Post-pandemic fallout could see government grasping for tax reforms, but questions remain over how to create a system that is fair, simple and certain, writes Philip Smith
It was not even a thinly-veiled threat when Chancellor Rishi Sunak revealed his financial support package for the self employed. On the whole, it was a generous package, even though some might fall through the cracks, notably directors of personal services companies and the recently self employed. But it was clear that Sunak would be looking for something in return.
Focusing on how different forms of employment created varying tax liabilities, Sunak said: ‘If we all want to benefit equally from state support, we must all pay in equally in the future.’
So, the scene has now been set for reform, but what should be reformed, and how should it be reformed?
The House of Lords has now published a review of the IR35 rules for the private sector. In the report from the House of Lords Economic Affairs Finance Bill Sub-Committee, ‘Off-payroll working: treating people fairly’, it was made clear that the committee believes the government needs to consider the damage that will be done to the diversity and flexibility of the labour market if it goes ahead with IR35 proposals as currently designed.
The government has already pushed back the compulsory starting date for the private sector reforms to IR35 by a year, but as the House of Lords said: ‘The IR35 rules - the government’s framework to tackle tax avoidance by those in ‘disguised employment’ - have never worked satisfactorily, throughout the whole of their 20-year history. We therefore conclude that this framework is flawed.’
The Institute for Government takes this a step further. In its report on overcoming the barriers to tax reform, published last month, the institute said: ‘The UK tax system needs substantial reform, but recent governments have shied away from it because of public resistance. That needs to change – and government should seize the chance to do so.
‘The coronavirus epidemic will accentuate existing problems – but may also bring public support for tax reform, offering government a rare opportunity to make sweeping changes.’
The Institute for Government (IfG) believes there is not only a long-standing need for reform, but that there is now a unique opportunity to implement that reform.
‘The aftermath of this crisis could provide an opportunity to address longstanding problems and improve the way in which we raise tax – and indeed, to move to a higher tax system if that is indicated by public desire.
‘But that will require major tax reform that previous governments have struggled to deliver.’
The government’s economic rescue package will add many billions of pounds to public debt, which will have to be financed. It may create public desire for a permanently larger role for the state – with higher spending to increase resilience in public services and a more generous welfare system. But, the IfG argues, this will not happen without a wholesale reform of the tax system.
George Bull, tax partner at RSM agrees that there is now a window of opportunity to tackle tax reform.
George Bull said: ‘With growing recognition that economic life will not be the same after coronavirus, the tax system will have an important part to play in the recovery and in the transition to the new normal. Tax reform will be required. With the goodwill of the people in evidence, now is the time to sort out not only NHS funding but also the future shape of the tax system.
‘As the first wave of coronavirus appears to be receding, we should expect three more things of the tax system: it should be supportive of growth, it should be administratively straightforward, and it should be manageable by HMRC.’
Calls for reform of the tax system are not new. Back in December, the IfG set out recommendations on tax reform. In its report, ‘How to be a tax-reforming chancellor’, the IfG recommends the chancellor should:
- set out a clear vision for the tax system to give taxpayers more clarity, help explain to the public why sometimes contentious changes are needed and help resist the pressure to tinker;
- seek advice, look at the evidence and take implementation concerns seriously. The tax system is complicated and few people – even experienced professional advisers – have a good sense of how the whole system works in practice;
- communicate more with the public and media to tackle myths and promote discussion of the problems and the need for reform;
- involve other Cabinet ministers in the development of tax policy – particularly where it interacts with other policies – to avoid unintended consequences and ensure that tax is the right tool to use;
- build support for contentious changes by making a persuasive case to the public for change, and packaging reforms together to show the benefits that are made possible by unpopular changes; and
- carefully consider whether the benefits of acting early might be outweighed by other costs. Previous chancellors have announced major tax changes early on in the life of a new Parliament to take advantage of the government’s political capital, to give time for resentment to fade and benefits to be appreciated. But acting quickly may allow too little time for consultation or explanation.
And in a recent blog, ICAEW tax technical lead Anita Monteith, observes that the institute’s longstanding 10 tenets for good policy in the tax system apply now more than ever.
These include certainty and simplicity, ease of calculation and collection, proper consultation, regular reviews, and a system that is fair, reasonable and competitive.
As Monteith said: ‘These principles have never been more important, as never before has there been a clearer call to action for tax change.’