Covid-19 has significantly accelerated changes to the tax landscape. Tax jurisdictions may be seeking to pay for Covid-19 costs by increasing the tax take and we have seen initial discussions on this in the press over the last few weeks.
The evolution of the tax landscape post-covid and navigating the challenges
Increases in VAT cannot be easily used at this stage, nor generalised increases in income tax or NICs as these weigh on consumption. Struggling UK businesses are not an obvious source of additional net tax revenue either. Therefore, the government will likely have to raise the tax take, in the short term, from private wealth, international business, investigations and anti-avoidance.
In addition, it is believed that Corporate Tax (CT) rates are likely to be increased, perhaps with additional tax incentives created for productive investment in UK business tilting the tax balance more in favour of innovation.
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These changes create different risks, threats and opportunities across a range of areas:
Taxes on capital are currently much less than taxes on earnings. Quantitative easing has inflated capital values and increased wealth inequality. Ideas like paying for social care by increased tax rates for the 40+ demographic are also being discussed and there may be an increased tax burden on capital as a result. This could be by wealth taxes, or by equalising rates of Capital Gains Tax (CGT), Income Tax and increasing the tax base for Inheritance Tax (IHT). There could also be additional surcharges on unearned income.
UK Privately Owned Business
UK business may be favoured in the Government’s attempt to level up the regions and make a success of Brexit. While corporates of CT may increase, there could also be breaks on the model of R&D tax credits widening the focus so that productive businesses, committed to innovation, enjoy lower effective rates than others such as investment businesses.
Taxes including Diverted Profits Tax (DPT), and possibly new sales taxes for online retailers may seek to increase the tax take from international or online business. Customs Duties, post the Brexit transitional period, may also become more important and supply chains may need to be considered.
Anti-avoidance may be strengthened especially in the areas of international tax and private wealth to extend the tax base without legislative change.
In addition, evidence suggests that around two-thirds of employees spent some time working whilst furloughed, contrary to the rules of the CoronavirusJob Retention Scheme (CJRS). Investigations will commence shortly with penalties for those who have wrongly claimed.
In the long term, it looks likely that PAYE and NIC may be increased, however, for now, the focus will be on compliance to increase the tax take without increasing the rates of tax. As HMRC seeks to ensure real-time compliance with employer withholding requirements, it will become increasingly important to ensure that processes are robust.
It is also widely recognised that Covid-19 will create a permanent change in favour of more flexible work patterns. Many employees may continue to work from home and are likely to want different types of reward packages. Company cars and season ticket loans may become a thing of the past as more employees choose to cycle to work for example.
Tax governance, risk and reporting
Tax under-declarations, mistakes, or aggressive avoidance will become even less acceptable with reputational damage being a preoccupation as well as financial damage. Tax governance will be a priority at Board level. Tax reporting and assurance therefore will have a very high value to taxpayers.
Transactions driven by restructuring
As businesses adapt to a ‘K’ shaped recovery and the need to accelerate change in business models, there may be high levels of restructuring and consolidation across all sectors. Businesses will want to ensure that these transactions are carried out in a way that ensures there is no mismatch between the economic result of a transaction and its taxable profit.
A fairer and better tax system?
We would all like to see a fairer tax system, with high levels of compliance, more equal burdens between different classes of taxpayer, and moreover a tax system which creates the economic incentives for long term business investment and productivity growth.
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Managing your current tax risks has never been more important than now. To discuss how we can support you to safely navigate the current tax challenges, please get in touch.
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