Tax system overhaul

May 12, 2021

Business in the UK will face some huge challenges if proposals for sweeping changes to the taxation system are implemented.

Changes could come into force following the long-awaited publication of the House of Commons Treasury Committee report ‘Tax After Coronavirus,’ which was published at the start of March. 

Reform has already begun on reforms to Capital Gains Tax (CGT) and Inheritance Tax (IHT), and we can expect to see changes in these areas in the short to medium term, while some of the areas recommended for action have already been addressed in Chancellor Rishi Sunak’s Budget of March 3. 

These include the threshold on the amount you can earn each year before paying any income tax. This will rise next year but stay at that level until 2026. This means that if people do get a wage rise, they will be paying more Income Tax.

The Chancellor also announced that the tax on company profits – Corporation Tax – would rise from its current rate of 19 per cent to 25 per cent in 2023. However, only companies making profits of more than £250,000 per year would pay the full amount

All committee members agree with the report, but its findings are recommendations to the Government rather than new laws. The Government may choose to implement all, some or none of the recommendations. However, it must make a formal response by 1 May 2021.

The 80-page volume delves into how the country will bounce back after coronavirus, what taxes may have to rise and what allowances will be affected. Businesses should now be planning how to handle any proposed changes and what effect they will have. 

The pandemic has had a huge effect on the UK economy. 

The Office for Budget Responsibility (OBR) – which keeps tabs on Government spending – said that borrowing would be £355bn for the financial year to April 2021, before falling back to £234bn over the next year.

That’s the highest figure ever seen outside wartime. Over £100 billion is being spent on support for jobs, such as the furlough scheme, where the Government steps in to pay most of workers’ wages.

However, the pandemic has reduced the amount the Government raises in tax.

Unemployed or furloughed workers pay less income tax, businesses pay less tax if their profits are lower, and shoppers pay less VAT if they buy fewer things.

Raising funding has been hampered by the Conservatives’ manifesto pledge that there will be a tax “triple lock” for the duration of this parliament, i.e. no rises in Income Tax, National Insurance or VAT and the unknown impact of the UK’s departure from the European Union.  

The report looks at several areas and notes that Income Tax, National Insurance and VAT made up 66 per cent of the 2019/20 total tax yield. However, any slight upward movement in the rates of any of the three would generate a substantial amount of extra tax, but would be a political gamble.

Areas under consideration could be a three-year loss carry-back for trading losses which would allow losses made during the pandemic to be set against up to three previous profitable years, generating a tax refund. This would be a similar policy to those adopted during the economic crises of 1991 and 2008.

In addition, a proposed windfall tax of 10 per cent could be levied on those businesses that have thrived during the pandemic, but there are reservations about a one-off wealth tax, because of implementation and administration issues. 

The standard rate of VAT could see an increase, while the median rate of VAT in the EU is 21 per cent so this would not be seen as too damaging, but the removal of some exemptions and reduced rates is seen as more difficult and open to challenge. Wholesale merging National Insurance and Income Tax is not recommended, but a gradual removal of distortions in the system should be the priority.

The following are seen as the main areas for reform:

  • Taxing income from work – Should the income of the self-employed be taxed at the same rate as employees? It was recommended the reform look at ways of simplifying this old, complex system and the interaction of taxes.
  • Limited companies – It was noted that company owner-managers are taxed less overall than their self-employed or employed counterparts, primarily due to the use of dividends. It was recommended that, if the tax advantages of self-employment are to be reduced, so should the tax advantages of operating through a limited company, relative to the taxation of employees.
  • On the proposed Digital Services Tax, the committee says it is clear that more work is needed in this area, and that it should be monitored to see the impact of the current levy.
  • The committee believes reform of capital gains and inheritance tax was needed and should continue to proceed with reviewing the previous proposals. There is a worry that any significant increase could damage future business investment in the UK, particularly in light of Brexit.
  • The report says that there is not enough evidence to support retail sales tax as an alternative to VAT and it could potentially be very complex given trade deals and how other jurisdictions would still charge VAT.
  • Carbon taxes are unlikely to form a major part of the long-term tax base for a while and tax strategy in the longer term to be developed with measures introduced to incentivise behavioural change. 
  • Stamp Duty Land Tax is seen as economically inefficient and damages the economy and should be treated as a priority area for review and set levels to encourage homeownership. Although a new rate, of two per cent above the existing rate, must be now applied to all purchases of residential property in England and Northern Ireland by those not resident in the UK from 1 April. 
  • The report says the council tax is an outdated system with bandings that are in some cases 30 years old and should be reformed in partnership with the relevant committees for housing and communities.
  • The committee recommended a review of business rates takes place to reform the functioning and application of business rates.

It also remains to be seen how quickly the UK economy bounces back from the pandemic. Current opinion would suggest that the general public’s morale is low, and any increases in the major taxes, particularly those ‘protected’ by the triple lock would not be a popular choice.   For help arranging your affairs in a tax-efficient manner, please speak to our team today.

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