When and how will taxes rise?
Many people expect tax increases to be announced in the 2020 Autumn Budget, with some rises applying with immediate effect, but former Chancellor Philip Hammond takes a longer view.
Phillip Hammond was speaking at the Avalara Inspire 2020 online conference about the role of tax in the Covid-19 recovery and Brexit challenges. He is no longer an MP, having stood down at the 2019 general election, but he will soon join the House of Lords to continue contributing to the public debate on tax and other issues.
Hammond is broadly supportive of the UK government’s efforts to support the economy following the Covid-19 shutdown, but the current generous approach to funding can’t continue forever. At some point the extraordinary fiscal costs of 2020 will have to be recovered either through taxation or a reduction in public spending.
As interest rates are currently very low, the cost of servicing public debt is also low, so in the short term Covid support costs will be covered by continued government borrowing. In good times the government does not want to be carrying a level of debt approximately equal to the country’s GDP. A reduction in debt will provide headroom for fiscal manoeuvres to cope with the next problem that comes along, like Covid or another financial crisis as happened in 2008.
Two stages of tax policy
Hammond sees the tax landscape developing in two stages, which can be distinguished as firstly as presentational and secondly as substance.
He suspects that in the short term the government is likely to impose additional taxes on up to three groups:
- Foreigners in the UK
- Extremely wealthy individuals.
Hammond said these taxes will be imposed largely for demonstrational effect. The tax rises won’t raise large amounts of money as there are just not enough taxpayers in those categories to raise serious amounts of money.
Also, the people in those groups are not numerous enough to affect the political arithmetic (in other words they don’t have many votes). There will also be a large amount of continued borrowing to avoid tax rises or spending cuts that would affect the vast majority voters.
In the longer term, the only way to raise significant amounts of additional revenue is with broad-based taxes that do affect the majority of people (such as income tax, national insurance and VAT). But that will be a very painful and difficult political decision.
Delaying the pain
Hammond could not envisage the current government raising taxes that will affect the majority of the population, so it will push back the need to address the issue until beyond the next general election in 2024.
That delay is not necessarily a bad thing, as looking at the economic outlook Hammond said it would probably be unwise to impose significant tax increases before the recovery is well underway. That recovery could take at least two to three years, so 2021 would not be a good time to raise taxes. Then 2022/23 is getting close to the next general election.
Digital services tax
There has been real public anger over large digital-platform groups avoiding taxes in the countries where they operate. This became such a political pressure point across Europe that several governments have imposed digital services taxes (DST), in an attempt to tax those large online platforms.
The perceived tax avoidance has come about because the current international tax system was developed in the 1920s when trade meant physical trade in goods. Where the company has no physical presence in a country there is nothing for the local tax system to bite on. Those companies do pay taxes in the countries where they hold their headquarters – which is usually the USA.
Philip Hammond was involved in the design of the UK digital services tax. This levy applies from 1 April 2020 to tax turnover (not profit) from online market places, social media services and search engines where the global digital revenue of the group is at least £500m and the turnover in the UK is at least £25m.
The DST was always intended to be an interim measure that would be withdrawn as soon as there is an international agreement on a global settlement of a similar tax. The G20 group of countries, supported by the Organisation for Economic Development (OECD), has been labouring to come up with an internationally agreed tax regime.
This is not an easy task as the USA doesn’t agree that American companies should be subject to a global DST as this would amount to a redistribution of tax revenue away from the US Treasury to other countries. The USA agreed to not take retaliatory action on countries which have imposed a DST; that is until the revenue starts to be physically collected from those taxes.
For the UK the first payments of DST will be due in October 2021, but for France, the DST will become payable in December 2020. The USA could, therefore, start imposing retaliatory measures on France, or on the whole of the EU, from December 2020 or January 2021.
Interesting times ahead
Hammond had a final message for tax advisers everywhere when he said: “No one working in the tax field will be short of work any time soon.”