When Chancellor Rishi Sunak launched a £350bn package of measures to support UK businesses during the coronavirus crisis it was welcomed by individuals and businesses. We, are all aware, however, that such measures are inevitably followed by a day of fiscal reckoning. As the number of infections from Covid-19 steadily decrease, speculation about the economic impact of a devastating global pandemic takes the opposite trajectory. Who will pay for the pandemic and what are the options for the Government?
In the last fortnight, there has been discussion in the press about the possible introduction of a wealth tax in the UK, to make up the fiscal deficit created by the UK's response to Covid-19. It was recently reported that the deficit is more extensive than the Government forecast owing in part to a reduction in indirect tax receipts by the Treasury, as the leisure, tourism and hospitality industries struggle with the UK's continuing lockdown.
The Guardian recently featured a study by Richard Murphy, a professor in political economy at City University in London, which considered a tax on wealth at the same rate as a tax on income. 'Wealth' in the study equated to a tax on pensions or a tax on property. Never one to knowingly understate the ability of increased rates of tax to raise revenues, Richard Murphy suggested that the Government has the potential to raise up to £174bn a year by taxing wealth at a rate equivalent to income, increasing the progressive rate of tax from 3.4% to 29.4%. The Guardian article concludes that 'those with wealth, are the only people who could afford to pick up the bill. If anything, everyone else needs a tax cut just to help them survive. Any politician with any concern for tax justice will have to understand this.' The effect of such taxes on the broader economy is not (and has never been) one of Mr Murphy's concerns.
The Guardian is not the only broadsheet to be exploring a tax on wealth. An article published on 17 May in the Sunday Times reported a statement by Liberal Democrat MP, Sir Ed Davey that the Government has been 'far too generous to the far too wealthy for far too long.' The inspiration for this statement reportedly being that the concession for non-UK residents to spend up to 60 days in the UK without becoming UK tax-resident, for exceptional circumstances beyond their control has been confirmed by HMRC to apply to time spent in the UK by individuals as a result of the pandemic. It would appear that when there is a deficit of £350bn to repay, all bets are off and the Government is at risk of being considered too kind to wealthy individuals, even if by maintaining the status quo and acknowledging that the global pandemic which has Prime Minister's Questions taking place from MP's bedrooms, and the borders of advanced economies such as the UAE, temporarily closed to non-citizens who have valid permits to work there, as exceptional.
It is unfortunate that the Sunday Times article did not pick up on the fact that HMRC has not extended the scope of exceptional circumstances at all, so that non UK resident individuals who returned to the UK as a result of the pandemic, who continue work in the UK remotely for their overseas employer, may be required to pay UK tax on their overseas income if they work in the UK for 40 days in the tax year. The exceptional circumstances in which we find ourselves are different to any envisaged when the concession for non-UK residents was first introduced, as a response to travel restrictions created by the Gulf War.
We are all looking for a way though these unprecedented times, and the hope is that a balance can be found which allows the UK economy to recover without increasing the taxes imposed on those who are perceived to be wealthy, to an extent that drives away individuals and innovation on which we might otherwise rely to reignite the economy. It is clear that the Government is under pressure to repay the deficit by taxing the perceived wealthy, but what are its options? Those on the table are currently thought to include:
- a property tax linked to council tax bands;
- significantly reducing the annual capital gains tax allowance, or increasing the capital gains tax rates;
- abolishing higher-rate tax reliefs for pension contributions;
- a one off or limited time 'solidarity tax.'
In 2010, the Institute of Fiscal Studies ('IFS') published a review of the current system for taxing inherited wealth with an annual 'wealth tax' adopted by other European economies such as France (the '2010 Study').
In the 2010 Study the property tax linked to council tax bands was considered to be a relatively straightforward way of implementing a wealth tax in the UK. However, a query as to whether the tax would be imposed on owners or occupiers, as tenants responsible for paying council tax, who are currently creating wealth for other individuals and businesses, rather than for themselves. The 2010 Study also concludes that: 'Such a major change in the tax system needs to be justified by a sufficient margin to outweigh the costs of change, and it is far from clear that the advantages of a wealth tax are sufficiently great to justify the risks of such a change. For example, the yield of wealth taxes in countries such as France has not been significant.'
The UK Government is being criticized for failing to learn lessons quickly enough from other countries who are weeks ahead of the UK in the fight against Covid-19. As we turn our focus to the economy, it is hoped that we can learn lessons from other economies which have experimented with the introduction of a wealth tax before us. This could be critical if the UK is to find a balance between raising capital to repay the deficit, and remaining open in both the short term and the long term to business and to high net worth individuals, who spend time in the UK and contribute their financial resources to the UK economy. Whilst it must be tempting for the UK Government to impose a wealth tax, the long term consequences of falling out of step on taxation with other advanced economies is difficult to quantify.
We will be keeping a close eye on developments and providing timely updates as the government's response to funding the pandemic becomes clearer. Politically there will have to be some changes to the tax system so watch this space.
We will be looking at this topic in more detail during a live webinar on 7 July.
