Tax system overhaul – The Government’s response

By Rob Brown, Tax Partner

Earlier this year, the House of Commons Treasury Select Committee released a new report called ‘Tax After Coronavirus’, which called for landmark changes to the UK’s tax system to deal with the impact of the COVID-19 pandemic.

This 80-page document was packed with recommendations for the Government to consider, put together and agreed by the cross-party group of MPs, which looked at how the nation could increase tax revenues without stunting economic growth.

Among the recommendations agreed by the Committee in its report were:

  • Taxing Income from Work – Calls to reform this old, complex system and the interaction of different taxes, including greater alignment between Income Tax and National Insurance.
  • Limited Companies – If the tax advantages of self-employment are to be reduced, then so should the tax advantages of operating through a limited company, relative to the taxation of employees, the report said.
  • Digital Services Tax – The Committee said more work is needed in this area, and that it should be monitored to see the impact of the current levy on businesses and tax collection.
  • Capital Gains and Inheritance Tax – These forms of taxation should be reformed and balanced with the need that any significant increase could damage future business investment in the UK, particularly in light of Brexit.
  • Retail Sales Tax – The Committee said there is not enough evidence to support retail sales tax as an alternative to VAT and it could potentially be very complex given trade deals and how other jurisdictions would still charge VAT.
  • Stamp Duty Land Tax – Described as economically inefficient and damaging to the economy and should be treated as a priority area for review so that the Government could set levels to encourage homeownership.

The Government has now published its findings to the report in a response to the Treasury Committee, although elements of the recommendations were incorporated into the March Budget by the Chancellor.

Within its response, the Government said it is committed to supporting jobs, businesses and livelihoods.

It pointed to several measures undertaken already to support businesses based on the Committee’s recommendations, including:

  • Extending the carry back rules for trade losses from one to three years for both incorporated and unincorporated businesses.
  • Creating additional capital allowances in the form of the super deduction and an extended first-year allowance, which it said went beyond the recommendations of the Committee to lengthen the current timeline for the £1 million Annual Investment Allowances beyond January 2022.

The Government said it had even gone further by extending a number of the existing support schemes, such as business rates relief and the VAT reduction for the UK’s tourism and hospitality sector, which were both linked to calls from the Treasury Committee in its report to continue helping businesses affected by the pandemic.

As a result of the Government’s actions over the past year and the measures announced at Budget, the Office for Budget Responsibility now expects the economy to return to its pre-crisis peak two quarters earlier than previously forecast.

Of course, in the original report, the Committee also called on the Government to maintain public spending at a sustainable level, which the Government claims it has done in its most recent actions.

In its statement to the Treasury Committee, the Government said: “The Chancellor has also been clear with taxpayers about the need to get the public finances back on track once the recovery is durably under way.

“The Budget also set out steps to repair the public finances once the recovery is well under way.”

The Government said in order to do this it would:

  • Increase the main rate of Corporation Tax from 2023 under a new tapered system, which would see businesses earning profits of £250,000 or more pay tax at a rate of 25 per cent (rather than 19 per cent).
  • Follow the recommendations of the original report to freeze personal taxes.

However, the latest response fell short on many of the major reforms to tax strategies laid out by the Committee, particular an overhaul of the Stamp Duty Land Tax and VAT systems.

The response stated: “The Budget has set out the Chancellor’s medium-term plan for how the tax system will support the Government’s broad economic objectives for the next five years.

“The Government keeps all taxes under review and the Chancellor will outline tax reforms as part of future fiscal events.”

Concluding the Government said it welcomed many of the recommendations made by the Committee, but felt that “the report leans away from measures that would help to repair the public finances in the coming years”.

The Government, while adopting some elements of the Committee’s ‘Tax After Coronavirus’ report, seem to have neglected or perhaps rejected other important elements as they focus more on economic growth instead of a major reform of UK taxation.

It is likely, however, that future Budgets will include measures that seek to recoup the significant spending brought about by COVID-19 and the subsequent recovery.

A full version of the Government’s response can be found here.

If you have any queries about the latest response or the measures recently outlined by the Government, please speak to our team today.

Posted in Press Releases.