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Boris Johnson has resigned – What does this mean for tax policy?
08 Jul 2022
Paul Brown, Tax Partner at WR Partners
Paul Brown our Tax Partner & Director of Advisory reflects on this week’s Government announcements.
“So, the Prime Minister has resigned but intends to stay in post until Autumn. (Although who knows how likely that is as we head into what seems to be entirely uncharted waters). Whether the PM stays in a caretaker role, in the short term or not, it will be some time before a new permanent administration takes shape. Given the current challenges facing the UK, this is an increasingly concerning situation.
Thinking specifically about the current economy, and specifically the cost-of-living crisis, the concern is that this turbulence could create paralysis in government policy. How likely is an interim administration to make critical policy decisions to address the issues the economy is undoubtedly facing?
From a tax point of view, it now seems like pretty much all bets are off. There were constant rumours of a rift between the Chancellor and the Prime Minister over whether to use the tax system to support those facing the cost-of-living crisis. Now, with both having resigned, what does that mean for tax policy?
Here are my thoughts:
The proposed hike in corporation tax to 25% is likely to be wound back, in full or at least in part. My thoughts have always been that there was a built-in ability for the government to wind back the rise as a pre-election bit of “good news” so while the circumstances are very different from what might have been envisaged I believe that still gives the government room for manoeuvre.
In his initial musings, the new Chancellor, Mr Zahawi, has hinted that the increase may be postponed or canned entirely. Given the economic situation and the ever-present need to increase business investment and productivity, imposing this rise would seem counterintuitive.
The NIC increase from 6 April is already in full swing, as is the NIC reduction for 1 July. Further tweaks to the rates here would cause significant complexity for employers and payroll providers so I don’t see that as a realistic option.
The fuel duty cut, announced in March, has done little to halt the rise in prices, even assuming it was passed on by retailers. Further changes here seem very unlikely when the previous reduction has had so little impact.
What about a temporary cut in income tax? Traditionally, a big vote winner in the lead-up to elections, an income tax cut will make a meaningful impact on those suffering the worst now. For example, if a full-time worker on £30k per year had a 2p cut, it would save them around £350 a year. Hardly life-changing, although every little certainly helps.
What about a cut in VAT? On the face of it, this would be a popular move, however, many essentials either do not carry VAT (most food for example) or carry VAT at a reduced rate (5% for domestic supplies). On that basis, a VAT rate cut is unlikely to help those struggling, however, it would benefit those with spare cash to splash out on discretionary items such as cars or consumer electrical goods.
Using the tax system to support those currently struggling is an attractive plan, however, the impacts are not as positive as first imagined. The ultimate solution must be to create a high wage, high growth, high productivity economy – something the ex-PM spoke about often but never seemed to have a clear plan for delivery. Whilst this is a much longer-term idea there may well be ways to use the tax system to incentivise the investment that would be the engine room for such an economy. However, they are not going to help heat houses and put food on the table now.
During the financial crisis from 2008 onwards, Governments around the World reacted in many ways. In Australia, the Government sent each taxpayer a cheque to spend as they saw fit to support those in need and to stimulate the economy. I’m not saying that this is the right answer, although it seemed to have some positive impact down under – but maybe now is the time to stop looking at the tax system to deliver support and think more widely and radically than Governments have done in the past. The tax system itself is a huge and frankly creaking edifice, long overdue for reform, so tinkering at the edges is at best like moving the deckchairs on the Titanic.
By all means, let’s get started on meaningful reform, but in the short-term let’s hope the current chaotic state of the Government does not prevent decisions from being made to help those hit the hardest. There are times when any decision is better than no decision at all – but frankly, to give proper, valuable help let’s stop focussing on the tax system as the delivery method and get something done!”
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