In short, if you are reading this, it is probably you.
The Office for Budget responsibility is maintaining a spreadsheet here of the direct costs of Covid-19. The sheet is incomplete and is already at £104 billion of additional costs to the Treasury, mainly at the moment made up of direct support to business (largely the 25% of employees whose salaries are now being paid by the government). These costs will continue to rise as support to business is extended and firms who have been lent money (£330 billion so far) under cbils and other schemes, go bust. The true costs will be much higher once the impact of lost tax flows through to the figures, with forecasts of £350 billion of taxable productivity being lost. It is therefore likely that we are heading for national debt of 120% of GDP which is unlike anything we have seen since WW2. Then the government inflated its way out of the problem but this looks harder in the current inflationary environment and so we will be left with a choice of cuts or taxes.
Unfortunately the cuts have already happened.
We’ve made it clear that a Conservative government would spend less than Labour. We’re not frightened of their idiotic chants about “cuts”.David Cameron to Conference 26th April 2020
We have been told for the last decade that the country is far too indebted and needs to live within its means. This was used to justify cuts of circa £40 billion, mainly impacting the poor, disabled and vulnerable. The money clawed back through austerity over ten years will be dwarfed by the huge amounts now being spent by essentially the same administration.
British compassion for those who are suffering has been replaced by a punitive, mean-spirited and callous approach…UN Poverty Envoy, Philip Alston 2018
This leaves the government with one remaining option, which is to increase taxes. We have been run over the last 25 years by all three main political parties in some form or other and none has done anything other than tinker with taxation. The last real tax rise was under Gordon Brown when a rise in National Insurance was used to give money to the NHS but he was the same chancellor that reduced the basic rate of income tax from 23% to 22% in 1999 in a pointless and costly giveaway. One reason for this is the public’s general aversion to paying tax (although there is a majority in favour of ‘a duty to contribute to public services’), witness the uproar created by Osbourne’s pasty tax, protests in 2000 over fuel duty or the fact that those surveyed felt that inheritance tax is paid by 25% of estates when the true figure is 4%.
Ironically despite his flaws, the current Prime Minister might be the right person to ‘sell’ tax rises to the public. He is early in his 5-year term, has a large majority, has a very obvious need to do it, an enemy in Covid19 that we all have in common and a hero in the space of the publicly funded NHS. In addition his bluster/lack of attention to detail seems to play well with a public not known for its attention span. He will need to construct a package of tax reform though, rather than annual tweaks, if he is to allow his chancellor to raise the revenue needed.
If you all want to benefit equally from state support you must all pay in equally in the future.Chancellor Rishi Sunak 25th March 2020
The problem he and Rishi Sunak face is that the taxable wealth is largely in the hands of the older, retired section of the population that also tend to turn out and vote (80% versus 50% for the youth vote). Pensioners in the last 20 years have done better than the average person in the population possibly for this very reason. The fact that our population is ageing is also causing a rapidly increasing cost to the country in the form of health and social care budgets. In addition to this, income has been the focus of taxation in recent years and not capital, which these people tend to hold more of. So there is a tricky political and economic balance to be struck.
So what are the options for taxation?
- Taking Amazon as an easy example, they have both avoided paying UK tax themselves and by destroying the high street have reduced the UK taxes we can collect on high street businesses. It is difficult to tax their UK profits because they shift them overseas. A recent proposal by the UK government to introduce a digital services tax lead to a threat of retaliation by the US (where most of the big tech firms are based) and our defense against this sort of international bullying will inevitably be weaker once we are no longer in Europe. The OECD are doing some good work in this area but will likely be hampered by ‘begger my neighbour’ tactics of member countries.
- Corporation taxes could increase on UK businesses who can’t shift profits overseas and the headline rate is much lower at 19% than it used to be at 25%-30% in the dotcom boom. The problem here is that current losses stemming from the lockdown period, will be carried forward to offset tax for a few years and even after this corporates might still be too financially vulnerable to tax too highly.
- A trick has already been missed here by Rishi Sunak who could have made the Covid19 business support contingent on good corporate behaviour or even have gone as far as the Danish and refused to bail out companies avoiding tax.
- If business is largely too mobile to pin down long enough to tax, property is the opposite. Taxation is a trade off between potential tax take and ease of collection. Property is the hardest asset to move or hide and therefore is easy and makes up a huge amount of the country’s wealth and is therefore potentially lucrative.
- Taxation of second home ownership has already increased with reductions in mortgage interest relief, higher rates of CGT, increases in stamp duty and ATED charges. The government could go further in this area with further increases in tax or reductions in relief. This would be less of a vote loser than taxation of the main residence. Stamp Duty is probably an example where further increases in tax might lead to a reduction in transactions, which is counter-productive.
- Main residence tax could increase in the form of increases to council tax to try to claw back the 60% odd reductions in local authority funding, albeit this doesn’t help the central government budgets. The most obvious change would be a revaluation of all properties to bring them up to date and push homes up the council tax letter bands. This might lead to a lot of challenges. The UK is unusual in having such low rates of local taxation and this might be more acceptable (poll tax riots aside) to the population than a tax on property.
