Coronavirus: How Will We Settle The Bill?

21st Sep 2020
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It’s no secret that the COVID-19 pandemic has cost the economy dear. So who’s going to pay for it?

The coronavirus headache

The UK’s fiscal deficit for 2020-21 has been estimated at somewhere between £300 and £350 billion thanks largely to the COVID-19 pandemic. Representing around 14% of GDP this figure is truly eye-watering.

Chancellor Rishi Sunak’s swift roll-out of the Coronavirus Job Retention Scheme helped to at least hold back a tidal wave of job losses. But with the scheme shortly drawing to a close, the real challenge is clearly still to come.

So how is the country going to balance the need to tackle the deficit without completely killing off any economic green shoots? Tax rises are pretty much a given, and speculation is rife about how, where and when they will occur.

Potential VAT increase

Earlier in the year, Sunak took the step of temporarily cutting VAT for the tourism and hospitality sector from 20% to 5% to try and ease its suffering. But this all-time low is unsustainable, especially as VAT is a hefty source of tax revenue for the government, raking in £132 billion in 2018-19. Relatively small rises can therefore have big impacts.

National insurance tax rise

As part of his election pledge, Boris Johnson promised to raise the National Insurance threshold from £9,500 to £12,500 inside five years. It was intended that this would provide a welcome hand to lower earners.

As it stands, this is still a goal for the government, meaning that the revenue will need to be clawed back in other ways. Rishi Sunak has already hinted that future tax rises could be burdened on the self-employed. Time will tell.

Income tax hike

Good old income tax could also be due for a fattening up in the not too distant future. This would presumably be levied most heavily on the highest earners.

However, the government needs to get the delicate balance right, as income tax increases that are too high risk stifling an already fragile economy. One thing they do have on their side is that at least people do understand the coronavirus came out of nowhere and has to be paid for. An income tax hike is perhaps the obvious answer in footing at least some of the bill.

Online sales tax

Since lockdown was introduced, online sales have exploded. Indeed, at the height of the lockdown in May, recent statistics show that online grocery shopping alone jumped by more than 32%. Great if you’re an online retailer, not so good if you’re a bricks and mortar outfit on the high street.

Some kind of online sales tax is therefore another option where online sales are taxed fairly heavily. Not only would this bring in more revenue for the government, it may encourage shoppers to hit the ailing high street. However, there are many critics who are against an online sales tax, saying it curbs innovation and doesn’t support what is perhaps a natural shift in consumer shopping habits.

But the fact remains that a levy of, say, 2% on items sold online would generate £2 billion a year for the treasury. It could even go one step further, where we see higher delivery charges too (potentially touted as designed to reduce emissions).

A rise in ‘wealth tax’

Taxes that typically affect more ‘affluent’ UK citizens may also be targeted for increases. It gets a bit political here (we’ll stay well away from that!) but it’s something that’s been banded about long before coronavirus came along.

Potential wealth taxes could include a hike in so-called mansion tax, that is council tax and other taxes levied on high-value properties. There could also be an increase in inheritance tax.

Capital gains tax increase

There has been some speculation in the press that Chancellor Sunak, following a call for a review, is planning to raise capital gains tax. Whilst not necessarily a very popular move, it would mean the government potentially clawing back large sums of money very quickly. As well as increases, capital gains tax exemption is also likely to come under the microscope. One avenue may be that individuals will need to pay CGT when they sell their main residence, instead of only on additional properties as it is now.

Read more: Rishi Sunak orders review into UK capital gains tax

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Of course, if your client’s tax affairs are a little more complex or you’d like more comprehensive advice, you’re very welcome to deal directly with the Myriad Associates team. Just contact us using the details below.

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