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How 2022 frames the tax landscape for 2023

Author: Frank Haskew

Published: 12 Jan 2023

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Frank Haskew shares his insights on how external factors might shape future tax developments, including regulation and Making Tax Digital.

This time last year, we were still recovering from the COVID-19 crisis and counting the costs of dealing with the pandemic. This had blown a huge hole in the UK’s finances. Total debt was then more than £2.4trn – a figure almost impossible to imagine, but which works out at more than £35,000 per person. 

Could the position get worse? The answer is clear: it could and it has. The war in Ukraine was the catalyst for a series of economic shocks that, at the time of writing, shows little sign of easing – first with rapidly rising inflation and interest rate rises, followed by an energy crisis and now a looming recession. Throughout this, the UK’s debt mountain has continued to increase so it is now more than £2.5trn and is forecast by the Office for Budget Responsibility to rise to £2.9trn by 2028/29.

Governments across the world have been struggling to know how to respond to these shocks

Governments across the world have been struggling to know how to respond to these shocks. The UK government has been no exception. Such has been the turmoil that in one year we have had three Prime Ministers, four Chancellors and three Financial Secretaries to the Treasury (FSTs). The result has been a lack of direction in tax policymaking and policies apparently made ‘on the hoof’, as we saw in the tax-cutting ‘fiscal event’ on 23 September, where growth was prioritised over the public finances. 

But, as the saying goes, you can’t buck the markets. The fallout took down the Chancellor and Prime Minister, and was followed in short order by a number of high-profile policy reversals that culminated in the Autumn Statement on 17 November. That statement was all about the need to reassure the markets that the public finances and government borrowing were under control. Plans for growth were now a long way down the list of priorities. 

Where has this left us? 

Interestingly, one of the few changes that was announced in the now infamous 23 September statement that wasn’t reversed in the following weeks was the repeal of the health and social care levy, which was due to be introduced in April 2023. However, we now know that the increase in the main rate of corporation tax from 19% to 25%, first announced by Rishi Sunak in the Budget of March 2021, will go ahead in April 2023 as originally planned. 

The 23 September fiscal event also announced the abolition of the 45% additional rate from April 2023, only for this decision to be rescinded weeks later. It was then followed in the Autumn Statement by a reduction in the starting point at which the 45% rate is paid, from £150,000 to £125,140. We moved from a proposed tax cut to a tax increase all in the space of less than eight weeks.

These increases will also be accompanied by a new ‘fiscal ice age’, in which virtually all allowances in the tax system will be frozen (or even reduced in the cases of the capital gains tax annual allowance and the dividend allowance) for the next five years. With inflation now reaching more than 10%, the freezing of tax allowances will impact much more quickly on the tax system. 

An increasing number of taxpayers will be drawn into higher rates and many more will be joining the self assessment system, putting further strain on an already overstretched HMRC. Furthermore, these developments are now focusing attention on the impact of cliff-edges in the tax system, with high marginal rates likely to affect far more taxpayers than in the past. 

The fiscal strategy of freezing rates is, however, not new, and not confined only to the UK. From discussions with fellow directors of tax in the Global Accounting Alliance, this strategy is common practice elsewhere. For example, tax thresholds have been frozen in New Zealand since 2013.

The jury is out on how tax simplification might be embedded into HMRC

There was considerable concern at the announcement that the Office for Tax Simplification would be abolished. Instead, responsibilities for tax simplification would be embedded into HMRC and HM Treasury. Really? ICAEW, along with other professional bodies, wrote to the FST to express our concern at this development and asked that the decision be reviewed. Unfortunately, our plea fell on deaf ears. The jury is out on how tax simplification might be embedded into HMRC. It is difficult to see that we can expect any meaningful tax simplification for the foreseeable future.

At your service? 

In January 2022, I noted the rising public concern at HMRC’s performance standards. At the time, coming out of the pandemic, we expected service standards to show a steady improvement. However, it became clear that standards were not improving and there is little evidence that it is any better today, with members reporting long delays across all areas of the tax system. 