- An annual mansion tax on properties over a certain value would be a good revenue raiser but possibly easier for a Labour or Liberal government to sell to its voter base than a Conservative one.
- Income tax
- The headline rates of 20% and 40% income tax are relatively easy to understand and it is likely to be political suicide to change either. This hilarious Question Time clip is worth a watch to see a particularly ill informed member of the public claiming that his salary of £80k was the ‘average’ and therefore it was unfair of Labour to target him in its manifesto. It also gives you a sense of what politicians are up against, when different panel members repeatedly tell him what the average is but he won’t accept it because he feels in the right.
- The more complex side of income taxation is National Insurance which used to pay for state benefits but has morphed into general taxation of income. Politicians like to play with NI rates because it is generally less understood than income tax. A merging of NI with income tax would make a lot of sense were it not for the fact that it would make it transparent just how much income is taxed.
- Income tax relief has grown over the years, mainly through the lobbying of interest groups. It is not entirely clear that the granting of these reliefs has boosted sectors of the economy in any meaningful way. It has, however, been jolly useful to tax planners such as us and our wealthy clients so we might have reached the end of the road with some of these.
- All governments since 1999 have been increasing the tax-free thresholds with the aim of reducing tax for the lowest paid. This has cost £10-15 billion alone in respect of income tax and might have done some good. It is, however, important if taxation is to be sold as a public good that pays for important public services then everyone has to feel some buy in. It has also lead to complications in the tax system as counter-measures have been introduced to make sure that higher earners don’t also benefit from rising nil rate thresholds.
- Self-employment might come under scrutiny as this status is generally taxed more lightly but the self-employed have still demanded the same protections from Covid19 as everyone else. Reform in this area was stymied under Philip Hammond but might come up again.
- Capital Gains Tax
- There is big potential reform in this area coming. CGT has always been historically linked to income tax rates but is currently charged at 10% and 20% (apart from property which is 18% and 28%) rather than the 20% and 40% main rates of income tax. This change was introduced by Gordon Brown when chancellor (don’t worry he conformed to type and sneakily removed indexation allowance and taper relief on gains at the same time) and has lead to a positon where those benefiting from capital growth have paid less tax than those benefiting from income growth. When we consider that incomes have stagnated over the last decade whereas capital has boomed (despite recent setbacks) this looks unsustainable.
- Entrepreneurs relief taxes capital gains at 10% when a qualifying business is sold and was another Gordon Brown invention. It has already been trailed that this might be removed.
- Inheritance tax
- George Osbourne’s introduction of the main residence nil rate band now looks like a silly move as it greatly increased complexity, reduced the tax take slightly and was mainly about scoring political points. A simplication of inheritance tax is long overdue and the Office for Tax Simplication has already published some sensible proposals.
- Simplification of the rules around property and a tightening of agricultural and business reliefs to stop abuse are possibilities but might effect Conservative MPs and Peers directly.
- The most effective measure in this area would be to remove or reduce some existing reliefs and to not increase the nil rate band thereby catching more estates each year.
- There are some issues here that the coalition government nearly addressed. A clear anomaly is the cost of providing higher rate tax relief on contributions. Tax relief on pensions overall costs the government £40 billion per year with a large amount of this relating to higher rate taxpayers. This seems politically unsustainable but would need to go hand in hand with further simplifcation of the current rules. A removal of the 60% (£100k plus) and 45% (£150k plus) income bands might simplify and compensate somewhat.
- The annual allowance has caused multiple problems not least to senior NHS staff causing many to retire at possibly the worst time. A removal of the Annual Allowance, increases in the eligibility to Auto-Enrolment and sorting out of net pay arrangements for lower earners, combined with a reduction in relief to higher rate taxpayers, would save money and achieve much needed improvement to pensions.
- Removal of the tax free cash from pensions has long been discussed but would be hard to implement as it would create a two-tier pension system favouring those who had already drawn benefits.
- Targeted taxes
- These can work as we saw with Labour and the Coalition’s introduction of a University tax or ‘fees’ as it was sold to the public. There was some resistance and the Liberal Democrats have never really recovered from it but the move is still in place today.
- When airlines first started out, the UK government gave them a tax holiday on aircraft fuel duty but this was to be the never-ending tax holiday. It has remained a ridiculous tax break for one of our most polluting industries and always looked unsustainable. Given the parlous state of most airlines, this particular tax reform is unlikely to fly anytime soon.
- Following the 2000 road vehicle fuel duty was frozen in 2011 and has remained frozen ever since. This represents a year on year tax cut for motorists as the price of everything else rises. The cost of this was £6 billion.
- Climate change has not unfortunately gone away whilst out attention has been on Covid19, with the resultant short-term reductions in emissions making no real contribution to the long-term picture. If we are to move to net zero in the UK by 2050 (which still leads to 1.5 degrees of warming) then people will need to be incentivised to change behaviour and a green tax package as a part of wider reforms would be a good way of achieving this and raising some further short-term revenue.
If you have made it this far and feel that this blog post didn’t contain enough detail, we would highly recommend the very readable ‘Overcoming the barriers to tax reform’ report from the Institute for Government. In this report they propose an independent commission to analyse tax reform which might take the politics out of this tricky area and ensure that our desperately needed public services are funded properly in the future.