Join our community of smart investors

Tax changes: Who should foot the pandemic bill?

Public finances are unsustainable and tax reform is urgently required says a parliamentary Treasury committee
Tax changes: Who should foot the pandemic bill?
  • The Treasury committee thinks the UK can take a much greater tax burden
  • Worst hit by proposed tax reforms would be investors, small businesses and property owners

If the nation has been waiting on tenterhooks for an answer to the question of when lockdown will end, a different question has left many with a feeling of dread: who will be asked to settle the bill? 

Because when the pandemic ends, the next dragon to slay will be the soaring national debt. With one Office of Budget Responsibility estimate putting the eventual rise in public sector net debt as high as 123 per cent of GDP, government tax revenues under pressure and spending up, it’s little wonder people are wary of impending tax changes. 

A Treasury committee was set up in 2020 to examine what role windfall taxes might play in the post-crisis world, how much (more) tax the UK economy can bear and which areas of the tax system are in most need of reform. The committee has now published its findings. What did it conclude?

The good news is that the committee is of the view that no significant tax rises should be attempted in the short term - it wants the economy to be firing on all cylinders first which it thinks might be in two to three years time. On the whole, the committee has reservations about imposing a windfall tax on businesses which profited during the pandemic - this would be too problematic and potentially unfair. Nor did it like the idea of an annual wealth tax - it would be extremely challenging to introduce and there is too much evidence that other countries which introduced one, later abolished it (read about France's wealth tax lesson here). While it was less opposed to a one-off wealth tax, and agreed this could raise significant revenue, it expressed reservations about the temptation to impose such a tax again in the future. Steep rises in corporation tax would be “counterproductive” but given that the rate of corporation tax is currently just 19 per cent - the lowest it has ever been in the UK and the lowest in the G20, then a moderate increase in the rate “could raise revenue without damaging growth”. The committee was also strongly in favour of an internationally agreed way of capturing some of the profits made by digital companies 

Pension tax relief: urgent reform required

More ominously, however the committee believes the chancellor should urgently reform the state’s entire approach to pension tax relief. As the second most costly tax relief, reducing it would make a big difference to public finances.

Not only should the two higher rates of tax relief be curtailed, the committee highlighted the fact that pensioners are getting off lightly because they do not need to pay National Insurance - something that has been to their enormous advantage over the years as income tax rates have fallen and NI rates have been increased. Thus “there is a case for at least a modest increase in tax on occupational pensions in payment”. 

Self employed tax a priority

The committee believes there is little justification for the different rates of tax paid by the self employed, the employed and contractors working for a company. It acknowledged that the self employed face risks and lack access to certain state benefits but was otherwise appalled that different types of employment meant higher or lower tax rates. Tax rates should be the same for all and the chancellor should address this as soon as possible. 

The trouble with Capital Gains Tax

For anyone hoping that the Office of tax Simplification’s reports on reforming capital gains tax and inheritance tax might be quietly buried, the committee’s view is that there is a compelling case for reform of these taxes, which sounds very much like an endorsement of the OTS view that the CGT uplift on death should be removed and that CGT rates should be aligned with income tax.  

Replace Stamp Duty Land Tax 

Finally, the committee’s verdict on another big burdensome tax - SDLT - is that it is economically inefficient and damaging to the economy. It should be got rid of. But don’t cheer too soon. It suggests the tax along with council tax could be replaced by an annual housing levy despite the fact such a measure could create some very big losers (read our verdict on a similar property tax proposal here).

Like no other existential shock before, the Covid-19 pandemic has brought into sharp relief the question of where the bulk of the tax burden should fall. Although chancellor Rishi Sunak is not expected to rush through any major tax amendments in this week’s budget (he will want to build confidence not cripple recovery), the challenge of restoring the nation’s finances cannot be avoided for ever – even with a tailwind of easily affordable interest rates.

The current crisis has given the chancellor’s office a unique opportunity to put right failings and flaws in the current system, and also to prepare for future decades when an ageing population and a greener economy will require finding different ways of taxing a smaller tax base. Nasty tax shocks are unlikely on Wednesday or even this year but be in no doubt they are on their way. 

Read more: 

Have investors priced in a corporation tax hike?

Be on your guard, high earners and buy to let investors

After the pandemic: the tax changes to expect

Guest comment: A wealth tax isn't perfect but its better than the alternatives