I recently played my son, aged 6, at our first game of ‘proper’ Monopoly. While reading the rules I noted that, “The bank never goes broke. If the bank runs out of money, the banker may issue as much as may be needed by writing on any ordinary paper.”
I hadn’t realised that Monopoly was actually a blueprint for modern day economic practices! Needless to say, first turn he rolled a 7, took a chance that sent him to Mayfair, bought it and that was the start of my first (but not last) thrashing at the hands of my son.
The amount of money the Government has granted, lent and generally made available since the C19 pandemic started has been staggering. Now, as lockdown begins to ease and life, but not as we know it Jim, starts to resume, the question is how to pay for all of this.
There is no doubt that borrowing, particularly with global interest rates being near zero, will increase but inevitably so too will taxes.
Generally speaking, there are three methods of raising tax revenue: create new taxes, increase the rate of existing tax or decrease reliefs. I expect the Government will use a combination of all of these in the coming months.
Create new taxes
The area where creative juices flow the most is in relation to new taxes. From the cow flatulence tax in Denmark to the tethered balloon tax in Kansas, Governments have thought up ways to tax almost anything, so what might we see in the UK?
In my view, the most likely area where we see a new tax is in relation to UK property. A ‘mansion tax’, similar perhaps to those in parts of Europe, on high-value residential property, might hurt the “absent oligarchs” so often written about in the media. Alternatively, a ‘second home tax’, might be a way to obtain revenue not just from the international community but also from the domestic community owning second homes in, say, Fife.
More dramatic but shorter lasting might be a one-off ‘community contribution tax’. The Government could introduce a single year additional tax to anyone who earned more than a particular threshold last year and exceeds that threshold this year. While this would be unpalatable for many of the super-wealthy, it would likely be supported by the public as it only impacts those people with substantial amounts of income both last year and in the current year. The Government would have several years to reconcile those hurt by such a tax before the next election.
Increase the rate of existing tax
Before being elected, the Government promised not to increase income tax, national insurance contributions or VAT. While manifesto pledges have always been more like guidelines than actual rules, it would not be unreasonable to treat the current pandemic as a game-changer allowing them to revisit these promises. That said, the Government needs to encourage spending and we recently saw Germany announce a reduction in their rate of VAT precisely to encourage spending.
The Chancellor has made it clear that the taxation of the self-employed is likely to mirror that of employed individuals and, at least for the sake of simplicity, that makes sense. Income tax rates may well remain the same for normal earners but could a return to 50% income tax be on the cards? More likely, in my view, is that the capital gains tax rate, currently at a respectable 20% may increase significantly. There are also rumours (with the football transfer window being delayed there has to be something else to talk about) that inheritance tax will be aligned to income tax with gift recipients above a certain threshold being required to report the receipt as income and pay tax at their personal rate.
For years there have been talks of reform to the existing UK tax reliefs, particularly business property relief for inheritance tax. Will we finally see shares in AIM listed companies no longer qualifying for relief or 100% relief being reduced to 50% across the board? The UK still has to encourage entrepreneurial spirit so I don’t expect relief for unquoted shares to disappear just yet. Other areas up for consideration are agricultural property relief, particularly on land, and further restrictions on entrepreneur’s relief.
Finally, there will be the usual cry of decreasing tax avoidance, punishing evaders and their advisors. The problem remains that what the Government thinks is tax avoidance is often just sensible tax planning but the Government knows it is a good sound-byte. Expect lots of noise about non-doms but don’t expect major changes to the non-dom regime nor the remittance basis (for now at least).