Tax after coronavirus – there has to be reform to address the unsustainable public finances

Lovewell Blake

With the current financial crisis and more challenges looming in the future, now is the time for significant forward-thinking tax reform, in the context of a clear long term-strategy, says Natalie Miller of Lovewell Blake.

Tax is always a political football, so it’s rare for politicians in one party, let alone three, to agree on tax issues. However, the cross-party Treasury Committee has today published an unanimously signed report saying that significant fiscal measures, including revenue raising, will be needed in the long-term. The dilemma is how to do that, without jeopardising economic recovery.

One striking feature of the report is the exhortation that the Government set a clear tax strategy for what it wants to achieve from the tax system and identify high-level objectives. Given that this is bound to extend beyond the life of any one Government, the Committee suggest that there must be cross-party input from the outset. All non-committee members at the launch agreed that this would help give clarity on the way ahead.

Annual Budgets, such as the one due on Wednesday, tend to focus on balancing the accounts and short-term aims, but what’s missing is a holistic approach which sets out a roadmap for government, businesses, and individual taxpayers. If you know the destination, you might then have to accept you’re going to have to cross a few toll-bridges along the way. Extending the journey metaphor, the reality is we may have to go the long way round to avoid further hardship for those stuck in the current traffic jam. The Treasury Committee makes a series of observations and recommendations in its report.

The Government will need to raise revenue quickly but 67% of tax revenues comes from income tax, national insurance, and VAT, increases to all of which were ruled out by the Government’s ‘tax lock’ commitment. There’s been speculation that the Chancellor might freeze allowances and rate bands on Wednesday as a work-around, but the Committee notes that the manifesto commitment is likely to come under further pressure – Committee Chairman, Mel Stride MP, likened the situation to committing to a freeze on defence spending needing to be reviewed when a country goes to war.

Corporation tax isn’t subject to the tax lock and is the fourth largest source of revenue. Leaks over the weekend suggest that the Chancellor will be looking to increase this on Wednesday and the Committee agreed that a moderate increase shouldn’t jeopardise growth, provided that there was also some relief for affected businesses, such as enhanced loss relief and more generous capital allowances.

They recommend introducing a temporary three-year loss carry-back for trading losses for both incorporated and unincorporated businesses, allowing those who were previously profitable to generate a tax repayment. There should also be a further extension to the Annual Investment Allowance, enabling businesses to buy new plant and machinery to support their future growth.

The Committee reported that there was widespread agreement that stamp duty land tax (SDLT) is economically inefficient and can hold back both the property market and the mobility of the workforce. They suggest that reforming SDLT should be a priority.

Another priority for what the Committee describes as ‘long overdue’ reform is the inconsistent treatment between people of different employment statuses. Historic differences in tax treatment, affecting both the individual and the engager have led to people doing broadly the same thing being treated very differently for tax purposes, with some groups missing out on the Covid support altogether.

Pensions tax relief is estimated to cost £20.4bn in 2018/19, with those in the highest earnings brackets getting the highest benefit. Although the pension system underwent significant reform as recently as 2015, the Committee argues that there needs to be urgent reform to the entire approach to pension tax relief,

The Committee considered the options of new taxes, such as a windfall tax on businesses who have profited from the pandemic and a one-off wealth tax on individuals. Although they left them as possibilities for the future, they highlighted difficulties in introducing either tax. It was also noted that there might be other ways of achieving these aims, such as the proposed digital services tax and closer alignment between the taxation of labour and that of investment.

While noting that the Government needs to develop a tax strategy to meet ‘net zero’ (reducing the UK’s emissions by 100% from 1990 levels) including tax incentives where necessary, they felt that carbon taxes are unlikely to form a major part of the long-term tax base.

None of this is easy, particularly when you get to the detail of who should pay more tax and on what. However, if we can get some clarity on long-term objectives, then at least we might have some hope of seeing where we’re hoping to get to. The longer we delay reform, the worse the problems are likely to become. 

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