[Updated for the 'Winter Economy Plan' announced by the UK's finance minister (the Chancellor) on 24 September 2020]
Governments around the globe have introduced far-reaching measures to support businesses facing unprecedented challenges as a result of the COVID-19 pandemic. Tax relief and deferral has formed a key part of these support measures, although the extent of these significantly varies across different jurisdictions. (For further details, see our COVID-19: Global tax measures guide.)
The initial emergency phase of the pandemic in the spring may have passed. But with infection levels rising once again in the autumn, forcing a tightening of social and economic restrictions, the policy focus has remained on economic stimulus measures, which has included extending and supplementing existing tax support measures. The overall cost of these measures is mounting. And governments are coming under pressure to explain how these measures will be paid for, with new and/or increased taxes seemingly inevitable.
We explore below possible further tax measures that we might see introduced in the UK. In doing so, we expand on comments included in a previous article by our colleagues here.
Phase 1: emergency tax measures to protect jobs
Emergency tax measures were introduced in the UK in March 2020; but ultimately these were relatively limited as compared to measures introduced by other jurisdictions, principally comprising limited deferrals of VAT and income tax payments and a one-year business rates holiday for certain businesses in the retail, hospitality and leisure sectors. According to UK government statistics, over half a million businesses have made use of the VAT deferral option alone, resulting in around £30bn of deferred VAT payments. HMRC (the UK tax authority) already had in place a 'Time to Pay' scheme for use on a case-by-case basis, and it is reported that over 70,000 new tax deferral arrangements have been agreed under this scheme.
The UK’s other measures to provide support to businesses with the cashflow implications of a sudden fall in revenues initially focused on various loan funding schemes and employment grant schemes, including the Coronavirus Job Retention Scheme (CJRS). The latter is administered by HMRC, but is not strictly a tax measure, although it does have some interesting tax implications – including the tax treatment of voluntary repayments of grants under the CJRS (as discussed in further detail here).
The CJRS is being phased out and will not be available from 31 October 2020. However, new job support measures are being introduced to help employers retain staff when the CJRS is no longer available. The first a is a ‘job retention bonus’, which is a one-off payment to employers of £1,000 for every employee that was validly furloughed under the CJRS and who remains continuously employed by the same employer through to 31 January 2021. The second is the new Job Support Scheme that will be introduced from the beginning of November 2020, which was announced as part of the Chancellor’s 'Winter Economy Plan' on 24 September 2020. (For further details on the new Job Support Scheme, see here.)
Phase 2: additional economic support
As the UK started to emerge from the initial lockdown restrictions, the government turned its attention to reinvigorating the UK economy. The UK Chancellor announced further (limited) tax measures as part of a summer economic update in July 2020 as follows:
- Temporary VAT rate reduction. Supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises and supplies of accommodation and admission to attractions, which are otherwise subject to the standard UK VAT rate of 20 per cent, will be subject to the reduced VAT rate of 5 per cent for the period from 15 July 2020 to 31 March 2021 (extended from the original end date of 12 January 2021 as part of the Winter Economy Plan).
- Temporary increase in residential stamp duty land tax (SDLT) nil-rate band. The nil-rate SDLT band for purchases of residential property in England and Northern Ireland has been increased from £125,000 to £500,000 for the period 8 July 2020 to 31 March 2021. Corresponding measures were subsequently introduced in Scotland and Wales to raise the nil-rate bands for land and buildings transaction tax and land transaction tax to £250,000.
The bill for the UK’s COVID-19 support measures is mounting. Documents accompanying the summer economic update calculated the cost of the direct fiscal support measures implemented at £158.7bn. New employment support measures announced to assist employers as the CJRS ends in October 2020, now including the new Job Support Scheme, will add to that bill, while the tax measures described above will decrease tax revenues rather than add to the pot.
Even in early July it was predicted that the UK Government’s budget deficit – the difference between its spending and income from taxes and other sources – will exceed an eye-watering £300bn in 2020/21, equivalent to around 15 per cent of GDP. This prediction is steadily becoming a reality: a recent update from the Office for Budget Responsibility (OBR) reports that the UK budget deficit already reached £174bn in the first five months of the 2020/21 fiscal year. To give this some perspective, this is an increase of £147bn as compared to the same period last year.
