COVID-19 and its far-reaching economic implications has affected how we all operate on a global scale, with both businesses and individuals reeling from its effects some 3 months after the Government imposed “lockdown”.
To help businesses and individuals combat the financial implications of COVID-19, the UK Government launched a swathe of temporary funding measures throughout the early spring. But as the economy steadily begins to reignite, the focus has now shifted to the future of our economy, what this might look like, and how it might be achieved.
Finding the right balance between boosting the economy whilst looking to recoup lost or deferred taxes during the lockdown period is now crucial. So, what measures can we expect from the government?
Tax efficient measures the Government may consider
Catherine Desmond, Private Client Partner at Smith Cooper comments “It would seem counter-productive to increase taxes in the short term, despite the large amount of government spending and debt that has been required over the last three months. The Chancellor will no doubt want to focus on stimulating the economy so that profits and spending produce tax revenues in the longer term, and there are several ways in which this may be done.”
Here, Catherine considers several strategies that the Government may implement.
- A CHANGE TO INCOME TAX THRESHOLDS
“Income tax rates stay the same, but perhaps the thresholds for the different rates of tax increases. This would put more money in people’s pockets to spend. Employers may like to see a cut in the costs of taking on new employees perhaps by cuts in the employers NIC rates or by tax incentives for training and apprenticeships.”
- R&D AND CAPITAL ALLOWANCES
“We already have encouragement for business spend in the form of R&D and capital allowances, but these may be made even more generous to encourage capital investment and innovation.”
- REDUCTION IN SDLT
“The housing market may benefit from a reduction in SDLT or an increase in the threshold value at which it starts to become payable.”
- BUSINESS RATES
“Support for shopping locally with smaller businesses may come at the business rates level or by way of more grants, whilst supporting specific sectors such as agriculture can be helped by maintaining our high standards and ensuring that substandard imports are not encouraged at the expense of UK businesses.”
“Rebalancing the books may have to wait a while, but we may well see an increased focus on tax avoidance to raise funds, and perhaps an increase in taxes on unhealthy foods and pollutants as measures that are less likely to attract too much negative attention in the meantime.”
“Longer term, capital taxes may well rise. Capital gains tax has been levied at a very low rate for some years and there have been whisperings of a wholesale reform of Inheritance Tax in favour of a lower rate at the cost of reliefs for some time now. These changes would probably not raise sufficient revenues alone and more mainstream tax rises might well be on the cards further down the line.
Indirect Tax initiatives – Striking the balance
Gavin West, Head of VAT and Indirect Taxes at Smith Cooper comments “As we emerge from the crisis, striking the balance will be key. Although recouping lost or deferred tax revenue will be a top priority, we may find that the Government is now reluctant to place extra burden on businesses in the midst of the Brexit transition phase.”
“We would expect a sector by sector approach in relation to VAT and Indirect Tax, with various initiatives and measures being introduced which may include the following:
- AN INCREASED FOCUS ON TAX AVOIDANCE AND FRAUD
Businesses could expect a greater number of compliance inspections or queries being raised by HMRC to help generate additional revenues. If tax rises are to be introduced, then it is likely that they would be in sectors which will not upset much of the electorate or the media. The gaming industry is the usual scapegoat although as it is already subject to excessively high indirect tax rates in comparison to other industry sectors there may be no headroom to generate additional amounts of any significance.
- REDUCED RATE OF VAT
After the recession in 2008/09, the rate of VAT was temporarily reduced to 15% for a 12-month period. I am not sure that this would be the best course of action now. Under current legislation, any cut would have to be limited to 2.5%, which is unlikely to create significant savings.
Stakeholders have previously lobbied Government for VAT to be charged at 5% rather than 20% on supplies made by bars, restaurants, hotels, and leisure venues without success. However, given the devastating impact Covid-19 has had on this sector a reduction in the VAT rate would now be most welcomed. This would not be a radical move with reduced rates already applied to this sector in other European countries.
- HMRC – COLLECTING DEFERRED VAT PAYMENTS
We will be watching with interest HMRC’s approach to collecting deferred VAT payments – with billions of pounds of VAT not being collected in the period from March to June 2020, businesses will be expected to repay the amounts deferred from March 2021 onwards. Given that some businesses have not yet fully opened and uncertain trading patterns ahead it is entirely likely that there will be insufficient cash available for some to make these payments. Will HMRC take a sympathetic view and allow negotiated time to pay arrangements? We are likely to find out sooner rather than later.”
The unprecedented outbreak of the COVID-19 virus has affected how we all operate on a global scale
The economic recovery will be complex, and many business and individuals will no doubt be concerned about difficulties that may lie ahead as we emerge out the other side of the crisis and start the road to recovery. Dean Nelson, Business recovery and Insolvency Partner says “Unfortunately, some casualties may be inevitable, but in times of difficulty, early intervention is paramount. Futureproofing your business and implementing a strategic recovery plan at this point is crucial.”
We have recently issued a COVID-19 guidance framework, to help businesses and individuals understand the options out there if they are facing financial pressure. We encourage anyone to seek help in navigating the impact of COVID-19 and the repercussions it has had or is projected to have on businesses and individuals. The earlier you seek professional advice, the greater the options available to you.
Furthermore, our COVID-19 support hub is updated on a regular basis, and we also continue to issue regular updates keep our clients and contacts up to date with any changes. To subscribe to our mailing list, click here, or if you have a general query and would like to speak with one of our experts, click here to submit an enquiry.