This time last year, Rishi Sunak was getting ready to prepare his first Budget as Chancellor of the Exchequer. He had been in the role for just four weeks, following Sajid Javid’s resignation. And then, just one day before the Budget was due to be delivered, COVID-19 was declared a global pandemic by the World Health Organization. Therefore, the Budget was understandably a rather truncated affair compared with earlier years. Many of the included measures were introduced at short notice in response to the virus.

One year on, those measures seem tiny in comparison with the various schemes that have since been introduced to support employees, employers and unincorporated businesses after much of the UK economy was effectively closed down in the wake of the first nationwide lockdown. As we approach the anniversary of last year’s Budget, the economic effect of the pandemic is still with us, despite the promise of the vaccines being rolled out across the country.

The Brexit transition period has also come to an end. While a Free Trade Agreement was struck between the UK and the EU on Christmas Eve, many businesses are grappling with consequential adjustments, particularly those importing from and exporting to EU countries.

Both of these events are causing major disruption and upheaval for both business and HMRC alike. The latter’s resources are being stretched in unprecedented ways, and this is on top of the plan it has committed to for extending Making Tax Digital to income tax matters by 2023.

It is within this context that ICAEW’s Tax Faculty prepared Budget representations for 2021 with a “steady as she goes” message. The representations call for a delay to any reform that would cause further disruption or upheaval for business, other taxpayers and HMRC, apart from measures designed to make each of these events easier to deal with.

Coronavirus relaxations

In its representations, the faculty has set out a number of short-term measures that it would like to see introduced to ease the cashflow burden for businesses. These include:

• relaxations to tax rules in which the treatment depends on the number of days that an individual is present in a particular location, such as the temporary workplace rules and the statutory residence test;
• improved provisions to allow businesses to use trading losses more flexibly, such as a temporary extension of the loss carry-back rules for companies and unincorporated businesses from 12 months to three years;
• allowing such losses to be calculated and claimed on a provisional basis, rather than needing to wait until the return for the loss-making period has been filed;
• more powers for HMRC to exercise discretion over the time limits included in various areas of the tax legislation, including capital gains reinvestment relief, replacement of main residence relief and the properties open to the public exemption for the purposes of the annual tax on enveloped dwellings; and
• extension to the period of grace provisions included in the furnished holiday let rules.

The faculty has always welcomed the measures that have been put in place to support business and employment during this difficult time and recommends that they are continued or even extended if the UK continues to experience lockdown measures into the Spring. 

Making Tax Digital for income tax self-assessment (MTD ITSA)

The faculty believes that the tax system should be simplified considerably to allow MTD ITSA to achieve its full potential and ensure that its introduction is not a missed opportunity. Our principal recommendations are:

• align the tax year end (5 April) with the end of a calendar month. The least radical option would be 31 March, although 31 December would provide more consistency with most other developed economies. One of the key benefits to this change would be to reduce the number of digital reports businesses would need to make under MTD by aligning VAT and IT quarterly reporting periods;
• simplify tax rules to make reporting easier to achieve, including allowing property income reporting to 31 March (rather than 5 April) and aligning the trading and property income rules around cash versus accruals accounting; and
• ideally, separate the need to keep digital accounting records from the need to make quarterly reports. The former could bring immediate benefits to business while the latter creates more of a burden, especially if VAT and IT reporting are not aligned. Quarterly reporting could be mandated at a later stage once the benefits of digital record keeping have been established and embedded.

Planning for the future

Looking to the future, the faculty also supports longer-term changes with a view to improving the efficiency of the UK tax system. Now that the UK has left the EU, for example, opportunities arise to make changes in areas that were hitherto largely governed by EU law. These include simplifying the VAT system, including reviewing the need for exemptions, reduced rates etc, and making use of incentives that have so far been subject to EU state aid rules, such as the enterprise investment scheme and R&D tax relief for SMEs. The harmonisation of the tax and NIC treatments of employed and self-employed income should also be considered as a long-term aim.

Any major reform will require funding and the faculty urges the government to provide the resources that HMRC needs to consider these issues in the context of its 10-year Tax Administration Strategy, as well as both restoring and improving performance levels and transforming the tax administration system in the medium to longer term.

Final thoughts

Clearly, a fall in tax receipts as businesses’ incomes remain suppressed and the cost of the various COVID-19 support schemes administered by the government mean that taxes will need to rise at some point in the future. The Tax Faculty will also continue to press for simplification of the UK tax system so that it is easier for taxpayers to understand and comply with. However, these are battles for another day. In the meantime, the main priority should be for the government to steer us all safely through these currently choppy waters.

About the author

Richard Jones is Business Tax Manager at the Tax Faculty of ICAEW