Phase 3: further economic stimulus measures and revenue raising measures
Looking forward, we can expect measures to be introduced in the medium to longer term to begin to balance the scales. The UK Chancellor had originally stated there would be an autumn budget and spending review and that would be the time to 'put our public finances back on a sustainable footing'. However, the autumn budget has been delayed, and instead the Chancellor set out his ‘Winter Economy Plan’ on 24 September 2020, which provides targeted additional support measures as highlighted above.
It is anticipated that the delayed budget will take place in spring 2021, but this has not been officially confirmed. Whenever the next budget takes place, the government will need to strike a delicate balance between encouraging economic activity and investment, and repairing the public finances.
What further fiscal economic stimulus measures might we see?
Income tax changes could provide significant stimulus. We would expect any such measures to be concentrated at the lower end of the income scale, for example through increasing the income tax personal allowance amount and/or increasing the basic rate band. This could potentially be combined with revenue-raising measures for higher/additional rate taxpayers – see further below.
It has also been suggested by various bodies, including the Institute of Directors, that a reduction in employer national insurance contributions (NICs) would serve the dual purpose of minimising job losses in hard hit sectors and encouraging private sector firms to take on new employees. This would fit with the Chancellor’s focus on supporting employment and his ‘plan for jobs’.
Could we see further VAT rate reductions in order to further stimulate consumer spending? Following the 2008 financial crisis, the standard rate of VAT in the UK was temporarily reduced to 15 per cent from 17.5 per cent (which is similar to a stimulus measure recently announced in Germany – see here). A targeted VAT rate cut now, followed by a more wide-ranging VAT rate cut later, might chime with comments by The Institute for Fiscal Studies that an across-the-board VAT reduction could be effective, but not if it is implemented too early (see here); so it may yet be that the current targeted VAT rate cut will at some point be further expanded in scope.
In the corporate context, and moving beyond headline tax rates, increased flexibility in the use of corporate losses and other offsetting tax attributes seems an obvious option: we have not yet seen this in the UK, but various other jurisdictions, including the US, Germany and Belgium (see here for further details), have included this in their COVID-19 tax measures. It is a tool the UK government has used previously: following the 2008 financial crisis, the UK introduced a limited extension permitting carry-back of losses of up to £50,000 for a further two years beyond the usual one-year carry-back. The UK tax code has grown in complexity since that time, and now includes new limitations in the form of the corporate interest restriction and the 50 per cent carried-forward corporate loss restrictions; so temporary relaxations of these more recent rules could also be considered.
Changes might also be made to the capital allowances regime in order to provide increased incentives for investment. The UK also has form in this area, having introduced a temporary expansion of first year allowances following the 2008 financial crisis.
What can we learn from the revenue-raising measures introduced after the 2008 financial crisis?
Income tax increases for higher rate taxpayers featured in the UK government’s response to the 2008 financial crisis, but may be less palatable now. At Budget 2009 it was announced that an additional rate of income tax of 50 per cent (since reduced to 45 per cent) would apply to income over £150,000, and that the income tax personal allowance would be restricted for those with income over £100,000. However, in their manifesto for the 2019 general election, the Conservatives committed not to raise the rates of income tax (or indeed the rates of NICs or VAT), which would make the politics of such tax increases challenging.
The rates of employee, employer and self-employed NICs were also all increased in April 2011; and the Chancellor has indicated that a revenue-raising move could be to align the rates of NICs for self-employed people with the higher rates for employees (a reform that has often been mooted, but never previously had sufficient political support to proceed). But increases in the NICs rates would breach the Conservatives’ manifesto commitments; and as mentioned above, it may be that in the short term, the government is more inclined to reduce employer NICs rates as a fiscal stimulus measure.
Budget 2009 also made changes to restrict tax relief on pensions contributions for those with incomes of £150,000 and over with effect from April 2011. These rules could be further tightened without breaching the manifesto commitments.
