumstances of individual properties and hence the local authority in which the property is situated that is stated to be desirable. It would also simplify some of the reliefs as, for example, where properties are suffering a void period with no rent being paid or received, relief could be given automatically simply by operation of the tax.
Online Sales Tax
In July 2020, news broke of the government’s potential implementation of a new 2% sales tax that may be levied at online businesses, or as a potential new tax on consumer deliveries. The aim of the tax would be to raise around £2 billion annually, which would help to alleviate some of the costs of the fallout from COVID-19. Not only that, there are hopes it could level the competitive playing field for the high street in comparison to e-commerce sites such as Amazon. This new tax would run alongside the present digital sales tax (DST).
The tax itself has yet to be confirmed, but its potential introduction has left smaller digital firms wondering how to adequately prepare. Given that the new sales tax may effectively be based on turnover, there might be a significant change on the customer end of transactions. For example, if there's a sale of £100, but 2%'s levied on top, most businesses will want to pass that on to the customer base. It will likely lead to an increase in the cost of goods purchased online, particularly if a new tax is aimed directly at the online retail sale.
The main fallout of the new tax will be on those businesses that haven’t got the necessary infrastructure for implementation. As an example, most businesses can understand VAT, to an extent, and operate their systems and processes accordingly, having adjusted their pricing structures to fit that need. Larger businesses that have familiarity with working cross-border with different VAT rates and other levies already have online systems set up. However, smaller businesses that aren’t international might feel the brunt of this on a practical level.
The imposition of a new, additional tax likely means businesses will need to update their IT systems, payment processing and their pricing structure, having not previously planned to for the next few years. They may not have the necessary functionality to charge and account for both a VAT element and the additional online sales tax element in place and that is likely to be costly. Not only that, but other nations might look at this tax – if successfully implemented – and start doing the same thing, requiring further adaptation.
On a commercial level any tax that targets delivery fees will favour larger businesses, because they are already reducing – or in some cases eliminating – their delivery charges in a way that smaller businesses cannot. You can see that larger elements of the marketplace are already doing away with delivery charges, and clients and customers already feel as though it’s relatively neutral in cost terms. Smaller businesses with a minimal online presence can’t do the same, as it’s uneconomic, and will have to retain their delivery charge and add the additional tax. We think this tax is one that might disproportionately affect smaller businesses, because they can't do much with their margins, and they don't have the sort of internal capacity and resources to deal with a new tax as efficiently as their larger competitors. A key element of design for the Government should be how ensure the tax does not advantage the large players in the market by creating substantial compliance costs that small companies will be less able to bear.
A ‘third way’
One equitable solution from a policy perspective might be to combine an overhaul of the business rates system with an Online Sales tax. For example if the government chose to:
- Reform the business rates system to one which taxes occupiers on the rent that they actually pay and owners on the rent that they receive;
- Introduced an online sales tax based on 2% of turnover from online sales; and
- Provided a mechanism such that any business rates liability could be offset against the online sales tax
This would provide a more equitable split of the tax burden between landlords and tenants that both have a stake in the property and also target the online sales tax away from those retailers with high street store portfolios to those larger online players that operate from out of town warehouses.
The above could also be combined with further incentives for use of green technology and assets within physical premises and supply chains and perhaps penalty taxes for businesses with an increased carbon footprint resulting from using large portfolios of non-environmentally friendly delivery vans to bridge the ‘last mile’ to the consumer.
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