Tax after Coronavirus The View from RSM

George Bull George Senior Tax Partner at RSM which provides audit, tax & consulting services looks the the tax environment after Coronavirus

With the publication of the Treasury Committee’s unanimously agreed report as part of its inquiry into “Tax After Coronavirus”. The report is the culmination of a seven-month inquiry by the committee into what the tax system will – and should – look like following the reconstruction of the economy after the unprecedented economic fallout of the coronavirus crisis.

The presentation of the report by committee chair Rt Hon Mel Stride felt at times like a mini-Budget, with the chair stealing the Chancellor’s Budget-day thunder, and at others like a series of warning shots for the Chancellor ahead of the Budget on Wednesday 3 March.

The chair made it clear beyond doubt that the public finances are on an unsustainable long-term trajectory for three reasons. First, because of the fiscal impact of the coronavirus pandemic. Second, because of the adverse economic consequences of Brexit. Third, because of rising age-related spending.

Significant fiscal measures, including revenue-raising, will probably be needed in future. This is a large-scale and long-term challenge that requires taking a view of the whole tax system, how it can be reformed, and how it can raise revenue in a way that minimises economic damage as well as effectively supporting public services, which in turn can promote growth.

The Treasury Committee made a series of recommendations in its report.

First, raising tax revenue quickly and at a large scale is likely to require higher contributions from one or more of income tax, national insurance, and VAT. Any increases in the rates of these taxes were ruled out in this Parliament by the Conservative Party’s ‘tax lock’ manifesto commitment. It is clear to the Committee that this manifesto commitment will come under pressure in the current circumstances. The commitment not to increase the rate of income tax does not preclude the Government from adjusting income tax thresholds. The Government could raise revenue simply by freezing income tax thresholds; such a change would cause minimum economic distortion. Increases in national insurance contributions may be especially difficult given the probable impact on jobs, at a time when increasing employment is likely to remain an economic priority.

Corporation tax, which is currently 19 per cent, is the fourth largest source of tax revenue, and is not covered by the ‘triple tax lock’. A moderate increase in the rate could raise revenue without damaging growth, especially if balanced with fiscally appropriate measures for business, such as enhanced loss relief and more generous capital allowances. However, a very significant increase in the corporation tax rate would be counterproductive.

There was widespread agreement in evidence that stamp duty land tax (SDLT) is economically inefficient, causing damage to the economy by affecting when and how often people buy homes. The report recommends that Government should prioritise reforming SDLT, setting the tax at a level that optimises revenue while encouraging home ownership.

The Government should support businesses by introducing a temporary three-year loss carry-back for trading losses in both incorporated and unincorporated businesses. This would allow losses made during the pandemic to be set against up to three previous profitable years, generating a tax refund. It would help those businesses which have shown that they were previously profitable to recover from losses imposed by the impact of the pandemic. The Government was urged to further extend, and possibly make permanent at the existing level, the annual investment allowance, which provides tax relief for expenditure on most plant and machinery.

Introducing a windfall tax on profits that have resulted from the pandemic would be problematic for numerous reasons, such as identifying sectors to which any such tax should apply. Nor would the Committee recommend an annual wealth tax as the development and administration of it would be extremely challenging. But the political arguments for some form of wealth tax would become stronger if the wealth-to-income ratio were to increase considerably. There were notable reservations that, once imposed, a one-off wealth tax could raise significant revenue, but could be imposed again.

Pension tax relief is estimated to cost £20.4bn in 2018-19. Given the regressive nature of the benefits accruing to individuals from the current arrangements on pension tax relief, especially those in the top earnings decile, the report recommends urgent reform to the entire approach to pension tax relief.

The Chancellor has said that “it is now much harder to justify the inconsistent contributions between people of different employment statuses.” The Committee repeats a view frequently heard within and outside Parliament, that a major reform of the tax treatment of the self-employed and employees is long overdue. The current system is confused, unfair and unsustainable. The review should incorporate the benefits which accrue upon payment of NICs and other taxes as well as the level, the incentives, and the interaction of such taxes. It should look as far as is possible to eliminate the so called ‘three-person problem’ altogether. This is an area where the complexity of the UK tax system, and the lack of joined-up thinking, causes distortions of behaviour which affect the economy as a whole and the tax yield in particular.

While the Committee agrees that tax has a part to play in achieving the net-zero goal to tackle the climate emergency, carbon taxes are unlikely to form a major part of the long-term tax base or stabilisation of the public finances, as they are designed to complete the transition to net zero. The Government should develop a tax strategy to meet net zero. This should include tax measures to incentivise the behavioural changes needed to achieve net zero while at the same time providing short term support in the tax system for pump-priming green innovation and balancing the need to protect those on low incomes.

While much was made of the unanimity of committee members in publishing the report, during the Q&A it quickly became apparent that cross-party collaboration would be withdrawn when an election is called. Once again, we find ourselves in a situation where tax policy reform will be for the good of the party and not necessarily for the good of the people.