Tax reform needed to address unsustainable public finances

The influential Treasury Committee is calling for the Chancellor to set out a long-term tax strategy to address the hole in public finances following the pandemic, while reforming the tax status of all types of worker should be a priority

In its latest report, Tax after Coronavirus, the Committee sets out a number of recommendations including warnings on not rushing to raise taxes while businesses prepare to recover from the fallout from three lockdowns, with the latest only starting to ease in mid April when non-essential retail can re-open.

Now is not the time for tax rises or fiscal consolidation, but significant fiscal measures, including revenue raising, will probably be needed in the future, MPs warned, speaking during a CIOT hosted webinar.

Mel Stride, chair of the Treasury Committee, said that the government is constrained by its tax lock manifesto commitment which will come under significant pressure.

‘Income tax, NICs and VAT account for two thirds of tax raised. There is a preference for income tax changes with reports of freezing thresholds. This is something to look out for further down the line,’ Stride said.

However, the triple lock excludes tax thresholds, which could be one area for potential tax rises.

The commitment not to increase the rate of income tax does not preclude it from adjusting income tax thresholds. The Committee noted that the government could raise revenue simply by freezing income tax thresholds, and that such a change would cause minimum economic distortion. Increases in national insurance contributions may be especially difficult given the probable impact on jobs, at a time when increasing employment is likely to remain an economic priority.

Committee member Angela Guest said: ‘Despite the arguments there will be from particular political view points we came to a spine of agreement. Often the annual budget process is how you get the books balanced and quite often the more you do that on an annual basis the more you move away from measures that have a holistic approach. That is why the government needs to set out its tax strategy.

‘The economy is 10% less large than a year ago and there is a ballooning deficit, and some other structural things to consider, as well as demographic issues. The tax lock raises 67% of revenue so it does not give us much leeway to look at tax measures. There is a great deal of uncertainty around.’

Corporation tax

A moderate increase in corporation tax could raise revenue without damaging growth, the report suggested.

‘On corporation tax, the Treasury has to be careful to judge any increases against other options, a moderate increase in corporation tax would not be problematic. We believe there is quite a lot of headroom for a moderate increase, this would raise around £3bn for every 1% increase. We could see rates coming up over time by 3% (to 22%). But we do stress this should be coupled with other investment stimulus, such as clawback and an increase in the annual investment allowance.’

A measure which would be welcomed by business and is supported by the Treasury Committee is the introduction of a temporary three-year loss carry-back for trading losses and increase investment incentives for business.

This would allow losses made during the pandemic to be set against up to three previous profitable years, generating a tax refund. It would help those businesses which have shown that they were previously profitable recover from losses imposed by the impact of the pandemic.

Janine Juggins, EVP global tax & treasury at Unilever, said: ‘It is encouraging to see the focus in the report on a more sustainable tax system. In particular there may be space to take a longer term view, and the emphasis on not raising taxes too quickly.

‘Businesses would welcome a tax strategy and business tax roadmap, which is even more important if corporation tax rates increase.

‘We would also like to see the consultation process improved, which would help to see a more stable approach to tax with more involvement from businesses.’

Another widely trailed tax option is a windfall tax on businesses which have benefited from the pandemic. A one-off wealth tax is also under consideration, which would be a 1% tax on income and assets for those with estates worth over £500,000, but there is concern on the committee as to whether windfall taxes would be seen as a one-off and MPs also highlighted the risk of retrospective collection. The case for a one-off wealth tax is strong but there need to be measures in place to deter avoidance action.

One of the hot topics for reform is the tax status of the various types of workers, the so-called ‘three-person problem’. Although the Treasury Committee did not set out specific reform measures, it stressed that this was one of the most important issues for levelling out the tax burden.

‘The current system is confused, unfair and unsustainable. The review should incorporate the benefits which accrue upon payment of NICs and other taxes as well as the level, the incentives, and the interaction of such taxes. It should look as far as is possible to eliminate the so-called “three-person problem” altogether,’ the report stated.

Stride said: ‘There is an urgent need to look at employment status - the employed, self employed and those working for their own companies. This has started with the reform of IR35. But the changing work landscape means that structural reform is needed urgently.’

Treasury Committee report, Tax after Coronavirus

Sara White |Editor, Accountancy Daily, published by Croner-i

Sara White is editor of Accountancy Daily, published by Croner-i, and in...

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