As we reach the half-year point of 2021, the COVID-19 pandemic has yet to be finally beaten. However, thankfully there is now light at the end of the tunnel due to the vaccination programme which has proceed especially quickly in the UK. Many businesses are also on the path to returning to something like normality.
The ongoing lockdown and disruptions have significantly increased government borrowing worldwide. In the UK, for example, the government has provided COVID-19 support totalling £299 billion (April 2020–2021) and in the Budget on 3rd March, additional support was announced which will take that figure to £352 billion.
Tax policy is arguably more important than ever this year, as it will inevitably be one of the mechanisms which the government can use to rebuild the economy. Even considering the large size of the UK economy, these are clearly considerable amounts of money and eventually this support will need to be paid for through a combination of tax rises and restraint in public spending.
In the Budget, the Chancellor Rishi Sunak announced a delayed tax rise in the form of an increase in Corporation Tax and, at the personal tax level, a freezing of personal tax allowances until April 2026.
The rise in Corporation Tax is highly significant: it has not been increased since as far back as 1974. It will now rise again in 2023 from 19% to 25% with the aim of producing an annual tax revenue boost of £17.2 billion. This tax increase marks a reversal of the trend in the UK to move to increasingly lower Corporation Tax rates.
The intention had previously been to reach the lowest tax rate in the G20, but the pandemic has shifted this approach greatly. Even after the increase, the new 25% rate will still be the lowest in the G7. It remains to be seen whether this will have an effect on the UK’s desire to be seen as the inward investment destination of choice for global businesses.
Even though the current 19% corporation tax rate is relatively low, the UK ranks only 22nd out of 36 countries in the Tax Foundation’s International Tax Competitiveness Index 2020. This can probably be explained by the broadness of the UK’s tax base combined with the comparatively narrow range of tax incentives available compared with other jurisdictions.
Capital Gains Tax
There were certain notable omissions from the Chancellor’s Budget in 2020. Crucially, no mention was made of the introduction of a wealth tax. Whilst such a tax cannot be entirely ruled out, the possibility of its introduction has certainly receded at least for the short term for political reasons.
What was even more of a surprise was the absence of any change to the rate of Capital Gains Tax (“CGT”). An increase in the rates of CGT had been widely expected. It had been speculated that rates would rise from the current rate of 20% (28% in the case of real estate) to match the current higher and additional rates of income tax. This would have resulted in an additional-rate taxpayer paying CGT at the penal rate of 45% on gains.
Whilst this change did not materialise, it is unlikely that CGT will remain at its current rate, as a future increase is still expected in the short to medium term.
International changes to the tax system
Of course, the UK is not alone in looking to the tax system to assist in meeting the bill for COVID-19. By way of example, some commentators have predicted a rise in the US corporate tax rate from 21% to 28%. In Germany, the reintroduction of a wealth tax has been suggested, and the Russian income tax rate has recently increased to 15% from 13% for wealthy individuals. In Latin America, wealth taxes are currently being considered by several governments in order to pay for the costs of the pandemic. Argentina has just brought in a one-off tax that applies to the wealth over ARS 200 million of both resident and non-resident individuals. Peru, Mexico, Chile, and Brazil are also all examining the possibility of a wealth tax.
As would be expected, many countries are actively considering amending their domestic tax laws in response to the pandemic. Many governments worldwide have had to spend far more than could have been anticipated in supporting their economies over the last eighteen months. Increases in tax rates and the broadening of the tax base offer an obvious way of increasing revenue, albeit one that is unlikely to be popular with the general body of taxpayers. Whether a country does use tax as a tool to balance its books will obviously depend on its specific circumstances. Some countries may decide to squeeze public expenditure as an alternative strategy – not unlike what occurred following the 2008 financial crisis.