Tax policy is up in the air, being reviewed by various Parliamentary and other bodies, particularly as a response to Covid-19 and the huge effect it has had on our economy and public finances. It's a good moment to take stock of four events or announcements in just two weeks, up to 20 July 2020.
First, a meeting of an All-Party Parliamentary Groups (APPG) on property taxes which I helped lead on 7 July, then some key themes from a launch of two reviews, one of CGT, announced on 14 July, by the Office of Tax Simplification (OTS); and the other on 17 July by the Treasury Select Committee, of tax strategy as a whole. Finally on 20 July the Public Accounts Committee (PAC) reported on a review of tax reliefs. All this, showing the transformational time we are living through, and a statement from the Chancellor on 8 July which was mainly about spending to help the economy, rather than tax, other than a big concession on SDLT for house buyers.
As Chair of the Chartered Institute of Taxation's (CIOT) Private Client (UK) Tax committee, I have the privilege and responsibility to be involved in a lot of thinking about tax, considering detailed changes and ways in which draft legislation and HMRC guidance might work better. This focus is technical and operational, how it is designed and works given the stated tax policy, and the CIOT (with other professional bodies) tries to help HMRC improve the operation of taxes and e.g. to avoid unforeseen consequences. Looking at the policy is a very different matter, so it’s helpful to take my CIOT "hat" off sometimes, and reflect on where tax is going.
1. APPG on Intergenerational Fairness
Substantial tax breaks over many years have enabled many now retired to build up large pensions and equity in homes – the two largest forms of wealth in the country. The APPG was set up to consider tax issues between the generations and has recently reviewed its report on Inheritance Tax, from January 2020, in the light of COVID-19.
I was then asked by STEP to open a discussion of property tax – specifically council tax, SDLT (Stamp Duty Land Tax) and Capital Gains Tax (CGT) main residence (PPR) relief – at this APPG on 7 July, the day before the temporary SDLT cut was announced. Council tax, which replaced the most unpopular "poll tax" is a tax on property value (rather than individuals - as with the community charge) but it doesn't increase substantially with property value, and there's a cap, so it's seen as a regressive tax. SDLT has tried to address the issue of first time buyers, with a special relief introduced in 2018, but there are still issues about how it works for some of the younger generation looking to get started on the property ladder.
PPR relief is so controversial, and this ties in with all the items below – it's central to the OTS review, as an expensive element of CGT, it’s a major tax policy element playing a big part in the development of our housing market and the PAC say there's insufficient analysis of how such reliefs work. All chancellors like announcing reliefs and exemptions in Budgets, but what happens afterwards?
The importance of this APPG is in considering the perspective of the younger generation who haven't built up their wealth, their equity in property (or pensions) as yet, and may need some help from the tax system to get going, just as the baby boomers and older generations had so much help from tax breaks. Some are looking again at a Wealth Tax, recognising that those who have it may be best placed to pay more tax now and recognising the breaks they had had before. There are always winners and losers in tax changes but the APPG is asking questions about priorities here.
2. Review of CGT by the OTS
This new review grabbed some attention, around 14 July, with speculation that the Chancellor might change CGT rates to bring them in line with income tax. The issue of different rates is, indeed, on the OTS Agenda, but this review isn't a post-COVID-19 initiative of Rishi Sunak. I attended a meeting in November 2019, of the OTS and CIOT, looking at a possible CGT review and its potential scope, as this is what the OTS does. Their role is to look at how taxes might be simplified, on behalf of HMRC/The Treasury, and there's lots here for them to get their teeth into.
2a. The Principles of CGT (responses by 10 August 2020): first the OTS is looking at allowances, exemptions and reliefs; the treatment of losses and the interaction with “other types of income” and whether different rates should apply to short and long term gains.
2b. The main part: the call for evidence on the big issues (responses by 12 October 2020): The scope and rates of CGT, annual exemptions, PPR (main residence) relief, reliefs for business owners/shareholders, issues in administering estates and the interaction with IHT and other taxes, are (among others) all in the mix. It's very timely, in this time of transition, and the OTS are likely to produce some radical ideas and not merely pure “simplification”.
