The Treasury Select Committee will undertake an inquiry into the UK taxation system to review how the current framework operates, and whether it is in need of reform.
The inquiry will focus on long-term pressures on the existing regime; how can it be protected from globalisation and technological change; as well as looking into a possible tax reform, the committee said.
More specifically, the review will examine and collect evidence on what role can tax reliefs have in rebuilding the economy, after the hit of the coronavirus outbreak and subsequent lockdown measures, and whether there is room and scope to introduce windfall taxes.
These are usually levied on unforeseen or unexpectedly large profits, especially if they are believed to be excessive or obtained unfairly.
Mel Stride, chair of the Treasury committee, said: “The UK economy, like many economies around the world, has been placed under extraordinary stress due to coronavirus, with the worst of the economic fallout perhaps yet to come.
“Tax will play a major role in the years ahead in restoring the public finances and ensuring that we have a recovery which is balanced across the UK and fair to all.
“So, the Treasury committee has launched this inquiry to examine how the government should approach taxation after the coronavirus.”
Good cop, reality cop
Rachael Griffin, tax and financial planning expert at Quilter, believes the spotlight will now be on chancellor of the exchequer Rishi Sunak, who has handed out billions to support those struggling during the pandemic, but who, in one way or another, has shied away from making hard decisions.
That is something he won’t be able to do in the upcoming Autumn budget.
She said: “So far, throughout the pandemic, we have been witnessing the chancellor’s good cop routine as he announces wave after wave of unprecedented fiscal support.
“But come the Autumn, the good cop will give way to reality cop and the chancellor will be forced to reel in the spending and increase tax to ensure the sustainability of the public finances.
“There’s no doubt that the chancellor will have to raid the piggy bank, and difficult choices on tax policy will have to be made. The committee’s focus on post-pandemic tax reform is a welcome next step as it is important there is adequate consideration of how any potential change can be implemented efficiently, without distorting behaviour and while ensuring fairness to all.
“The recommendations it puts forward will surely contribute to the pressure on the chancellor to find creative solutions to the complex challenges he faces.
“The chancellor has signalled his intention to put the public finances back on a sustainable footing in the Autumn, but precisely what this should mean for tax changes has already generated considerable debate.,” Griffin added.
Example of these are the Office for Tax Simplification’s review of the capital gains tax (CGT) regime ordered by the Treasury on 15 July 2020, and the rumoured removal of the triple lock for pensions.
Raise taxes fairly
“The chancellor faces the unenviable challenge of balancing the economy and public spending while raising sufficient tax revenues,” Griffin continued. “This is difficult enough during periods of stability, but it becomes a particularly thorny nettle when demand slumps, public debt widens, and there is expectation from voters that the country spends more on key public services.
“He must now look at where to apportion taxes across income, consumption, capital and assets, and consider how the Exchequer can raise funds fairly, and without compounding economic damage by suppressing demand and curbing incentives to work and invest.
“That complex challenge explains why political commentators are proposing a wide range of potentially radical reforms, from one-off wealth taxes to scrapping key reliefs on pensions and investments.
“Ultimately, however, policy making is less about the art of the possible, and more about the practically achievable and politically acceptable. Rishi Sunak will be looking at what is necessary, but also what is palatable to his party and what can be legislated for and implemented in good time.
“Complete overhauls of the tax system are unlikely in the Autumn given the practical implementation challenges and the distortions it could generate, but tweaks and changes are inevitable.”
While Griffin believes a ‘wealth tax’ is harder to pull off, a rise in CGT rates and a reduction of the CGT annual allowance are far more likely to happen.
“We may also see the chancellor seek to lean more heavily on those with the broadest shoulders, and who have been less impacted economically by covid-19,” she added.
People should be included too
Gill Philpott, tax and trust specialist at Ascot Lloyd, asks why the inquiry has been rolled out now.
“There have been no major tax reforms since the 1980s,” he said. “Tax reform has been considered over the decades, but it has proved very difficult to get any traction and support. The current pandemic has elevated the need for a wide-reaching tax review.
“The current pandemic together with the ever-widening gap between the nations’ income from tax take and expenditure on social and healthcare now makes a review an imperative. With little scope or appetite to make large cutbacks in public spending, to begin the process of putting the UK’s public finances back on a more sustainable footing will need a raid on the tax system.
“The inquiry will be taking a bigger picture view and is not looking to tinker with the individual tax rates, allowances, exemptions and reliefs in the current system. The inquiry also identifies the need for education in the area of tax in the wider societal environment. Framing a future tax system should not just involve those in the tax professions and government posts but also the wider population.”
Yet, Philpott argues, even though the current system is under review, this should not deter people from either embarking on or sticking to their financial planning.
“A wide review of UK taxations is firmly on the table and while the possible changes to UK taxation will lead to a period of uncertainty, a point to consider is that tax changes are not often detrimentally retrospective, so planning now with known current rules could mean tax savings may be gained rather than lost.
“Taking good financial advice makes sound financial sense.”
