The Covid pandemic is the biggest challenge facing the world economy for a generation. But thankfully the tide has turned. Earlier this month the World Health Organisation confirmed that the tools are in place to defeat the pandemic within a matter of months. So, it’s a sensible time to consider what the tax world will look like post-pandemic. Peter Webb, our Head of Tax Advisory, shares his thoughts.
Governments around the world have incurred massive debts in their efforts to fight the pandemic and alleviate the economic impact for both individuals and businesses. They now have three options to help them begin to reduce the Coronavirus debt:
- Cut back on government spending
- Increase taxes
- Stimulate economic growth so that the ratio of debt to income reduces
What option will the UK take?
Chancellor Rishi Sunak has rejected a return to the austerity measures introduced following the 2008 global financial crisis. So, in the short term at least, we aren’t expecting the UK government to significantly reduce spending.
When it comes to increasing taxes it’s a different story. In his March Budget, Mr Sunak kept to the Conservative manifesto pledge not to raise Income Tax, National Insurance or VAT. But we did see a dramatic increase to Corporation Tax announced (the first rise in 47 years) along with tax allowance freezes and clear signposts for more changes. The Chancellor also confirmed that “Tax rises were…needed to help repair the public finances”. It appears that future increases are inevitable.
Where will we see tax increases?
In January 2021 the self-appointed ‘Wealth Tax Commission” issued a report recommending the introduction of a Wealth Tax in the UK. The recommendation was firmly rejected by Rishi Sunak. With such a clear dismissal it seems a very remote possibility that the UK will join the small number of countries that have a Wealth Tax.
Fuel duty has been frozen since 2010 and has enormous potential, not only to raise revenue, but to change behaviour to promote greener transport solutions. With that in mind it seems likely that this is an area to watch.
The UK property sector has enjoyed an incredible period, with sales and house prices surging. This has certainly been boosted in England and Wales with Stamp Duty cuts, although these will return to pre-Covid levels in September 2021. A new levy for non-UK residents was also recently introduced. So, a buoyant housing market may be a soft target for further tax rises.
A simple way to increase taxes is for Rishi Sunak to freeze allowances and tax bands. Inflation will then effectively erode the value of those allowances and a higher percentage of your income will be paid to the government in tax. This is the strategy the Chancellor adopted in his recent Budget statement. As a result, the amount of Income Tax, Capital Gains Tax and Inheritance Tax paid will increase over the next five years without the Government needing to raise the headline rates of those taxes.
Another area to keep an eye on is Corporation Tax, which is increasing from 19% to 25% by 2023. This announcement did come as a surprise; a raise to 23% was the maximum expected. The Chancellor was insistent that a rate of 25% is still the lowest in the G7 group of nations, so it’s possible there are further raises to come.
The Inheritance Tax regime is also long overdue an overhaul. Recent reports by an influential committee of MPs and the Office of Tax Simplification recommended simplifying this complex tax. A straightforward option would be to get rid of or restrict the reliefs for assets used in a business and when making direct gifts to individuals during your lifetime. Another option would be to remove the tax relief which applies to any uplift in the value of inherited assets. Abolishing it could increase the amount of Capital Gains Tax charged to beneficiaries.
The Office of Tax Simplification were asked by the Government to consider reforms needed to Capital Gains Tax (CGT). The recommendations included increasing the tax from the current record lows of 10% to 28% to bring them in line with Income Tax rates of 20% to 45%. They also suggested reducing the CGT annual exemption from the current level of £12,300 to £2,000.
Finally, there’s no doubt that tax reforms have a significant role to play when it comes to helping stimulate the economy. This was seen in the recent Budget statement which saw a ‘super deduction’ for companies announced, extending limits for offsetting losses and the creation of tax advantaged freeports.
It’s generally accepted that in the post-Covid tax landscape, many of us will be paying more tax. But against this backdrop it’s clear that there will be specific and targeted tax reliefs to help stimulate a recovering economy.
To discuss any aspect of your tax planning please contact your nearest office.