The tax system in review

As I said in January 2021, future academics and historians will be falling over themselves to write about the impact of the COVID-19 crisis. Although 2021 was a year when we began to recover from the crisis, at the time of writing the jury is out on whether there will be a resurgence of it in the winter and some countries are about to impose lockdowns on unvaccinated citizens. Whatever happens, COVID-19 is clearly not going away and it is likely to cast a shadow over the UK tax system, especially the public finances, for many years to come.

Counting the cost

As the year progressed and restrictions lifted, we did see a return to business as usual on the tax front. We even had two Budgets. The first, in March 2021, painted a pretty dire financial position, while by the second, in October 2021, the position was somewhat improved, as compared with the earlier forecast. However, there is no escaping the fact that the COVID-19 crisis has cost the UK almost £300bn and laid bare that the UK public debt is now nearly £2.4trn – that is about £36,000 for every person in the UK.

Last year, I said that the Chancellor would 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 and that tough decisions lay ahead, both on tax policy and probably also on spending. However, I predicted that his priority in 2021 would be stability over tax increases. Well, I do not think anybody saw coming the announcement on 7 September 2021 of a new tax – the health and social care levy.

This new levy is to fund increased spending on the NHS and also to reflect proposed changes to the rules for funding social care. If the timing of the announcement was a surprise – we are still scratching our heads about why that approach was adopted – we were disappointed that this extra money would be raised by way of yet another new tax.

The new tax was billed as hypothecated to the NHS, a statement that is, arguably, only partly true and that will cover only a small proportion of the total budget of the NHS, which will rise from £136bn in 2021/22 to £163bn in 2023/24. It remains to be seen how hypothecating new taxes to the NHS will go down with the public, especially if citizens do not see much return for the extra money spent.

Service please

Another area of rising public concern is HMRC’s performance standards. The diversion of HMRC’s resources to deal with the crisis and the dislocation of staff being forced to work from home had a major impact on performance in 2020 and this state of affairs continued into 2021. It was not unreasonable to expect that, as the immediate crisis abated, standards would start to show a steady improvement. However, this does not appear to have happened.

At the time of writing, in November 2021, we are receiving disturbing reports about a further decline in standards, with long waits on the phone recurring and the response times to post stretching to six months – even longer in some cases. Clearly, HMRC was on the front line in responding to the COVID-19 crisis and did excellent work building the grant schemes from scratch and getting them up and running, which reflected great credit on its part. However, our members have also been on the front line helping to keep businesses and the UK economy going and the continued poor performance at HMRC does raise concerns about whether there are deeper seated and systemic problems underlying this poor performance.

Listen up

HMRC’s engagement on consultations and listening to the profession presented a mixed picture. The consultation on the tax administration framework went well, although the thought of tearing up the rule book yet again on HMRC’s powers is a concern, given that we have already had a ‘once in a generation’ stab at this following the creation of HMRC in 2005.

There is a real and pressing need for the UK tax legislation to be put into some sort of order. We have not had any consolidation of tax legislation in more than 10 years and it shows. An excellent place to start would be a consolidation of all the HMRC powers provisions into a new Taxes Management Act – it is now more than 50 years since the last consolidation and the next one is long overdue.

In relation to Making Tax Digital (MTD), we welcomed the announcement of a year’s deferral of MTD income tax self assessment. That was the good news. Less welcome were the proposals to reform the basis period rules, which are likely to impose considerable extra burdens on businesses, especially international partnerships, which have 31 December year ends. Some welcome amendments to the basis period rules were announced in the autumn Budget 2021, but this does not alter the fact that the reform will impose considerable extra costs and uncertainty for businesses that are affected.

While on this subject, the question was also raised by the Office for Tax Simplification (OTS) as to whether the UK should adopt a different tax year end. From the position of international competitiveness, the adoption of a 31 December year end would make much sense, but would cause a lot of transitional pain along the way, as well as giving the government’s accounting system apoplexy. In the event, it was not a surprise that the idea was parked in favour of adopting an approach that might be summed up as ‘let’s pretend that 31 March is 5 April’. It may be a small step, but adopting a calendar quarter approach is a start in trying to rationalise the UK’s tax system, which is far too complicated for its own good.

It remains the case that we need to design systems that work for taxpayers and their agents and ensure that they are fully tested and work 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 a stand-alone system that does not interact with the rest of the tax system, duplicates work and increases the scope for errors. The announcement that the reporting and payment window would be extended to 60 days, as recommended by the OTS, was welcome, but with greater thought and consultation at the outset much of the subsequent debacle could have been avoided.

Where to in 2022?

Given the events of the past few years, I am rather loath to make any predictions for 2022. I predicted last year that while we would return to the office before the year was out, our working arrangements were likely to change irrevocably and, indeed, it looks like homeworking for at least part of the week is here to stay.

The pressure on the government’s finances and the rising costs of health and social care will mean that tax remains centre stage. Will the opening of the Pandora’s Box of hypothecated taxes to fund health and social care encourage a national debate about how much we are prepared to pay for them, and what we might expect in return?

If the past is a guide to the future – I remember Gordon Brown posing the same question when he raised the national insurance contribution rates to pay for increased NHS spending – my prediction is that we are unlikely to hold such a debate any time soon. Rest assured that whatever happens, the Tax Faculty is here to support you in 2022.

About the author

Frank Haskew, Head of Tax Faculty