Looking ahead – The future of tax
As part of our Looking ahead series, Andy Wallis looks to how COVID-19 might change the future of tax.
The cost of government support to individuals and the businesses affected by COVID-19 in the UK has already topped £100bn and will continue to rise. It is unlikely that we will ever know the exact figure, but we do know that government will, at some point, need to put in place measures to boost its coffers. So what might the future of tax look like?
Tax is complex, detailed and challenging. In looking at how tax might change it would be easy to fall into the trap of examining individual taxes and how they might be tweaked to raise revenues. That is a discussion that will unfold in the coming months and possibly years as changes to the tax system are announced through the everyday course of politics.
There are, I believe, some larger and more fundamental questions that government should now look to address with regards our relationship with tax. And as we begin to emerge from our COVID-19 lockdown now is the right time for government to start this national conversation.
There are three areas that should be explored: fairness, transparency and personal tax.
Income tax, national insurance and VAT are the three largest contributors to government coffers and affect each of us in the UK. Changes to any one of these three would generate significant additional revenues for government. A universal 1% increase in income tax rates could raise revenues of c.£6-7bn per annum. It is worth noting that the return of the 50% tax rate for additional rate payers is not likely to raise significant revenue and the resultant behavioural change could actually lead to a reduction.
COVID-19 has shown society the importance and value of the NHS with overwhelming support for our carers. But it has also shown its weaknesses, particularly with regards social care. A better funded NHS and social care system is needed.
Government could use COVID-19 to raise taxes on income to better and more directly fund the NHS and social care.
It is also important to keep in mind the austerity measures introduced by government after the 2008 crash. There will be little appetite to see government explore that option.
Any tax increases would be difficult for government, particularly the Conservative one now in office. It would mean moving away from its election manifesto promises made at the end of 2019. But I believe there is a window where there can be an open, frank and honest conversation with the nation. That conversation needs to be underpinned by the next two themes – fairness and transparency.
Fairness and transparency
The tax regime in the UK is complex and that complexity helps to hide transparency. Without transparency it is all too easy to believe that it is an unfair system, where large corporates and high earners can avoid paying what many might think is due.
National insurance was originally a tax designed as a safety net in terms of health and employment but has been increasingly blurred with income tax. The different treatment for employees and the self-employed has also led to perceived unfairness. There have been many discussions about the merging of income tax and national insurance, but it has proven too difficult and complex. It may be that there is renewed motivation for an overhaul of income tax and national insurance in order to improve fairness and transparency on how income tax and national insurance contributions are channelled to health and social care.
It may also be the case that VAT increases are likely in the medium to longer term once the economy has bounced back. Whilst those spending more incur more, any rise would still impact those on lower incomes. A VAT increase is traditionally unpopular for this reason, perhaps it may be more palatable now, especially if targeted at more luxurious goods and services.
COVID-19 has led Government into radical programmes of support to businesses and individuals. It is likely to lead to further radical thinking on tax.
We are hosting a series of practical webinars helping businesses to look ahead and plan for a post COVID-19 future. View topics and details of our ‘Looking ahead’ webinars or to register your place here.
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