Two particular problems stand out. The first is that many of the IT systems that have been introduced seem to be poorly designed and weren’t ready when launched, being beset by problems that then take a long time to fix. Examples include CGT 60-day reporting and the VAT Registration Service. The second problem is that if you need a person at HMRC to actually do something, for example answer a technical query, it seems to disappear into a black hole, with members reporting delays in responses of six months to a year. 

To the outside observer, there are systemic problems underlying these poor performances that appear to be nigh on intractable. However, they need to be fixed if we are to have a world-class tax administration. But for that to happen, someone at HMRC needs to take responsibility to effect real improvements and then deliver them.

MTD for income tax – past its sell-by date? 

Which brings us to Making Tax Digital (MTD). Given the problems with the introduction of the IT systems referred to above, it is no wonder that the gestation of MTD is proving so problematic. This programme started seven years ago under the banner of Making Tax Simpler, a highly laudable aim and one that we supported. However, the ‘Simpler’ disappeared very early on and we have spent many years now facing a potentially much more expensive and complicated system that appears to offer little in the way of benefits to taxpayers. 

However, just before Christmas, HMRC announced a number of changes to MTD for income tax self assessment (MTD ITSA), including deferring the start date by two years to April 2026 and then only mandating MTD ITSA for those with turnover of £50,000 or more rather than the proposed limit of £10,000, which would be reduced to £30,000 from April 2027. This was a timely and welcome development, but the world has moved on and the UK looks increasingly out of step. The proposed quarterly reporting system still looks to be the wrong approach when the key benefit should be the adoption of digital record-keeping. There really needs to be a rethink about what MTD ITSA is designed to achieve, including identifying what will be the benefits to taxpayers from adopting it and how it can make the tax system simpler for them. 

Regulation, or the dog that didn’t bark – yet…

This time last year, the government announced a forthcoming consultation on further steps to raise standards, including possible regulation, of the tax profession. A year on, we are still awaiting the consultation, although proposals to address the problems in high-risk areas, including high-volume repayment agents and the research and development sector, are progressing with the help and support of the profession. Our profession needs to help HMRC to stamp out poor (and worse) practices in a number of areas. But the question of whether there should be regulation of the wider tax profession is a much more difficult question to answer.

This question was one we posed in our annual Wyman Symposium on 1 November 2022. It was clear from the contributions made by the panel of speakers that there isn’t an off-the-shelf solution. While there are some major problem areas in the tax system, such as those highlighted above, many of the perpetrators are not members of a reputable professional body and their activities are not subject to any oversight. However, that does not mean that the rest of the tax market is so broken that it needs fixing. 

Most professional tax agents and advisers are doing their best to help their clients navigate the tax system and ensure that they pay the right amount of tax. This helps improve tax compliance and should be encouraged. We are concerned that regulation may increase the costs and burdens on good agents, which will, in turn, increase the cost of tax advice and compliance. The result may be that taxpayers who need advice are priced out of the market and decide to do it themselves. 

Given that the UK tax system is so complicated that even tax professionals sometimes struggle to understand it, what hope is there that the unrepresented taxpayer will get it right? Some with more straightforward affairs might, but there is a danger that regulation could reduce compliance and increase the tax gap – the very opposite of the policy intention. 

Where to in 2023?

The way events have unfolded in 2022 would have been difficult to foresee. I cautioned against making any predictions at the start of the year and, once again, I am rather loath to make any predictions for the coming year.

The pressure on the government’s finances caused by higher inflation and borrowing costs, coupled with the rising costs of health and social care, will mean that tax policy and collection remain centre stage

However, the pressure on the government’s finances caused by higher inflation and borrowing costs, coupled with the rising costs of health and social care, will mean that tax policy and collection remain centre stage. The squeeze on taxpayers looks set to continue for the foreseeable future. This will inevitably focus attention on the structure of the tax system, the direction of future tax policy and how the administration of the tax system needs to be improved to help support compliance and growth.

Frank Haskew, Head of Taxation Strategy, ICAEW