The impact of Covid-19 on the British economy has been seismic, with the aftershocks set to be felt for many more years to come. Consequently, the government is planning its long-term response to aid the recovery, and tax increases are widely acknowledged to be one of the main pillars that will be put in place.
The Office for Budget Responsibility has outlined that tax increases of £60bn or a return to austerity will be needed to restore the UK’s public finances to stability. But, with Prime Minister Boris Johnson ruling out austerity measures, the government must choose which taxes to raise carefully.
It is likely the government will look back to the response of previous regimes during similar critical events, particularly the 2008 recession and the two world wars. During both World War One and the Second World War, the UK Treasury issued war bonds to remove money from circulation and reduce inflation, while encouraging investment. It is not out of the realms of possibility that the Government could introduce Coronavirus bonds to help businesses recover from the crisis and have a similar impact to when they were issued during those two conflicts.
Additionally, the Government will undoubtedly be reflecting on the 2008 recession as a scale to work with. Many in government will have been involved in the recovery effort from that crisis, while data will be available to guide on mistakes that were made. With the Prime Minister ruling out austerity measures, tax rises that were introduced in response to the 2008 recession, such as the “bedroom tax” will likely be avoided to support that pledge.
Another area of past tax reform the Government could also draw experience from is Inheritance Tax (IHT). After World War II, the existing allowance for IHT was increased to 80% to accommodate for the implications of the thousands who lost their lives during the conflict. As such, a similar reform to IHT may happen to aid people who have lost loved ones due to Covid-19.
Taking a bit off the top
The economic impact of the Coronavirus Crisis could also lead the Government to target wealthier Brits with a newly formed wealth tax, but this would present huge implementation challenges. A wealth tax would represent a significant administrative burden, with a new framework required to accommodate for the influx of people declaring their assets. This would come at a time when most government departments are already overwhelmed with their response to the crisis. Alternatively, a one-off wealth tax would not require the same level of administration and could raise a significant amount of money in the short-term.
With so many administrative challenges associated with introducing a new wealth tax, it’s understandable that the Chancellor has first turned his attentions to Capital Gains Tax (CGT). A review of the tax was ordered a review in July and there are various reforms that could possibly be implemented to raise funds. Removing or reducing the annual exemption, which currently stands at £12,300, or reforming loss relief which would seem to be the most realistic policies. However, while this would apply to a lot of people, it would not raise a great deal of funds for the Government.
Another avenue the Chancellor could explore is to create other new taxes, and there is a strong possibility this could turn out to be the way forward. Yet again, there is certainly historical precedence for this, with income tax being introduced itself during a time of crisis, to pay for Britain’s involvement in the French Revolutionary War.
It has already been reported that the Treasury is considering a new tax on goods sold online, amid mounting concern about the collapse of the high street. In theory, this tax would involve a 2% levy on goods sold online and a mandatory charge on consumer deliveries.
The Treasury is also considering the abolishment of business rates and replacing them with a “Capital Values Tax”, based on the value of land and the buildings on it. The tax would then be paid by the owner of the property, rather than the business leasing it.
Sign of the times
The COVID-19 pandemic is reshaping Britain’s economy and will continue to do so for the foreseeable future. As such, new tax policies will reflect this changed landscape and new normal. For those interested in what the new tax regime will look like, a good place to start are the responses to global events that were on a similar scale. For example, coronavirus bonds and an increase to the inheritance tax allowance, similar to those introduced during World War II, could well be introduced.
Stimulating the economy is at the heart of the Chancellor’s plans to boost the recovery from the pandemic, and we could also see tax increases targeted at the wealthy. While a new wealth tax could prove to be too challenging to create, lowering the allowances on CGT could be an easier way to generate revenue. And as during other times of crisis, the recovery could also demand that new forms of taxation are introduced.
Whichever route the Government takes, we can be in no doubt that the future of the UK’s tax landscape will look very different as we navigate through the long-lasting impacts of the Covid-19 Crisis.
By Scott Barlow, tax director at ATC Tax