24/10/18

This Budget, I’m Dreaming of a Tax System Fit for the Future.

(City A.M.) -- The announcement that the Autumn Budget would take place in October – almost a month earlier than we’ve become accustomed to – surprised a fair few people.

It probably shouldn’t have. Philip Hammond understandably wants his finance bill passed safely through the Commons without it getting caught in the crosshairs of ongoing Brexit negotiations and the plethora of EU summits.

Given this apparent desire to have everything done and dusted with minimal fuss, one might be excused for thinking there won’t be an attempt at anything too drastic.

The current political landscape hardly lends itself to significant changes, and the last time the chancellor tried to introduce a real change (the increase in National Insurance contributions for the self-employed), it ended in a difficult climb down.

However, the Prime Minister has hinted at tax rises to help fund the extra £20bn a year promised to the NHS and the “end of austerity” heralded in her conference speech, while committing to protecting areas like the fuel duty freeze that could have helped raise the revenues. We may therefore see the Treasury looking for some creative tax raising measures.

The taxation of digital business is clearly front of mind. Hammond has said that the UK is prepared to go it alone with a digital services tax in the absence of international agreement.

But acting too soon is risky on many levels. Technology developments continue apace, bringing ongoing changes to businesses and how they operate – no sooner is a tax rule developed than it risks becoming redundant.

The desire to act quickly is understandable, but when dealing with issues spanning numerous territories, broader agreement is helpful and international cooperation is vital.

To get around this, Hammond may announce the introduction of a digital services tax, but with a delayed start date, to allow for alignment with the international community as the details are worked out.

This could be a neat way of navigating a path between trying to update the tax system for the modern economy, while preserving an environment that attracts the most innovative businesses once we’ve left the EU.

How we tax employment, especially the self-employed, will be another area under increased scrutiny. A balancing act is needed to ensure that we continue to encourage entrepreneurship and flexibility, while adapting policy to the changing labour landscape.

In every area, Hammond’s priority will be not just balancing the books, but ensuring that the UK can remain attractive and competitive on the world stage. That will likely feed into any changes to corporation tax.

Despite suggestions that the government may row back or postpone planned cuts to the UK corporation tax rate (currently 19 per cent and due to drop to 17 per cent in April 2020), the Prime Minister has again pledged that the UK should have the lowest rate in the G20 post-Brexit.

But while corporation tax is a headline grabber, what businesses are really longing for is greater clarity and simplicity. If we genuinely want to attract companies large and small to the UK after Brexit, the government should resist too much tinkering with tax rates and take a proper look at our tax base to rethink what is taxed and why.

Britain has an unwieldy and complicated system. There are more than 1,000 reliefs floating around that were introduced at different times over decades – many are no longer needed, and serve no purpose except to create layers of complexity.

This Budget is a chance for an overarching rehaul of the tax system. Brexit poses a massive challenge, but there has never been a better time to create something fit for the future, a tax system that complements modern ways of working and doing business.

This is about setting out a road map, one that shows a clear path through the murkiness created by current uncertainties to a place where the UK can thrive. Let’s start now.