A leaked Treasury document, revealed in The Telegraph, outlined that the UK will deploy a mixture of tax increases and reductions in public spending to shore up government finances, marking another major economy eyeing up tax hikes after Saudi Arabia tripled its VAT rate on May 11.
This adds to the concern among taxpayers that the tax burden will significantly rise in the aftermath of COVID-19, increasing the risk of unilateral measures and hostility towards multinational enterprises (MNEs) in some regions.
The proposed policy package, drawn up for Chancellor of the Exchequer Rishi Sunak, stated that the "base case scenario" now forecasts that Britain will have a £337 billion ($415 billion) budget deficit in 2020, compared to the forecast of £55 billion in March's budget.
The document states that tax rises and spending cuts, which would raise between £25 billion and £30 billion, would be needed to fund the increased debt. In the worst case scenario, the Treasury will have to raise £80 billion to £90 billion a year.
"To fill a gap this size [in the public finances] through tax revenue risers would be very challenging without breaking the tax lock. To raise fiscally significant amounts, we would either have to increase rates/thresholds in one of the broad-based taxes (IT, NICS, VAT, CT) or reform one of the biggest tax reliefs (e.g. pensions tax)," the document states.
The government argues that the package would be economically better to break the tax lock, a key election promise, to achieve revenue on the necessary scale than attempt to raise this level of revenue. The document states that it would also be important to consider measures that support “a growth-friendly composition of tax” such as consumption taxes, property taxes rather than taxes on income or profits.
The package states: "We should also look at opportunities for new taxes that could meet some of the government's broader policy objectives, raising revenue to relieve long-term fiscal pressures (e.g. an NHS/social care surcharge or new carbon/green taxes). A 1% increase in the basic rate in the basic rate of income tax would raise around £5 billion p.a."
The language and recommendations within the package makes it clear that the UK government will seek to raise revenue through indirect taxes, focusing on VAT and giving more weight to environmental taxes.
Some taxpayers feel that companies cannot be the only ones to bear the burden in economic recovery and that governments should be making more concessions to reduce deficits.
“One thing governments should work on is that they should prepare an administrative reform on their side to reduce expenses. Companies will argue that they can’t be squeezed for more taxes,” said one head of tax at an engineering company.
“The idea that there will be imminent tax rises to fund the economic consequences of lockdown is not a welcome prospect and one hopes the government's plans in this regard are better than their response to the pandemic," said Miles Dean, head of international tax at Andersen Tax UK.
Sunak has faced increased scrutiny over the UK’s plan to foot the COVID-19 bill, but has yet to make any public comments on future tax rises or reductions in public spending.
The Treasury did not have any further comments on the leaked documents.
These documents reveal the difficult discussions that government treasuries are having to make worldwide. While the UK’s plans may change, it shows that even the most business-friendly jurisdictions will have to leverage tax in order to patch the gaping holes in government spending. More will follow.
