While the world’s medics focus on caring for the sick and developing a vaccine, across the globe behind governments’ closed doors, policy makers are sketching out plans to repair the economic devastation. Tax has a key role to play but finding the balance between re-filling the coffers of the state and repaying the national debt while at the same time assisting the economic recovery will be a thin tightrope to tread.
Whilst tax increases in the immediate term are unlikely, as the government seeks to stimulate the economy, some tax changes are surely on their way. Without attempting to predict which path the UK will take, we set out some of the choices available to our tax policy makers who are getting ready to sharpen their pencils.
The current system
Tax policies fall into three main categories: regressive, proportional and progressive. The current UK tax system is a mix of proportional and progressive taxes. Examples of our proportional (“flat”) taxes are VAT and corporation tax which apply the same rate for all taxpayers. Our progressive taxes such as personal income tax and capital gains tax operate on the theory that higher earners can afford to contribute more tax, and these are payable at marginal rates. It will be interesting to see how the balance between these categories might shift.
We’re all in this together
The government has made much of the universal effect of the coronavirus and its impact on every citizen, whatever their demographic or earning capacity. Given the public mood of solidarity, a blanket increase in tax might not be as unpalatable as it would have been before the pandemic. Income tax rates would be the obvious and likely most lucrative target but the Conservative manifesto pledged not to raise the rates of income tax, national insurance or VAT so this could be problematic. A way to side-step the manifesto issue might be to lower the range of the income brackets such that for example, the 45 per cent rate applied to those earning over, say, £80,000 rather than the current £150,000.
A more radical alternative would be to introduce a new, temporary income tax, say a “coronavirus Recovery Tax” payable by all. This was the approach taken by Germany when it financed its reunification with a “Solidarity Tax”.
When the government announced that it would make grants to support the self-employed though the Self-Employment Income Support Scheme, it was a moment of sea change. The self-employed contribute significantly less into the ‘social pot’ (they pay lower National Insurance rates) and as a consequence, they are entitled to take less out (they have no maternity or sick pay). When the government released funds to the self-employed in March, they did so with a warning that those wanting to benefit from state support will have to pay in equally in the future.
Again, subject to the Conservative manifesto, increased national insurance contributions may well be in store for the self-employed, such as raising them to the rates paid by employees. Another way to achieve higher NIC receipts is to reduce the number of people who are eligible to be taxed as self-employed. This is the purpose of the new IR 35 legislation. The effective date of these rules has now been postponed until April 2021 and the government is under pressure to reconsider aspects of the draft rules. It is not inconceivable that revamping the IR35 legislation could be the opportunity the Chancellor seeks to categorise even more people as employees thus drawing them into the Class 1 NIC’s tax net.
Government support for specific industry groups during the pandemic may also come with strings attached. After the banks were bailed out in the 2008 Financial Crisis, the bank levy was introduced to reimburse the state. Should, for example, the airline industry be propped up by the government (as will happen in the US), it would not be surprising if at some point in the future an airline levy was introduced.
The government’s plans to improve infrastructure in the north of England have proved popular and so might the idea of funding this by raising tax from more prosperous parts of the country. Rumours of wealth taxes such as a mansion tax were already circulating before the March 2020 Budget but less controversial would be an increase in capital gains tax (CGT), which is in practice paid only by those with higher incomes and the ability to save. Options include equalising the CGT and income tax rates, or just raising all CGT rates to the 28 per cent rate which currently applies on certain assets only. The proposed one per cent stamp duty surcharge on residential property for foreign buyers could even be expanded to impose a surcharge on CGT for non-UK residents.
In a similar vein, a revival of the differential rates of tax for companies is a possibility. Since 2015, UK corporation tax has been charged at a flat rate (save with respect to certain oil and gas industry profits) whereas previously there was a small companies’ rate payable by companies with profits of under £300,000. The corporation tax rate for 2021 is already set to remain at 19 per cent but now may be the time to lower it for less profitable companies who could find it harder to rebound quickly.
Post Brexit changes
Once no longer subject to EU law, the UK may be tempted to tinker with VAT. Although VAT is a flat rate tax, its effect is often seen as regressive, because lower earners spend more, as a proportion of their income on consumer goods, which are subject to VAT. After the Transition Period is over, the UK will be at liberty to better redress this imbalance by allowing more items to benefit from lower or zero VAT rates, for example computers, cars and bicycles for home use.
At the same time VAT rates could be manipulated to encourage post coronavirus consumer behaviours. If the retail sector needs reviving, one option would be to increase VAT for online sales, encouraging people back to their local High Street.
Measures in the pipeline
Before the coronavirus crisis hit, the government had initiated consultations on tax measures aimed at encouraging foreign investment funds to locate their asset holding companies in the UK. They will also reconsider whether VAT charges should be levied on investment manager fees. The property business rates system and extending tax relief for research and development are also under review. On the personal tax front, the Office for Tax Simplification has suggested inheritance tax rates be significantly reduced (albeit with valuable reliefs abolished). It is hoped that the coronavirus pandemic will not blow such measures off course.
At this stage there are more questions than answers, and a great deal of pure speculation. We must wait until the next Budget for clarity, but when it comes, the Chancellor’s 2020 Autumn Statement is likely to be one we will remember.
If you require further information about anything covered in this briefing, please contact Charlotte Black, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2020