Published : 4 years ago, on 30/10/2020

By Finn Houlihan, Director at ATC Tax  

The economic impact of the COVID-19 pandemic on the British economy continues to be profound. In October, national debt surpassed 100% of GDP, causing Chancellor Rishi Sunak to stress the books needed to be balanced. In order to so, the Government will almost inevitably turn to tax increases as a core part of the long-term recovery effort.

And, with the Office for Budget Responsibility estimating that tax increases of £60bn are needed to restore the UK’s public finances to stability, and avoid a return to austerity, the UK’s tax policies could be set to undergo significant reform.

First up

Already it looks like the Chancellor will begin tax reformation by raising taxes for the wealthy, with a review of capital gains tax ordered in July. There are various ways capital gains tax could be reformed to raise funds. Removing or reducing the annual exemption or losses relief, currently standing at £12,300 would be the obvious way forward. However, while this would apply to a lot of people, it wouldn’t generate a significant amount of funds, although it would most likely win cross-party support.

Inheritance tax has also been discussed in being one of the first types of tax to be reformed. Last year, the Office for Tax Simplification published plans to streamline inheritance tax rules to limit the number of exemptions. While the report hasn’t been put into practice yet, the Government could return to the plans to raise funds.

Fresh approach

With the focus on increased taxes on the wealthy, the calls for a new wealth tax have grown and opinion polls indicate general public backing for one. Implementing a wealth tax would ensure those with the most assets carry the brunt of the financial load, while also raising a significant amount to shore up public finances.

However, the tax would require the creation of a huge administrative framework to deal with the declaration of assets from millions of Brits. The complexity of doing so would likely dissipate some of the public support while would take a long time, given government departments are already overwhelmed with responding to the crisis. A compromise could be found with a one-off wealth tax which would not require the same level of administration while still raise funds in the short-term.

Finn Houlihan

Other new forms of tax have been put forward, including a new tax on goods solid online to prevent the potential collapse of the high street, which is being considered by The Treasury. This tax would involve a 2% levy on goods sold online and a mandatory charge on consumer deliveries. With the Chancellor recently deciding to abolish tax-free shopping for tourists in the UK, it’s clear retail is a main focus of the Government’s tax policy, so this could well become reality.

Another new tax policy considered by the Treasury is the “Capital Values Tax”. This would replace current business rates and be based on the value of land and the buildings on it, with the tax paid by the property owner, rather than the business leasing it.

Precedent set

Another avenue the Government could go down is what has gone before in times of crisis. During both world wars, the Treasury issued war bonds to encourage investment while reduce inflation and remove money from circulation. To aid the economic recovery effort, the Government could introduce COVID-19 bonds to have a similar effect and help businesses recover.

The recovery plan from the 2008 recession will also be on the minds of the Government, particularly as many would have been in the government setup then. However, with Prime Minister Boris Johnson effectively ruling out a return to austerity, it’s likely the Government will do everything they can to avoid the return of unpopular taxes such as the “bedroom tax” which came into effect then.

New landscape

As the COVID-19 pandemic continues to reshape Britain’s economy, so too must its tax policy change with it. Funds will need to be raised in order to reduce debt and this will inevitably involve tax increases and it’s likely the Chancellor will employ a range of methods to create the new tax regime.

Early signs indicate taxes will be raised for the wealthy more than other demographics, with capital gains tax and inheritance tax likely to be targeted. Additionally, new forms of taxes relevant to the changed landscape will likely be put in place, particularly the online sales of goods tax to reflect the digital age. The Government may even look to previous crises, including the world wars and 2008 recession, to see what was done then.

Regardless, there can’t be any doubt that we’re about to enter a new stage of the pandemic response, which focuses around how to emerge from the crisis economically, and tax rises will be one of the first things to come into play.