The Chancellor’s announcements on Budget day were rightly about supporting the economy out of the pandemic and supporting families. And although he did make clear that the costs of the government’s support programs would have to be paid back in time the only tax rises he announced was the much trailed rise to corporation tax and the usual trick of freezing tax allowances for years ahead. See our Budget hub.
The fact that companies will not pay more tax until 2023 and, in the meantime will get considerable incentives to invest in their businesses (on which partnerships will miss out!) made it clear that the post-COVID recovery must come through before taxes are increased. However, it is widely accepted that corporation tax rises alone will not be enough to service the huge extra debt the Chancellor has sanctioned. So further tax rises seem highly likely as the post-COVID recovery builds and businesses will need to keep up to date with developments and review their organisations structure to ensure it remains cost effective.
On 23 March, now named “tax day” by the Treasury, the government will publish a range of tax consultations for future tax changes – reforms that will not be legislated until the Finance Bill for 2022 at the earliest. Why should we care? Well many suspect that a large number of these consultations will involve future tax rises, changes that would have got a lot of headlines on Budget day – taking the shine off the Chancellor’s supportive announcements. So what should you look out for?
In the countdown to Budget day, much was made of recent OTS and parliamentary reports on reforming both capital gains tax and inheritance – the idea of a new wealth tax also got a lot of press coverage and the Treasury select committee report on post-pandemic taxes gave it cautious backing. Given the government’s self-imposed ban on raising rates of income tax, VAT and NIC, raising more revenue from capital taxes is bound to look attractive to the Chancellor. Major tax rises in this will not be popular with entrepreneurs and his party’s traditional voter base, but these are relatively complex taxes and poorly understood by the public so “simplifying” them could provide cover to remove many of the widely used reliefs. Indeed, it may even be possible to both cut the headline rates of tax but still generate more revenue – if CGT changes are announced in advance there is bound to be another surge in activity as individuals seek to realise gains to pay tax at the current rates.
Having changed tack and legislated to increase corporation taxes, large companies will be nervous that the Chancellor may also consider windfall taxes and possible further taxes on online sales – again the Treasury select committee did not dismiss them completely. Personally, I’d be surprised if a windfall tax ever got past the consultation stage but the government might just present both options if only to win support for the ‘lesser evil’ of a new online sales tax (or perhaps a VAT differential for online sales). More prosaically, the government may use its post-Brexit freedom to toughen up exit taxes to dissuade businesses and entrepreneurs from leaving the UK in search of lower tax jurisdictions.
With ‘tax day’ billed as supporting HMRC’s 10 year plan it is possible that the idea of merging income tax and national insurance contributions will be brought back from the dead: such a move could both drastically simplify tax administration and resolve the IR 35 “three hats” problem in one step. Except, of course, because it would be such a major change it is more likely to take many small steps to get there.
Removing many of the existing NIC issues might be a good place to start – for example, removing the NIC exemption for over 65s (or at least for high earning older workers) could be up for debate. The Chancellor might also investigate streamlining NIC by removing everything except Class 1 so that everyone pays one rate of NIC – he has already mentioned the lower rate of Class 4 NIC (3% lower than Class 1) as potentially ripe for reform after the pandemic. This would help to address the disparities between the income tax and NIC paid by a self-employed individual, a personal service company owner and employee doing very similar jobs in different (or even the same) organisation. If the consultation could also find a better way to address the loss of employer’s NIC where labour is not directly employed it might even make the IR35 and off payroll labour legislation redundant.
On this theme, I expect to see further consultations on measures that facilitate Making Tax Digital and perhaps moves to fully linked through taxation, ie business tax systems that are so integrated with HMRC that tax is automatically paid as soon as the customer pays a business – akin to PAYE for business tax. Technology could already make that possible but tax law and business practice needs to change a lot to achieve that nirvana for HMRC.
Successive Chancellors have failed to grasp the nettle of the huge cost of providing tax reliefs for pensions and, despite Boris Johnson promising a plan to deal with social care cost for the elderly when he took office, none has yet materialised. A consultation that addresses both issues by cutting pension tax relief and ring-fencing the additional revenue for social care might seem appropriate – certainly to the younger generation.
As the Climate Change summit is due to take place at the end of the year it would be strange if the government did not come up with at least some eye-catching policies to support CO2 reduction – another way to put tax onto business’s ESG agendas.
Interestingly, even John Redwood MP has called for VAT to be cut on low CO2 products and this must now be possible after Brexit. Whether the Chancellor will go big on financial incentives and start to increase VAT on environmentally damaging goods like heating oil, plastic coffee cups and high emissions cars remains to be seen - the recent announcement of another fuel duty freeze and in domestic air-passenger duty clearly put economic concerns before environmental ones.
As the government has already cut the rate of VAT on hospitality for the rest of 2021, I’d also expect differential rates of VAT to be used to support other government projects going forward – in theory, there is no reason why we could not have a wide variety of VAT rates post-Brexit although it would hardly be tax simplification!
Of course, with all these ideas it is important not to lose sight of the fact that we are only talking about consultations at this stage – it might be best to think of them as future options for the Chancellor to keep in his armoury. That said, it is very useful for businesses to have advance warning of the government’s thinking on tax policy so that they can build it into their scenario planning for the future.
If the economy does pick up sharply after lockdown ends and growth can be sustained in the medium term, normal tax revenues might grow to the extent that many of the tax raising measures being considered are not needed in the end. While the Chancellor wants to signal to markets that the government is taking sensible measures to control government debt, he will probably hope he can let some of the tax raising ideas drift off into the long grass and eventually abandoned in the better times ahead. After all, despite the huge government spending during the pandemic, he is still a Conservative politician.
Neil Williams is a partner in BDO’s Professional Services team – see our Professional Services hub.