What’s on the horizon in 2021?

When I gazed into the 2020 crystal ball at the end of 2019, I saw no inkling of trouble. I predicted that, with the 2019 general election out of the way, we should at least enjoy greater certainty. I was wrong.

If someone had told me that we would spend most of 2020 grappling with a pandemic, the likes of which we had never seen before, I doubt I would have believed them. The only person I know of who predicted that a pandemic was our greatest threat was Bill Gates. We should listen to him more: he is clearly a man with both extraordinary intelligence and foresight.

The impact of COVID-19 on the UK tax system

Future academics and historians will be falling over themselves to write about the impact of the COVID-19 crisis. It has had an impact on all our lives and torn up the rulebooks in the process. After some chaotic years caused by uncertainty about the outcome of the Brexit negotiations, Chancellor Rishi Sunak’s first Budget on 11 March 2020 – remember that? the first one we had had for two years – promised a return to normality and business as usual in tax policymaking.

However, even as Sunak made his maiden speech, the shadow of COVID-19 had already begun to loom large. The very next week, he announced the first COVID-19 support scheme, the Job Retention Scheme 1.0 (the number came later, as we have had further iterations of it). The following week we were in lockdown. The first tax casualty was Sunak’s Budget – the carefully crafted numbers and policy proposals ripped to shreds within weeks.

The rapidly developing financial and human crisis called for swift action. To give credit where it is due, HM Treasury and HMRC responded well to the challenge by reverse engineering the tax system to provide support to employers/employees, followed in short order by a similar one for the self-employed. Neither of the schemes were perfect – there were many examples where those who deserved support were not eligible, particularly in respect of the self-employment scheme.

Given more time, the systems could have been better designed, but time was a luxury that HM Treasury and HMRC did not have. All credit to them for doing as well as they did. With the need to publish guidance even though there were no rules in place, it looked from the outside that HMRC was making up the rules as it went along. It was, but it had no choice.

Did any other tax authorities do any better? From discussions with my fellow heads of tax in the Global Accounting Alliance, it was remarkable how tax authorities around the world were in the same boat. They were all searching desperately for solutions to problems they had never had to deal with before. No doubt some support schemes have worked better than others, but no one knew for certain what would work best and many mistakes have been made along the way.

And what about the real tax system? Well, the tax rule books were also ripped up, with deferrals of VAT and self assessment bills, and extensive reliefs from business rates. The diversion of HMRC’s resources to deal with the crisis and the dislocation of staff being forced to work from home has also impacted badly on performance – as it has for many of our members.

As for the public finance position set out in the March 2020 Budget, it might as well have been input into a spreadsheet located on a galaxy far, far away. The bills for all this help and support are now coming. They are, to quote a modern phrase, awesome: hundreds of billions of pounds and counting. How some or all of this will ever be repaid are questions for another day.

Out of this miasma there has been a welcome development. HMRC recognised that it needed to enlist the support of the tax and accounting profession to help deliver these support schemes quickly to businesses and taxpayers. In this time of crisis, our members have been on the front line helping to deliver the support schemes – thus supporting the UK economy and demonstrating the critical role played by tax agents.

Our members have been the unsung heroes of all this. The critical role they play in supporting the economy needs proper recognition. My team members have also worked tirelessly with HMRC to help it develop and implement the schemes, and I am forever in their debt. We have built a much better working relationship with HMRC as a result, which is a welcome development.

For the future, we need to embed this closer working relationship at the policy and operational level, and do more to recognise the value that a professional tax agent can provide. HMRC’s call for evidence on raising standards in the tax advice market and the summary of responses to it published in November 2020 both highlight that the government and HMRC recognise the valuable role played by the professional bodies in supporting high standards and improving compliance.

If we are to build a trusted, modern tax administration system as HMRC has proposed, then the professional bodies and their members are an essential part of that process – not merely a ‘nice to have’. We now need to work with HMRC to design a system that works for taxpayers and their agents.

Making Tax Digital (MTD)

The MTD agenda was on hold for the first half of 2020, but the impact of the pandemic has encouraged the government to adopt a ‘dash for digital’ approach to the tax system. In July 2020, the government announced that it would restart the MTD programme and published a timetable for the introduction of MTD for income tax, with a proposed implementation date of April 2023.

The accompanying papers made much of the need to work with stakeholders and co-design systems. This is welcome news but, if we are to have world-class digital tax systems, we need to make it a reality. Although digital systems have developed tremendously due to lockdown, it is still essential that the digital agenda is not rushed.

We need to design systems that work for taxpayers and their agents. We also need to ensure that systems are fully tested before they go live. The introduction of the capital gains tax 30-day reporting and payment system has been a salutary lesson in what can still go wrong when you design digital tax systems.

EU withdrawal

This time last year, it looked unlikely that Brexit would be knocked off the front pages. However, by comparison with COVID-19, Brexit took a back seat for much of the year. At the time of writing, we still do not know if the UK and the EU will sign some sort of free trade agreement. Even if they do, the UK will be a separate customs territory from 1 January 2021.

This means that customs procedures will now start to apply to EU imports and exports in the same way that they do currently for all non-EU imports and exports. It is a major change to the way that the UK will conduct its trade in goods.

Many businesses will be unfamiliar with the processes and rules. It looks like there will be a lack of capacity to provide all the help and support businesses need, which opens an opportunity for ICAEW members to upskill themselves and offer new services to help their clients.

Where to in 2021?

After the events of 2020, I will leave making predictions for 2021 in the capable hands of Bill Gates. Hopefully the impact of COVID-19 will start to abate and we might be able to return to the office before the year is out, although our working arrangements look unlikely to return to exactly how they were before the pandemic arrived.

Being an optimist, I hope the UK will reach some sort of trade agreement with the EU and the uncertainties we have witnessed in recent years will ease, allowing businesses to reinvest and grow the economy while seeking new trading opportunities outside the EU.

However, the Chancellor will be burning the midnight oil trying to work out how we can get the UK’s finances back on some sort of path towards stability. Tough decisions lie ahead, both on tax policy and probably also on spending. His priority this year is likely to be stability over tax increases. Whatever happens, the Tax Faculty will be here to support you in 2021.

About the author

Frank Haskew is head of the Tax Faculty