In this series of blogs, John Endacott, partner and head of tax at PKF Francis Clark, considers how the UK economy that emerges from the coronavirus crisis will look different and how taxes on individuals and businesses are likely to rise in the years ahead.
The move away from the high street to online shopping has been accelerated by the coronavirus lockdown.
The high street was already suffering from an out of date business model and lack of investment. Business rates assessments were excessive but the government has been unable to give up its dependency on that source of revenue. Events will have forced its hand and a reform of business rates must surely now happen (but we have been saying that for at least a decade).
The problems with the high street will continue even as the lockdown is relaxed, as social distancing is likely to remain in place in some form and non-food spending will undoubtedly remain subdued. As a result, profitability of retailing will be reduced.
This is likely to mean that retailers decide not to reopen poor performing units that have been closed and accept that they will have higher staffing costs and lower sales in the shops and restaurants that they wish to preserve for the longer term.
The changing face of the high street
The belief that the high street would be preserved by physical service business and attractions – casual dining, cinemas, nail bars and tanning salons – no longer looks credible in the light of social distancing. Furthermore, the government is likely to want to discourage such consumption for at least the next 12 months, so might a short term VAT increase be considered rather than old-fashioned rationing?
There is also the impact on landlords to consider. Given the number of empty units on the high street and the need for farming and fishing businesses to find more local outlets and to reduce food miles, perhaps more pop-up food outlets are to be expected in the short term, especially across areas like the South West.
In the longer term, landlords are likely to look to create more residential accommodation in the high street and so one may see a retraction of the physical footprint of the existing retail space. Across many South West towns and cities that should be possible whereas in other parts of the country that may be very hard without an overarching planning approach.
Overall though, one is likely to see a substantial amount of job losses across the hospitality and retail sectors, and the hospitality industry is likely to have several challenging years ahead of it.
When the recovery comes for the hospitality industry, UK domestic holidays are likely to rebound before international travel and there could be a strong recovery when that happens, but I think that that is some way off. For the South West economy, with a heavy dependence on hospitality and retail businesses, then it is likely to be very tough for a number of years to come.
The way we work
Working patterns have been changing and the old distinction between self-employed and employed is no longer appropriate because of personal service companies and the rise of gig economy workers. Philip Hammond looked to increase National Insurance on the self-employed to tackle this issue but gave up following a backlash from within his own party.
In announcing a bailout for self-employed workers, Rishi Sunak made clear that he would look to return to this issue and increase Class 4 National Insurance contributions in future. Appeals by directors that their dividends were in fact earnings are only likely to make it easier for the government to look to levy National Insurance on certain close company dividends in the future as well. Certainly there is a prospect of more tax revenue on income being paid by the self-employed and personal service company directors.
In terms of assessing the impact of furloughing of workers and the likely effect on future unemployment, then the longer the period of furlough goes on the more likely it is that many of those workers will find it hard to return to their jobs. It may well mean that the government will change tack and look to provide different forms of support from July onwards, but it is also reasonable to assume that as various businesses restructure to cope with the new environment around home working and continuing social distancing they will look to reduce their workforces. In turn this is likely to see less demand for physical office space, once again impacting on landlords.
We are seeing businesses across the South West adapting very quickly to the changed circumstances and the opportunities presented by the current crisis, and I believe that our vibrant and strong economy will continue, but there will inevitably be casualties.
The Brexit factor
There was already a move away from free trade towards more protectionism and greater use of tariffs. The current crisis has shown countries closing borders and having less interest in internationally co-ordinating solutions. The flexibility given to the UK by Brexit could turn out to be very beneficial and facilitate a re-balancing of the economy, allowing for more state aid, government intervention and control, with Wilson’s government of the 1960s perhaps seen as the model (although not a great model to be honest). On the other hand, this new international approach might make “beggar thy neighbour” policies more likely, with a corresponding reduction in world trade and with a re-run of the 1930s being possible.
To read the other articles in this series ‘The outlook for the UK economy and taxation after coronavirus: an expert’s view, click the links below: