On 3 March, Chancellor Rishi Sunak will deliver his Spring Budget. Following the postponement of the 2020 Autumn Budget amid the second wave of Covid-19, there is significant expectation that he will present a route towards both rebooting the economy and replenishing public finances depleted in the fight against the pandemic.
With the Treasury Committee examining ‘Tax after Coronavirus’ and the Office for Tax Simplification reviewing issues ranging from the use third-party data to capital gains tax, as well as recent calls for both reformation of Inheritance Tax and the introduction of a ‘wealth tax’, tax is currently at the heart of public debate and tax policy will clearly play a key role in the ongoing recovery from Covid-19.
Zena Hanks, a partner in the private wealth team at Saffery Champness, offers her perspective on what will be on the Chancellor’s agenda and the factors which will drive tax policy in ‘the new normal’. She argues that when post-pandemic tax reforms are instated (whether that is in the Spring Budget or at a future point), the focus will be on three key areas: productivity and growth, efficiency of tax collection and a rebalancing of the tax system.
Zena Hanks comments:
“The fundamental job the Chancellor has right now is to navigate the economy through the Covid-19 storm. Clearly some creative thinking will be needed to address the issue of mounting public debt, and an increased tax take would be significant ballast for an ailing Treasury – but this Budget will likely be steady as she goes, with the Chancellor rightly wary that any wholesale and immediate changes could risk political mutiny or, worse, economic capsize. Many individuals, as well as businesses, are, after all, only just keeping their heads above water.
“The Chancellor may, however, begin to chart a course of reforms, rises and reliefs to steer the economy through the next few years hoping he can skate over any bad news by pushing the impact of any significant changes into the future, by which time they will have become old news.
“If the Chancellor feels the storm clouds are just too dark to countenance any hint of tax increases, however inevitable that eventual reality might be, then he may put off significant reforms altogether. However, he will be treading a political fine line if, say, he delays for 18 months or so at which point the next general election will be looming large and any tax rises will be very difficult to sell.
“Whenever the eventual post-pandemic tax question is answered by the government, the focus will be on three key areas: Productivity and growth, efficiency of tax collection and a rebalancing of the tax system.
Productivity and growth
“While tax rises in some quarters may be on the horizon, a key aspect of the Chancellor’s strategy must be increasing the overall tax take by boosting economic activity – and that may mean the implementation of a targeted system of reliefs.
“With the pandemic causing the loss of so many jobs and opportunities, as well as a revolution in working patterns and some sectors proving more Covid-resilient than others, there will be an ongoing focus on re-training the workforce. The Chancellor may seek to support this through, for instance, apprenticeship tax breaks.
“In keeping with the build back better mantra we may see green tax breaks that encourage investment into innovative and environmentally friendly businesses and initiatives. The Environmental Audit Committee has already called on government to explore areas such as a carbon tax, shifting the tax burden further on to those with a high or harmful environmental impact.
“Similarly, with Brexit potentially giving the government more license to support certain industries and sectors, which would previously have been limited by state aid rules, there could be an expansion of EIS or VCT tax breaks for start-ups which are part of the government’s new normal road map.
“At the same time, a burning economic question of our time is how to breathe life back into the ailing high street and clearly tax and incentives could play a key role here through, for example, a review of business rates, a profit tax on digital businesses to level the retail playing field or even tax breaks for the re-use and repurpose of redundant office space.”
Efficiency of tax collection
“Key to boosting the Treasury’s coffers will also likely be an increased effort to tackle the tax gap.
“With the OTS reviewing the use of third-party data in the automated tracking of tax liabilities, for example, automation and HMRC’s use of data will inevitably expand in scope and complexity. Most businesses are now cashless, or cash reduced, and data flows will provide HMRC added ability to track income streams with the focus on the real time reporting of that information via Making Tax Digital all being key to closing the tax gap. At the same time, we are seeing HMRC be very unforgiving around penalties for incorrect returns, with many enquiries now resulting in 200% penalties. Additional data tracking from multiple sources will further increase HMRC’s confidence in going after perceived non-compliance, while greater reliance on technology will likely support a leaner HMRC which will be operating on stricter resources post-Covid.”
Rebalancing the tax system
“But some tax increases, even if they are one-off increases, are increasingly likely – with heady borrowing levels sitting uneasily with the government and the Conservative back benches.
“One of the defining factors of the economic impact of Covid-19 has been significant pent up spending power and savings by many of those individuals who have been able to continue working. The government will be hoping to turn some of those accrued savings into public revenue. Some of this spending power has been unlocked through the stamp duty holiday which has caused a mini, if temporary, housing market boom. With the Help to Buy scheme being extended until 31 May 2021 it will be interesting to see if the Stamp Duty holiday follows suit.
“The catch will be that many of the key workers who have enabled some semblance of normality to carry on, doctors, nurses, teachers, refuse collection workers to name but a few, are often on comparatively low incomes. Given that income imbalance, any broad spread tax reform, such as a small increase in income tax or a holding back of any increase in the tax-free allowance would, while potentially making sound fiscal sense, be perceived as highly unequitable. There will likely be demand for any tax increases to focus on the top end of the income and gains spectrum. This might be a one-off levy on online or global businesses that have capitalised during the pandemic.
“One idea which has been whispered is whether the government might revisit the idea of war bonds. These have been shown through history to galvanise public support while providing government’s access to much needed capital. The war on Covid may well be seen by many as just cause worth investing in, particularly given the turbulence we have seen in traditional equities markets.
“Simply put, over the next few years the Treasury must nurture the economy back to health and facilitate growth and productivity. It’s to be hoped that the Chancellor delivers a Budget to that effect on 3 March.”