Tax policy making in a changing world: The opportunities

The reverberations from successful populist movements have not just caused earthquakes in the political class – they could also lead to a seismic shift in tax systems in the West’s economies.

As President Donald Trump enters his second month in office, he is making plans to announce sweeping reforms to simplify the US tax code and shake up how business taxes work. Trump plans to lower the top tax rate from over 39 percent to 33 percent and cut the number of income tax brackets for individuals from seven to three. He is also seeking to overhaul the business tax code, including a “border adjustment tax” of 20 percent on all imports of goods and services into the USA, while U.S. exports of goods and services wouldn’t be taxed at all.

On the other side of the Atlantic, both of France’s presidential frontrunners have pledged reforms to the tax system. Centrist independent Emmanuel Macron wants tax and spending cuts, while far-right Front National leader Marine Le Pen wants higher taxes on businesses which use migrant workers.

As our Prime Minister gears up to trigger Article 50 before the end of March 2017, very little is known about what the UK tax system outside the EU will look like. Reports have speculated that the Chancellor will slash corporation tax to make the UK more attractive to businesses, but in reality this is highly unlikely. What we do know is that there will be a huge push to make the UK the best place to do business. As regulatory changes, including the Apprenticeship Levy, Making Tax Digital and potential corporate governance reforms are poised to increase operational and compliance costs for business, Brexit presents the UK with an opportunity to ease regulatory burdens by creating a simpler, clearer tax system which is the bedrock of a strong, competitive global economy.

What could the new system look like? The next few years present an opportunity to review the business tax relief system. The review should consider whether tax reliefs are having the desired effect – that is, supporting the intended businesses and boosting bottom line productivity. Currently, EU state aid rules restrict the UK’s ability to offer certain reliefs freely, such as for the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) and Research and development. Post Brexit, the UK might not be obliged to comply with these rules there could be an opportunity to reconsider some targeting of these reliefs to areas of businesses which have perhaps been under-supported so far.

Before the UK starts a race to the bottom by cutting the rate of corporation tax, we need a public debate on how we tax companies. Similarly, a dialogue should be opened up on the future of National Insurance.

Outside of the EU, the UK will be free to change how VAT is charged or could even do something more radical, but initially the UK’s VAT principles are likely to mirror the existing rules. Nevertheless, Brexit presents an opportunity to make changes, especially as the UK may lose access to the ‘one-stop shop’ VATMOSS system. Getting the new VAT system right will be essential for the health of British exports, which will depend on clear rules.

With the number of high profile tax avoidance cases in the news, public faith in the fairness of the system has been tarnished. Many recent changes to the international tax regime have been driven by the OECD, and in particular its Base Erosion Profit Shifting (BEPS) Action Plan. The UK’s participation in these initiatives is unlikely to be unaffected by the UK leaving the EU.

To create a strong, global economy which keeps apace with the changing nature of employment, UK policymakers need to make it easier for workers to understand their status and make it clear that employment law and tax law are determined separately. In his Spring Budget the Chancellor proposed an increase in the National Insurance rates for the self employed. I suggest we need an informed national debate about the rates of NI paid by the self employed and employees, whether these should be different and if so by how much. The Government should focus on a clear, consistent and simple framework which includes clarification that employment law and tax law are determined separately.

As the UK prepares to embark on a new path outside of the EU, there is a unique opportunity to rethink the tax system. A simpler tax base will enable us to become a more agile, competitive, and innovative economy – and the most attractive place to do business in the world.

Anita Monteith

Anita Monteith

Anita Monteith is the tax technical lead and senior policy adviser on tax for the Institute of Chartered Accountants in England and Wales. She is also a Special Adviser on tax to the Treasury Select Committee of the House of Commons.
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