The fiscal consequences of the pandemic imply inevitable tax increases such as the rise of corporation tax, but the UK economy will first need time to recover, says Sarah Gabbai, tax senior associate at McDermott Will & Emery.
“What the government needs to do is to allow the economy to get going, to give it the chance to recover, to recuperate, and that will also give Treasury time to consult properly on what kinds of taxes will need to be put in place and to consult on the design and detail of those taxes,” she says.
Chancellor Rishi Sunak is considering new measures including cutting pension tax relief, aligning capital gains tax, increasing corporate tax and introducing an online sales tax, according to The Telegraph.
The corporate tax could increase from 19 percent to 24 percent in the UK – a change that would not impact investments in the country, says Gabbai.
“There’s a school of thought that says if you raise the rate of corporation tax, it makes the country look less competitive as a place to do business, and I can see why people say that. However, I never was of the view that knowing the rate of corporation tax to be below 20 percent would make any difference or would be beneficial in any particular way.
“I never felt that there was a need to lower the rate of corporation tax to below 20 percent in the first place. If you look at corporate rates across the OECD, there are plenty of countries whose corporate tax rates are easily in 20 percent,” she says.
“I don’t think that raising the rates to 24 percent would have a significant detrimental impact on inward investment into the UK.”
The corporate tax rate in Spain is 25 percent whilst Belgium’s rate is 29 percent, with France at 31 percent – a significant gap from the UK currently.
But according to Adam Marshall, director general of the British Chambers of Commerce, a potential increase of corporate tax would negatively affect businesses and the period of recovery.
“We’ve got to give the recovery space to build and grow,” he said in an interview with TimesRadio.
“We have to remember it is SMEs in particular who always pay their corporation tax bills in full whereas there are some larger multinational companies that have interesting tax arrangements in place – you tell them that their tax rates are going up, you tell them that it’s not a good environment to invest in, it’s not a good environment to take a risk, you will hamstring the recovery.”
Structural tax system change
The UK tax system needs a meaningful structural change, in which the three main taxes including VAT, National Insurance, and income tax would be reformed, according to Gabbai.
“The problem is that governments are typically very reluctant politically to touch the big three taxes. What I think really needs to happen here is a major reform of those three taxes and there are ways that one can do this.”
She suggests aligning income tax with National Insurance or merging them together to form a single tax.
“We also have at the moment deeply unequal treatment between employees on the one hand and self-employed on the other. The tax system effectively penalises one form of work contracts over another, so one form of labour over another and that is widely regarded by many practitioners as a major fault line within the tax system.
“Aligning income tax and National Insurance, possibly also with the simultaneous introduction of the payroll method across all businesses and not just employers, would go a long way towards eliminating those inequities,” she says.
Gabbai says the zero and 5 percent rates of VAT should also be eliminated to raise revenue efficiently, causing businesses to move from a net VAT recovery position to a net VAT payments position.
“Out of VAT, we have a system where we have a lot of reduced rates and zero-rated supplies. The policy reasons for making them zero-rated were originally brought about because the supplies were deemed socially beneficial in some way, but a lot of practitioners nowadays are questioning the value of these exemptions, these reduced rates,” she says.
The introduction of the sales tax on online commerce could also be detrimental for supply chains, says Gabbai, as businesses will already be subject to VAT and the Digital Services Tax (DST).
“It wouldn’t really make sense. With the sales tax, you have this problem that a cascading effect where you have different layers of sales tax being applied at different points in the supply chain, so you could end up with potential double or multiple taxations. We already have a system of VAT which is I suppose the closest thing we have to a sales tax. I can’t see it taking off in the UK.”