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Future of Tax

The future of tax after COVID-19

Author: ICAEW Insights

Published: 09 Mar 2022

Tax covid-19 main

The past two years have seen significant changes in the way we live and work and there is a consensus that we won’t go back to how it was before. What will this mean for taxation policy?

As COVID-19 moves from a pandemic that has shattered whole economies and imposed severe fiscal strain to an endemic virus that will be with us for years to come, it’s now clear that life will not be the same, even after pandemic-related restrictions are lifted.

There will be major implications for taxation policy as the economy evolves, while at the same time producing new – and some old – ideas for reforming tax and welfare systems.

The pandemic has accelerated trends that had already been present, such as the technological developments that have made virtual working possible. While a few office-based firms are insisting on a full return to the office, a hybrid model that combines office and homeworking appears to be emerging as the most common. Business travel is unlikely to return to pre-pandemic levels and online shopping is likely to continue to increase.

The market is already responding. In city centres with lower footfall, landlords are reducing business rents, while businesses redesign their offices around collaboration and acquire technology that makes virtual working easier. Pandemic-induced innovations such as restaurant ‘cook-at-home’ meals are likely to continue, while warehousing space and delivery networks expand to meet demand.

Governments are also adapting, albeit at a customary slower pace, now that the immediate emergency is over. They are actively debating how to fund and operate public transport systems with fewer daily commuters, how to tax online sales, how to accelerate the roll-out of faster internet connections to rural communities, and how to address levels of inflation not seen for decades. 

Finance ministries and tax authorities are not immune from needing to respond and not just because of the need to get public finances back under control. The pandemic has brought to the fore existing problems in the tax system that policymakers have struggled to address, such as differences in how online and offline – or “bricks-and-mortar” – businesses are taxed or between salaried employees and freelance workers. They also need to think through how to tax domestic property in a world where many more homes are now also offices, and how to treat those working from home in the tax system.

At the same time, ideas such as that of a universal basic income or greater taxation of wealth are gaining currency, each with significant implications for taxation policy and the design of the tax system. For example, the Welsh government has recently announced a £1600-a-month scheme for care leavers.

Shocks as a driver of tax innovation

Professor Andy Lymer of Aston Business School has studied the history and development of tax systems. He says: “There really are points in economic and social history where you get opportunities to do things that there might not normally be the social or political will to do. I tell my students that wars are terrible for everything except the opportunity for effective tax reform, because you get the opportunity to think outside the box for a change – as a society and a government. Disasters create that opportunity.” 

Stuart Adam at the Institute of Fiscal Studies (IFS) agrees. This, he says, “feels like a time when we can look at the way we tax work, the way we tax climate-related activities, how the indirect tax system treats consumption of different goods and services. We can examine how the tax system looks at capital activities including savings, investment and wealth. All of those things could do with some reform. 

“You want a tax system that’s robust enough to deal with different things happening in the economy. There are longstanding flaws in the tax system that have become more problematic as the economy has changed. For example, there is the fact that we tax self-employed people at lower rates than those employed, which has become a bigger issue because more people are self-employed.” 

According to the IFS, under current government plans, tax revenue is forecast to rise to 35% of GDP by 2025/26. So in some situations, fiscal policy can act as a scalpel, designed to do things precisely and sometimes quickly. Indeed, the fiscal response to the pandemic was delivered at speed and has so far proved reasonably successful, albeit an ongoing consequence of this pace has been a significant level of fraud and abuse to the system.

But at other times, bad tax policy can make things worse than they were to start with. “You have to beware of using it too much, making it too complex and generating too many side effects,” says Adam. “You also want to avoid constant tinkering with it.”

A fair share from business?

In the past 15 years, the global financial crisis and its aftermath has brought the issue of corporate tax planning and governance to the forefront of the debate over government action, business behaviour, stakeholder demands and the role of business in society. 

This concern was eloquently summed up by Dutch economist and historian Rutger Bregman during a panel discussion at Davos in 2019, when he expressed bafflement at the absence of the tax avoidance debate from the agenda that put social justice and better corporate behaviour at its heart. “It feels like I’m at a firefighters’ conference and no one’s allowed to speak about water,” he told the visibly uncomfortable audience of senior executives. Recent evidence is that this is changing, and in November 2021, the OECD brokered an agreement between countries constituting 90% of the world economy to set a minimum corporate tax rate, as 137 countries and jurisdictions signed up to a new two-pillar plan to reform international taxation rules. This should ensure that multinational enterprises pay a fair share of tax wherever they operate. How this works in practice remains to be seen but, both nationally and internationally, there is change focused on preventing tax avoidance.

George Dibb is Head of the Centre for Economic Justice at the Institute for Public Policy Research. In his view, tax and public spending policy at the highest level does have the potential to reshape society, but important questions must be asked, such as how do we deal with investment in business for instance?

“Should we be thinking about where [businesses are] physically located to try and boost high streets or boost places outside the South East, for instance? It would probably be complicated to do so, but not impossible.” This is a particularly challenging area for taxation policy as it is not clear how the tax system can be used effectively to tackle inequality in this way. The IFS has suggested how targeting economic activity outside London and the South East may be counterproductive given that despite being the most prosperous region in the UK, Greater London is also the area with the greatest social deprivation. 

Many questions remain about how the government will stimulate investment. For example, will we see more programmes along the line of freeports, the latest HM Treasury programme to stimulate investment, employment and innovation around some of the UK’s busiest ports and other transport hubs, many of which are in areas of social deprivation?

“The biggest challenge to driving inward investment, innovation and regional regeneration to level up is that regions must develop a USP on a global and national scale,” says Tim Morris, CEO at UK Major Ports Group. “So freeports are not at odds with that agenda and there’s no involvement of corporate tax. The tax incentives are very much around stimulating investment through things like capital allowances. We’re not asking for that. We are asking for tax measures that stimulate investment and that feels appropriate and within the direction of travel regarding companies paying their fair share.”

Testing the limits

Tom Pope, Deputy Chief Economist at the Institute for Government, is sceptical of the effectiveness of tax policy as a stimulant for future investment in innovation: “Some of the discount that we’re giving firms is for innovation that would have happened anyway, and we’re sort of accepting that dead weight. We think there are other positives involved, but I think we should be careful in general about the tax system trying to do too much there. 

“I think it will play some role in incentivising innovation and it’s right that it does that, but I don’t think that it’s going to end up being the primary driving role.”

In Pope’s view, there are many levers to pull outside the tax system when it comes to addressing lagging productivity rates and sluggish innovation. “For example, investing in STEM education and building the skills of the workforce would do more for encouraging that innovation and making the UK an attractive place to innovate than a modest tax advantage.”

However, the direction of travel is clear and more change is coming. Governments across the world need to raise revenue, and increasing the tax take from multinationals presents a politically popular solution. Meanwhile, the wider conversation around how nations will pay for the debt created by COVID-19 has yet to begin.

Although some of these shifts in tax policy were in train before COVID-19 upended the world, there’s no question that the pandemic has focused attention on the role of tax in funding society’s needs.