The 9 June will mark the beginning of a new era in UK tax policy. Whoever wins, it is clear that the era of political parties committing to lower taxes is over. Stealth taxes and the never ending war on avoidance often increased the take, but the direction of travel was clear – a slowly declining headline rate of tax.
With the demands on the state to deal with healthcare, an ageing population and education, the major political parties have made it clear that tax rates are going to be under pressure. Even the Conservatives are only pledged to ‘keep taxes as low as possible’, not a high bar against which to be measured. The other parties openly campaign for higher taxes for certain sectors. Greater demands are being placed on the State and there seems to be political agreement that they should be met. This requires tax revenue.
What is clear is that the UK tax system is complicated. The last Finance Bill was the longest ever and it was only the election that led to the jettisoning of huge swathes of proposed tax law. Some of the measures that were lost had been through a long consultation process and are specifically designed to raise taxes from larger companies. We will probably see them again. These include:
- restrictions on interest deductions for large companies
- restrictions on the use of brought forward losses.
Both of these proposals are designed to reduce the availability of tax deductions. The tax rate can be kept low, but if there are fewer allowable deductions the effective rate goes up. Private buy to let landlords have experienced a similar approach on their investments in the last few years. With all parties committed to raising additional revenue it seems likely a new government will reintroduce these measures after the election.
With all the parties committed to delivering enhanced public services, we can expect tax revenue to be raised in two ways. The straightforward increase in tax rates as already outlined by Labour and the Liberal Democrats, alongside the reduction of reliefs. Wealthy pension savers only need to consider the restrictions placed on making additions to their funds to see how this approach can be extremely effective.
What do taxpayers need to do?
The new government will need to move rapidly to outline its fiscal plans. The chances are, we can expect another Budget (an emergency Budget?), bringing the tally up to three this year, so we would do well to remember four things:
- Tax legislation is rarely retrospective. The law now is known – keep calm and carry on. If there is a relief you fear may be lost – use it now.
- Don’t suffer from Budget fatigue – the next one will take place in the middle of a tax year, so will make ‘instant changes’ harder to make. April 2018 may be the earliest that new laws can become effective.
- Pay attention. Chancellors have got into the habit of preannouncing changes that will come in over the next few years. It’s tricky to remember what happens and when. Make sure you know which changes will impact you and the timing of their introduction. It gives you a chance to prepare.
- Governments like to get the bad news out of the way early in their term. If there is a large majority and no likelihood of a further election, expect more aggressive tax policies from day one. A small majority is harder to manage which can make it harder to push through unpopular policies. Where this balance lies will determine how radical any changes are.
This article first appeared in Taxation in June 2017.