Change is inevitable – some thoughts on possible future tax policy

As part of the Stellar Partner Services programme, we are pleased to bring you the first guest article created with our partner network.

Tom Moore is a Chartered Tax Adviser and the Founder and Director of Westbridge Group, which support a number of our Partner Services from Business Structures and Transactions to Tax Advice for High-Net-Worth Individuals.

Tom has over 35 years’ experience in professional services, most of which as partner or director of one of the top UK accountancy firms.

Change is inevitable

With public finances being stretched further than ever before as a consequence of the pandemic, and more spending expected to be required; the question being asked ever louder is how can such spending be sustained?

Add to that deficit the Government’s manifesto commitments to slow borrowing and limit taxation, plus additional employment support announced in September last year, and the Treasury’s fiscal conundrum is daunting.

The Government has pledged not to raise the rate of Income Tax, VAT or National Insurance during their current term in office. If this commitment is honoured, the range of possible policy changes is narrow.

It is worth noting, while the Government may have pledged not to change rates, this does not necessarily prevent other changes in these areas. A reduction or removal of some reliefs may increase the tax take, while leaving the rate unaffected. Extension of the scope of VAT is another example.

However, Ministers are likely to be wary of repeating past mistakes. Reforms of self-employed National Insurance Contributions (like those proposed by Theresa May in 2017) might be widely regarded by commentators as likely. However ministers, already stung by reaction to their previous attempt at reform, are likely to tread with caution over this particular minefield. If recent rumours are true, it is more likely that any policy changes will focus on Capital Gains Tax and/or Corporation Tax.

Changes to existing tax rates could be on the horizon

Capital Gains Tax rates are the lowest they have been since the tax was introduced in 1965, and it is not the first time that rates have been under scrutiny. In recent times there have been calls to narrow the gap between tax rates suffered by the middle-ranking employed and those with capital wealth, who benefit from lower tax rates on investment returns. A policy proposal along these lines featured in Labour’s 2019 election manifesto.

Similarly, the Institute for Public Policy Research (“IPPR”) proposed in their report Just tax: Reforming the taxation of income from wealth and work a suggestion for equalising rates of tax on income and gains. It stated, “If everyone who makes ‘capital gains’ paid the same tax rate as earnings from work, it could generate at least £90 billion in extra revenue over five years…”. While taxing capital gains at that same rates as apply to income may appear extreme, it was only in 1998 that (then) Chancellor Gordon Brown announced the major reform that applied a separate rate of tax to capital gains with the introduction of Taper Relief (which included the now familiar lowest rate of 10%).

In July last year, Rishi Sunak instructed the Office for Tax Simplification (“OTS”) to review Capital Gains Tax. In his letter he stated, “This review should identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.”. He might be expected to withhold making any significant change to the Capital Gains Tax regime until he has the benefit of any insights this review may deliver; but it seems clear that Capital Gains Tax is being considered seriously for some form of policy change.

Like Capital Gains Tax, Corporation Tax is also at its lowest ever rate and, if not for a late reversal, it would have been cut further to 17%. The rumours are that Rishi Sunak is considering increasing this to 24%, which, it is estimated, could raise up to £17bn by 2023/24. Assuming the estimates to be right, the boost to revenue makes this a tempting target.

As always, however, the Chancellor and his Treasury colleagues must balance that against the disincentivising impact of such a change on businesses already reeling from the impact of the pandemic. This might point to a return of different marginal rates for smaller and larger companies with larger, more profitable companies bearing the brunt, based on the rationale that they (or at least some them), will have been cushioned from the worst of the economic fallout.

Could we also see the introduction of new taxes?

Predictions should not ignore international comparisons. According to The Tax Foundation report, the average rate of Corporation Tax across the 27 EU members in 2020 was 21.9% (this includes the UK). Many companies (and the same is true of many wealthy individuals) may be fiscally mobile and may have a choice of jurisdiction. International competition has been a driver of tax policy for many OECD nations. Higher rates (compared with those levied by other developed nations) may result in bigger tax yields in the short term but could erode the country’s tax base over the longer term.

In additional to the possibility of changes to existing taxes, the likelihood of one or more new taxes is on the rise. Perhaps the most widely tipped candidate is a wealth tax, along the lines of those that exist in a number of countries in Europe and the Americas. Generally, wealth-based taxes account for a very small percentage of national tax take and may have a disproportionately negative effect. It seems likely that this will not be the Chancellor’s first choice.

The timing of any changes in tax policy is another area for uncertainty. The delayed Budget is scheduled for 3rd March – but even that date is likely to fall within a period when severe restrictions will remain in place. It is questionable whether any major change can be justified at a point when UK plc, far from being in recovery, will be barely off life-support.

By Tom Moore of WestBridge Group

Join us for our upcoming series of tax clinics

We are pleased to be hosting a series of tax clinics in conjunction with our partners at WestBridge Group.

Hosted by Stellar, with expertise provided by Tom Moore, these clinics will provide a forum for advisers to discuss tax related issues and gain insight into the more complicated areas of inheritance tax and estate planning.

The first of these clinics is taking place on Wednesday, 17th February and will focus on strategies involving Business Relief Strategies.

Further clinics are also taking place in March and April, covering the topics of Using a Personal Trading Company Structure and Getting Clever with Business Relief respectively.

Click the link below to find out more information and register your place.

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