Partner Dawn Register looks at what the recent political uncertainty means for UK tax and how tax reform is needed to build a thriving ‘new economy’.
Without wanting to use the much over-used word of ‘uncertainty’, it is fair to say that the tax profession is currently in limbo following last weeks’ election result. The big picture of a hung parliament alongside the pending Brexit negotiations, means that it is obvious many tax policy and HMRC matters will be rapidly slipping down the new governments long and pressing ‘To Do’ list.
Many will wonder whether the minority government with DUP backing will bring any change in influence over future tax policies. For example the DUP have historically supported future increases in personal allowances and a higher rate of tax for the wealthiest taxpayers. Also, as the Labour party increase their power in Westminster, will their tax ideas get more air time? The uncomfortable truth for the tax profession at present, is that we are unlikely to have any clear answers until we see the contents of the Autumn Budget some 5 months away.
The government reshuffle has seen Liz Truss become the chief secretary to the Treasury and David Gauke becoming the work and pensions secretary. David Gauke was previously spearheading the plans to ‘Make Tax Digital’ and we await to see if his departure from the Treasury has any impact on the overall direction of this controversial policy. This is the one measure in Finance Bill 2017 which affects the majority of taxpayers and is subject to widespread consultation, media coverage and lobbying of MPs. The most desired change in the MTD policies is a longer implementation period and greater concessions or exemptions for small businesses. All of this may now be more easily achieved given the current political climate.
Clients, as well as advisers, are also in limbo until the Autumn Budget regarding drafted changes to the tax code which were dropped at the 11th hour as a result of the snap election on 8 June. Many of the dropped measures do still require Parliamentary scrutiny and we are left wondering if there will be any time in the debating chamber given all the more pressing issues for the new government.
The key corporate tax changes, due to take effect from 1 April 2017 but with implementation now unknown, include: changes to the corporate substantial shareholdings exemption, new rules on use corporate tax losses and the restriction of corporate interest deductions. For individuals, the key change affected is the Deemed domicile rules for non-UK domiciliaries.
We expect an unchanged and ongoing focus on reducing tax evasion and tax avoidance post-Election. This is seen by both main political parties as a way of raising much-needed revenue for the Treasury and also a popular policy with the general voting public. Many of the international measures are driven by the OECD and will be unaffected by the U.K.’s departure from the EU. Most importantly is the information HMRC will receive automatically on overseas bank accounts under the Common Reporting Standard from September 2018 which is likely to feed future investigations and increase tax receipts. Alongside this there is a concerted effort to reduce participation in what HMRC sees as aggressive tax avoidance through litigation and use of accelerated payment notices. Advisers are also targeted as potential facilitators with punitive sanctions if caught assisting tax evasion or avoidance. A general increase in financial penalties for “non-compliance” with the tax law will also likely increase HMRC’s revenues. We expect no departure from this program of activity.
Therefore, the pressure on taxpayers and advisers to get tax affairs in order and correctly file returns remains unchanged. What is changing is the sanctions and consequences of not doing it right.
So if these are the issues at stake what would we like to see change?
The major issue facing the Government, as we see it, is how to create a thriving post-Brexit economy which harnesses the entrepreneurial spirit of our ambitious businesses, which is regionally balanced and which, despite leaving the EU, remains outwardly focused. One area of focus should be on the sheer volume and complexity of tax law. As it stands our tax code is an obstacle to growth, with more than half (57%) of the businesses we’ve spoken to saying they would support tax simplification even if it meant marginal tax rises. Many in the profession would also like to see National Insurance and Income Tax aligned to create one simple payroll tax. Having parallel taxes creates unnecessary bureaucracy and added compliance costs for employers. Aligning both taxes with an ambition to merge both into one payroll tax would remove economic distortions, reduce burdens on business, and improve fairness and transparency.
Maybe the Government should go a step further and announce a moratorium until 2020 or until Brexit negotiations are finalised (whichever comes first) on any tax changes that do not simplify the tax system? A commitment to simplicity would send a clear pro-business message, allowing the Government to focus on Brexit and giving businesses some certainty in uncertain times.
The cliché is true. Uncertainty does seem to be the new normal. Tax policy will undoubtedly fall down the list of priorities as the Government looks at its packed agenda, however, we would urge policymakers to give as much clarity and simplicity to help individuals and businesses plan for the future.
For a reminder of what was promised in the Election Manifesto’s for tax policies, please view the BDO tracker.
Dawn Register is Tax Partner at BDO.