George Bull

Written by: George Bull

George Bull

Senior Tax Partner

How can the Chancellor limit tax increases after lockdown ends?

Tax revenues are set to plummet as the Government’s response to coronavirus enables businesses and individuals to postpone payment of their tax liabilities, and as PAYE and VAT receipts slump with the decline in UK economic activity.

At some point, all of this will be reversed. Past liabilities will have to be paid as HMRC’s Time-To-Pay agreements run their course. This suggests further cash flow pressures for businesses which will by then be trying to comprehend and work within whatever the new normal looks like.

Make no mistake, once the current phase of the coronavirus has passed, the economy will not simply slip back into its previous patterns. While significant numbers of employees are on furlough, many jobs have already been lost permanently. It is also becoming disappointingly clear that many businesses will not reopen their doors after the lockdown ends.

The way the lockdown ends will be crucial but will not be under the complete control of the UK Government. To end the lockdown too soon risks a second spike in coronavirus deaths. Leaving the relaxation too late could cause unnecessary damage to the economy and to the mental health of our citizens. 

While countries such as Spain and France try to develop exit strategies which avoid a second wave of infections, UK projections (albeit based on lamentably little test data) suggest that the country should brace itself for a second wave of infections in October and November 2020. For that reason, the UK does not yet have a published exit strategy.

However, it does seem that the reopening of workplaces and the resumption of jobs may have to be phased. If that is the case, who should be first and who last? And what is to happen if a business which has reopened and incurred all the costs of restocking, re-engaging with employees, customers and suppliers subsequently must shut down again? Will that be so much wasted money? Can the country afford a second bail-out plan?

The question of what the country can afford is the subject of a vigorous debate among politicians, economists and banks. Taxation is one certainty woven into the fabric of this debate.

Before the December 2019 general election, we sounded warnings that taxes would have to rise and that the increase would be borne by a reduced tax base. This was reflected in Rishi Sunak’s 2020 Budget, which announced tax policy decisions to increase the burden of taxation by £27 billion over the next five years. That Budget was delivered with little regard to the coronavirus and against the background of a Conservative party manifesto commitment not to increase the rates of income tax, NIC or VAT. 

Since then the UK economy has been upended by urgent steps necessary to protect the country, so far as is possible, from the worst effects of the coronavirus. In announcing a support package, the Chancellor made it clear that in future the self-employed may face higher NI contributions as a result of the help they are receiving during the pandemic. It should not therefore be taken for granted that the manifesto commitment to lock tax rates will survive coronavirus. 

While it is too early to predict what the UK tax system will look like after the virus has passed, one thing is clear: much more tax will be paid by fewer companies and individuals. If temporary tax measures are required to achieve this, we strongly recommend that they have sunset clauses, limiting their impact to a fixed number of years.

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