The rate of capital gains tax (CGT) was also increased from 18 per cent to 28 per cent for higher and additional rate taxpayers in 2010. It seems that CGT may again be in the mix as a possible revenue-raiser, with the Chancellor in July 2020 requesting the Office of Tax Simplification to carry out a review of the UK CGT regime (in particular as it applies to individuals and small businesses).
Increases in alcohol, tobacco and fuel duties also featured as a means of raising tax revenue following the 2008 financial crisis. These ‘sin taxes’ are usually an easy target when revenue-raising measures are required. Plainly, though, increasing alcohol duties would not be welcomed by the already struggling hospitality industry.
In the wake of the 2008 financial crisis, the UK also enacted a (one-off) bank payroll tax and a bank levy (which remains). (Later on, in 2016, the 8 per cent banking surcharge was introduced, but against a backdrop of reductions in the corporation tax rate more generally; so on one view, the surcharge was more about excluding banks from a tax cut.) From a political point of view, those measures could be justified by the proposition that the banking industry bore some responsibility for the financial crisis, and also needed fiscal incentives to change their ways (including in terms of the basis on which they funded themselves). However, given the nature of the crisis this time around, there is no obvious equivalent ‘target’ that the government can look to for specific revenue-raising measures.
What new measures might the UK take to raise revenues?
The loosely termed issue of ‘digital taxation’ has been a hot topic in the international tax context for some time. Interestingly, it seems that the COVID-19 crisis may spur things on in this area.
The OECD’s May 2020 report Tax and fiscal policy in response to the coronavirus crisis: strengthening confidence and resilience anticipates that a dwindling fiscal space, together with accelerated digitalisation of the economy, will cause a renewed focus on digital companies and minimum taxation of MNEs under its Pillar 1 (nexus and profit allocation) and Pillar 2 (minimum taxation) proposals. (For further details on this, see blog posts on our digital blog here.)
As regards the former, the UK introduced a digital services tax (DST) from 1 April 2020. However, the DST is only forecast to produce tax revenues in the region of £400m per annum – so won’t by itself make much of a dent in the budget deficit. It is also intended to be an interim measure until an internationally agreed solution on the taxation of the digital economy is reached.
The OECD also anticipates that there may be ‘extraordinary’ revenue raising measures in order to pay for the mounting costs arising as a result of the COVID-19 crisis, along with some governments taking the opportunity to enact wholesale reforms or entirely new systems of taxation on new bases.
In the UK, there have been calls for more taxes on wealth. The UK already has existing taxes on the transfer of wealth and assets, including inheritance tax, CGT and SDLT. Is there scope for a new type of recurring wealth tax based on ownership, which could take the form of an annual tax on the value of total assets minus debt?
The possibility of a 'mansion tax' focused on real estate property wealth has been mooted periodically in the UK since the financial crisis. However, whilst the concept may be straightforward, taxes of this nature tend to be difficult to design and administer in practice, particularly when considering issues relating to valuation (a particular issue so far as UK residential property is concerned), how to deal with the illiquid nature of certain assets, and the interaction with other taxes.
A more familiar suggestion, and much easier to implement than an entirely new tax, would be to increase the rate of corporation tax. The current government has already (before COVID-19 hit) taken the step of reversing the previously announced plan to reduce the UK corporation tax rate from 19 per cent to 17 per cent this year.
Of course, a rate increase would seem to go contrary to the stated aim of creating one of the most competitive corporate tax regimes in the G20 (though perhaps not, if the international trend of reducing corporate income tax rates was to reverse more generally). And a corporation tax rate increase could signal a long-term path towards fiscal health without imposing too much up-front pain – particularly if the fiscal stimulus measures were to include some temporary relaxation on use of losses. This approach could also be presented as targeting those businesses that have been relatively profitable during the crisis, such as supermarkets and some online retailers.
Finally, we may have had a clue from the Chancellor during his summer economic update when he mentioned that '[t]his is going to be a green recovery with concern for our environment at its heart'. This may indicate that there could be a focus on carbon taxes as part of the UK’s future revenue-raising measures.
“Amidst all this uncertainty, one conclusion seems clear. This and future governments will face a huge challenge in judging when and how public spending and tax policy levers should be pulled to place the public finances on a sustainable path.” OBR Fiscal Sustainability Report July 2020