The July 2019 OTS report on IHT, suggested some major changes. With both IHT and CGT, the Government will probably cherry-pick the ideas they like best, rather than accept wholesale (they never do). I'm leading a team from CIOT to meet the OTS in early August to share some ideas. It's good to have this body doing an important job of standing back from the day to day politics, to ask how the tax works in practice and could be made better, tax neutrally.
3. Review of Tax Strategy after Covid-19 by the Treasury Select Committee.
Four key areas of focus were identified by Mel Stride, chair of the Treasury Select Committee, on launching their review of tax strategy on 17 July, hosted by the CIOT (as the leading body for tax professionals in the country).
- The changing terrain across which taxation is applied – the international aspect, e.g. the new digital services tax; where we need to catch up with companies like Google, Facebook and Amazon, who create value through interaction with UK users that isn't currently being taxed.
- The way people structure themselves in employment, and the interplay between those employed by employers, the self-employed, and those who operate through their own company. The Chancellor did make a nod in this direction when bringing in his COVID-19 relief for the self-employed.
- Young people and the accumulation of wealth and who has accumulated it. Mr Stride said, "We saw very high levels of wealth accumulation in the 50s and 60s. It tailed down for a number of decades but it has recently been bumping up again. There's a concentration of wealth in the hands of a relatively dwindling number of individuals, many of whom are of an older demographic, and there is no doubt...that young people will need some kind of break in terms of the tax changes...going forward".
- Tax reliefs – anticipating the PAC report – as we talk a lot about raising tax, the rates, thresholds etc. but the vast amounts of tax foregone on reliefs, which would make a huge difference if some of the biggest were abolished. There would be huge political challenges, not least because one is the absence of VAT on food, but the top 5 or 6 would apparently come to about 10 percent of the UK tax take.
The inquiry will look at the major long-term pressures on the UK tax system are, how the UK can protect its tax base from globalisation and technological change, and whether such pressures should be met with tax reform. The Committee will also seek evidence on what overall level of taxation the economy can bear, the role of tax reliefs in rebuilding the economy, and whether there's a role for windfall taxes in the post-COVID-19 world. It'll be very interesting to see what they find.
4. Public Accounts Committee (PAC) Report on management of tax reliefs
Tax reliefs have an enormous impact on tax revenue but the PAC (which has an oversight of how money from taxation is used by governments) say it is far from clear whether they deliver the economic and social objectives they are supposed to support. The full cost of tax reliefs is unknown, but could exceed £159 billion a year, and they are not sufficiently evaluated to ensure they are delivering as intended. The impact of COVID-19 on public finances makes it ever-more important that tax reliefs are demonstrably cost-effective.
The PAC says it's staggering that HM Treasury and HMRC still have insufficient understanding of the cost and value for money of tax reliefs, as well as who benefits from them. With the extra current pressures on public finances, they must do more and focus on the largest and riskiest tax reliefs, improve their reporting on the cost, beneficiaries, and impact of tax reliefs to enable Parliament to scrutinise the value for money of these schemes.
Conclusion: Two of the tax reliefs referred to above illustrate this. CGT relief for main homes is very important for our housing market, and for the wealth of our nation, but is it working effectively? I’m not suggesting it be removed, just assessed to see how it works in practice. Likewise, the SDLT changes need analysing to see if they meet the targets they are designed to help, rather than just benefitting some taxpayers in a random way.
For all the drama of budget announcements, the system needs to work in an effective way to meet identified public policy needs. Looking back to both points 1 and 3 above, I hope this will involve some rebalancing between the "haves" who have had so many tax reliefs, and the "have nots" (who may be their children or grandchildren) who haven't had the chance to develop the established wealth to give them the long term security of the generations above.
Published: July 2020
A monthly briefing from Irwin Mitchell
July 2020
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