How to rethink the tax system: An expert’s view on five areas that change is needed, from merging income tax and NI to capital gains and inheritance
Paul Falvey of business advisory firm BDO
Paul Falvey is tax partner at accountancy and business advisory firm BDO.
Government finances are widely expected to come under severe pressure over the next few years to finance the huge public spending to support businesses and family incomes through Covid-19.
We need to strike a new financial settlement as the usual incremental approach is unlikely to be sufficient.
Covid-19 has provided a plethora of challenges to individuals and businesses, but has also allowed HMRC to demonstrate that they can make radical changes such as launching the furlough scheme whilst a substantial number of their staff were working from home.
What could be next?
Rethinking our tax system, which has its roots in the 19th century, through simplification and digitisation would be a great next step and there are early signs that a rethink is underway in several key areas.
Making Tax Digital
The move to Making Tax Digital (MTD) has resumed with an announcement that all landlords and the self-employed must file quarterly returns from 2023, with companies not far behind it seems.
This may not qualify as a rethink but, if the government is finally going to make the major investment in HMRC’s systems and practices that it promises, it would be pretty radical.
MTD won’t be pain-free but it should be more efficient if the government invests properly in HMRC’s systems: it will also enable HMRC to squash down on the tax gap again by pushing the ‘unofficial’ economy to the margins.
Making tax digital will enable HMRC to squash down on the tax gap again by pushing the ‘unofficial’ economy to the margins, says Paul Falvey
Business rates
At Budget 2020 the government proposed a major reform of business rates. It has recently launched a formal call for evidence that seeks to improve the effectiveness of the current business rate system.
Part of the document seeks views on possible replacement taxes, considering taxes such as a capital values tax paid by the property owner or an online sales tax (in addition to VAT).
In a recent survey we carried out of over 1,000 businesses, 84 per cent supported the idea of replacing business rates with an online sales tax, showing that now might be the time to rethink business rates.
Employment
The Chancellor’s Summer Economic Statement on 8 July was billed as a ‘Plan for jobs’ and while there were many spending commitments there was little real change. Rethinking the labour market for the post-Covid-19 economy demands more.
The whole pattern of employment is changing with more of us working from home with far less practical difference between employees and contractors than previously. To preserve mass employment, he may now need to remove employer’s NIC – or the ‘jobs tax’ as some call it.
A merger of income tax and NIC is the sort of radical simplification that many Chancellors have considered but none delivered. It would make tax filing simpler and more transparent: but, inevitably, headline rates of tax would be higher: that may be politically acceptable post-COVID-19.
‘A merger of income tax and NIC would make tax filing simpler and more transparent’
Capital Gains Tax
After cutting back on CGT Entrepreneurs’ relief in the spring Budget, the Chancellor has tasked the Office of Tax Simplification with a root and branch review of the tax.
The scope of the review is wide-ranging covering the rates of CGT and the many reliefs now available. The OTS call for evidence seeks comments on the principles of CGT by 10 August – hinting that a major rethink of CGT could be on the way in the autumn Budget.
I would not be surprised, indeed I’d hope to see, this go hand in hand with a rethink of inheritance tax so that all our taxes could operate coherently going forward.
Pensions
A recent Public Accounts Committee report has highlighted that government can’t prove that the £38billion annual cost (2018/19) of pensions tax relief is value of money.
A rethink here, perhaps focusing reliefs on younger taxpayers, could cut costs for the government. While there may be grumbling from some taxpayers if up front tax relief is cut, it is unlikely that it would have an immediate impact on the consumer.
All these topics may seem like old chestnuts and they have been too hot for past governments to handle properly.
Following Covid-19 and with the reality of Brexit on the horizon, people are expecting change, so this, along with the government having the political mandate, has given increased impetus for a widespread rethink of UK taxes. It’s certainly long overdue.
Paul Falvey is tax partner at accountants and business advisors BDO, who works with a wide range of individuals and businesses across a number of sectors.