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Mazars: tax system could be leveraged for sustainability

Author: ICAEW Insights

Published: 05 Oct 2021

Clive Fathers, tax partner at Mazars, uses tax data collected in the ICAEW Tax Race over the last 50 years to foreshadow a more digital and sustainable tax landscape.

Boris Johnson’s 2019 Conservative manifesto, delivered prior to Brexit and before the world had heard of COVID-19, promised not to increase the rate of income tax, VAT or National Insurance. However, the Budget delivered in March 2021 will see a rise to 35% of GDP by 2025-26, equivalent to the highest level of taxation since the late 1960s. 

Since that era, the tax landscape has largely evolved on political party policies - a trend revealed by the ICAEW Tax Race graphic that Clive Fathers, tax partner at Mazars, looks to explore further.

Mazars takes a look at the last 50 years of tax

History (and the tax race graphic) tells us that income tax has always been the largest source of Britain’s tax revenue. During the Second World War, income tax rates peaked over 99% and since then have followed a downward trajectory to 45% in the present day. Now just one among a plethora of taxes, its importance has diminished in the race for tax revenue, despite it remaining the tax that brings in the most for the Exchequer.

This shift can be tracked via the divergent policies of Harold Wilson’s Labour government and, from 1979, Margaret Thatcher’s Conservative government. Wilson’s government favoured direct taxation and introduced capital gains tax and corporation tax in 1965.

In 1975, National Insurance also changed from a flat-rate contribution to pay for social security benefits to a contribution based on earnings – taking on the characteristics of another direct tax.

Thatcher’s manifesto encouraged entrepreneurship and the tax system was used as a mechanism to drive economic growth. It shifted focus from direct to indirect taxes. Thatcher lowered the rate of income tax with a corresponding near-doubling of the VAT rate.

This shift has transformed VAT from a marginal revenue stream for the Exchequer historically, to its current position as one of the most significant drivers of revenue alongside income tax and National Insurance. While governments can be reluctant to increase tax rates, history has taught us that the way in which society can be taxed is bound to change.

What could the future hold?

Understanding that the taxation landscape is constantly evolving, it is fair and appropriate to question whether current forms of taxation are a sustainable way to maintain the provision of public services and borrowing. If the tax rates from the largest contributors of tax revenue remain constant, how could the tax base evolve to protect public finances?

Sustainability

Sustainability has been at the forefront of corporate leadership. We are already seeing the tax system being used as an important tool to shape socially responsible behaviours with the introduction of levies such as the clean air zones and the expansion of the Ultra-Low Emissions Zone in London from October 2021. We could expect tax policy to match long-term measures encouraging businesses to develop their sustainability agendas, particularly in the leading tax revenue performers as they have the widest tax bases.

In practice, this could mean the creation of sustainable reward programmes for employees which attract tax benefits, such as zero or low company tax for zero-emission vehicles, and direct tax reliefs and VAT rate reductions for ancillary green initiatives such as employer-provided green car charging units, renewable energy sources.

The heightened focus and reporting obligations will also be important in shaping change to the tax system. Levies may be used as a “stick” to encourage change, as may reliefs (highlighted by the benefit in kind tax rates for electric vans and cars).

Responding to present-day challenges

Taxpayer preferences have also evolved given the growth of technology and the COVID-19 pandemic, and the government has adapted its approach to protect its tax base.

A new Digital Services Tax introduced in 2020 taxes global conglomerates 2% on its revenue derived digitally from UK-based users, which is a departure from the traditional ‘permanent establishment’ income tax model. In 2023, a new Health and Social Care Levy will commence, which supplements National Insurance.

These new taxes/levies indicate the government is responding by introducing new discrete revenue raisers, built on existing forms of taxation. The question is whether this trend will continue with new taxes/levies, potentially leveraging the National Insurance again by introducing a series of discrete levies like its European neighbours to support social non-contributory benefits. If this becomes an established trend, there will undoubtedly be calls for the reform and simplification of the overall tax system, particularly from tax policy experts.

We are also seeing devolution in taxes, with the separate UK nation now having the opportunity to set certain taxes independently to the main UK parliament. This brings with it many complications but highlights that although the world may be more transparent, local decision making still matters and is likely to play a critical role moving forwards.

Trust in the chain

Corporate leaders are starting to incorporate tax transparency as part of their sustainability agenda and the attitude of more businesses is evolving to taking responsibility for ‘paying their fair share of tax’, which in return, builds trust.

Over 50 companies are now including in their ESG reporting the World Economic Forum’s Stakeholder Capitalism Metrics – where tax is recognised under the theme of community and social vitality. Domestically, businesses repaid to HMRC more than £709m claimed under the Coronavirus Job Retention Scheme – an indication that attitudes towards tax are changing.

We are also seeing formal transparency and due diligence approaches being incorporated into tax regimes, such as CbCR (Country by Country Reporting) at an international level and requirements to assure your labour supply chain to counteract tax evasion and employment intermediary reporting at UK level. As we head into an era of increased transparency, we expect to see HMRC respond with more targeted investigations as they act on information in the public domain.

The final word

Looking back over the past 50 years, it is clear that shifting government outlooks and their resulting policy decisions have dramatically changed the tax landscape. Today, we live in a time of enormous social and economic upheaval, and our tax regime will inevitably have to adapt to its new environment: we will follow the government’s solutions with interest.

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