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Better ways to tax: UK in the spotlight

Author: ICAEW Insights

Published: 27 Nov 2020

The letters 'UK' on a green background

The pandemic has presented governments with the opportunity to reform their tax systems with incentives and infrastructure in place to encourage investment. But will they? We take a look at what is expected from the UK. Words by Christian Doherty.

Whether it’s addressing inequality, boosting government revenues or incentivising investment and better corporate behaviour, tax systems are a vital tool in shaping the fortunes of the world’s economies. As nations begin to plan for what will hopefully be a swift return to some kind of normal, what role can taxes play?

In the spirit of never wasting a crisis, it’s already clear that COVID-19 represents a rare opportunity to reform how governments design, administer and enforce their tax regimes. Tax reform, in short, could play a vital role in the recovery.

Each country has its own set of challenges. Demography, geography, science and the dominant political cultures all contribute to the overall picture; and that’s without taking into account how stable its economy is. But crises like these, fortunately, don’t come along very often.

“This is a palpable, useful opportunity to take action, and it should be taken advantage of,” says Partho Shome, currently visiting fellow at the London School of Economics and a former Chief Economist to HMRC. “And the question for nations is how to get back on the growth path of rising economic prosperity.

“So [leaders] need to think about how they can apply tax policy to take into account the current economic base and income distribution in the country and whether you can extract more revenues from certain sectors. And they need to be wary of further distorting unhealthy aspects of the system, and of adding further instability into already shaky economies.

“Certainly each country has different problems, but the common denominator is COVID-19,” he warns. “And they all have to grapple with it.”

UK: Sailing into a perfect storm

The UK has long had a reputation for good governance and efficient administration, but there’s no denying that the government’s response to both the COVID-19 crisis and the fallout from the Brexit vote of 2016 has led many to question that. 

“Brexit, digitalisation of the tax system, changes to the taxation of work, and new tax administration rules in the pipeline were already putting UK businesses and tax professionals under pressure. For many, COVID-19 has been the last straw. It has given us complex support schemes and will leave huge debt in its wake. We have a tough few years ahead, but we have survived vast periods of change before and I see no reason to suppose we won’t do so this time,” says Anita Monteith, Technical Lead and Senior Policy Adviser, ICAEW Tax Faculty.

Chancellor Rishi Sunak has wasted no time in rolling out taxpayer-funded support schemes such as the Coronavirus Job Retention Scheme and Coronavirus Business Interruption Loan Scheme. However, there is not yet any clear sense of how the UK’s post-COVID-19, 
post-Brexit tax regime will look.

“You can’t detach tax policy from the broader political question, and a populist government will be seeking popularity. So that’s not a great recipe for long-term tax reform,” says Chris Higson, Associate Professor of Accounting Practice at London Business School.

Making Tax Digital

Whatever energy exists to reform the tax system is, for now, focused mainly on improving administration of a tax system the government describes as “badly in need of renewal”. Centred around Making Tax Digital, the watchwords are efficiency, resilience and transparency. Higson says, “Administration improvements are politically easy, much easier than raising taxes, but it doesn’t address the big conflicts that may be beyond any politician.” But with Brexit looming and the COVID-19 bills mounting up, some longer-term questions can’t be ignored.

“The UK has been leading the race to the bottom in corporate tax,” says Higson. And post-Brexit it’s likely that the signal to the world will be a continuation of that. So could the UK become the lowest tax territory in Europe? Could that be justified while the overriding pressure from COVID-19 puts the need for revenue to cover the enormous costs in competition with demands for a stimulus to encourage re-investment and rebuilding.

“The big tactical choice facing the Chancellor is between direct and indirect taxes,” says Higson. “That’s where we’re likely to see the reform debate take place. And consumption taxes are efficient because they’re hard to avoid and are policed aggressively (like VAT). But while sales and consumption taxes are simpler to implement, the price is that they are regressive and rest more heavily for those on lower incomes.”

Any government looking to sell tax reform as a vote winner will have to ensure reforms are seen as fair. “The last economic crisis saw big banks offsetting huge losses against their tax liabilities, leading many to cry foul,” says Higson.