skip to Main Content

The outlook for the UK economy and taxation after coronavirus: an expert’s view

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.

Part One: Coronavirus – a catalyst for change

When life is uncertain, it is more important than ever to plan ahead. To consider the possibilities, to make predictions and to scenario plan. As my father was taught at his officer cadet training unit in the last war, “time spent in reconnaissance is seldom ever wasted”. So, following that principle, what do I think the outlook is for taxation and for the South West economy?

It is obvious to everyone that the government is spending more money than it is raising right now. We also know that the government couldn’t balance its books before this crisis started and already had a large debt burden.  We then need to consider what would be the impact of the largest shock to the UK economy for over 40 years.  To this we have the added uncertainties of Brexit.

As far as our economy is concerned, the wartime comparisons some are making are probably wide of the mark.  Our fathers are not returning from six years out of the labour market in uniform to blitzed towns and the most severe rationing in our history.  Instead, I would suggest that the oil price shock of the 1970s and the resultant three-day week is probably a better reference point.  Indeed, that event was instrumental in driving a new political census in the UK – one that led to what we tend to call Thatcherism and which now seems to have run its course.

The coronavirus crisis may well have a much more profound impact on all of us than the 1973-1979 oil crisis and I am not suggesting the two events are equal in scale.  What I do see is the current crisis as a catalyst that is accelerating changes that are already taking place. These include economic, technological, business practices and social changes.

To set these in context, we need to start by considering how the political and cultural consensus may change as a result of this crisis. In doing this, it is worth starting by considering the longer term drivers of tax and economic policy and the political approaches to them prior to Covid-19 and how those may be impacted by the current crisis.

Climate change

The lockdown has certainly reduced emissions.  It has also demonstrated that the British public may be more willing to adapt their lifestyles than the government and commentators had previously assumed.  It is likely that there will be an ongoing need to restrict social interaction and non-essential travel will continue to be discouraged – perhaps for years to come.  From a climate change perspective this has implications for HS2, public transport franchises and low cost airlines.

The dramatic reduction in car journeys and the fall in the oil price also has major implications for fuel duty receipts.  The government is likely to use the need to restrict journeys and the fall in the oil prices as reasons for increasing fuel taxation – but what are the implications for more rural locations?  Is it time to now return to the horse and cart?  Although that might seem an extreme suggestion, life in the South West does seem to have gone back several decades in the last few weeks.

Inequality

David Cameron’s mantra of “we are all in it together” dominated the coalition government years as taxes on income and consumption were increased in an attempt to reduce perceived inequality.  In recent years there has been a focus on increasing asset wealth inequality and the generational divide between the old and the young.  We have also had the Grenfell Tower disaster and the sharp focus it has bought on the quality of housing some people are living in.

This has all led to talk of mansion taxes and the need for those in better quality houses to pay more in taxation. This started off as a Labour party policy idea and whilst it had been dismissed by the former Conservative governments and the coalition government, higher stamp duty land tax was introduced on purchases of properties whilst lower taxation was allowed to continue on those already occupying properties, other than the introduction of a tax on houses in companies as an annual wealth tax.

All of this has been designed to tax the internationally mobile super-rich and has been principally focused on London properties.  In the run-up to the last Budget, there had been increasing suggestions that council tax should be reformed as it is still a quasi-poll tax with relatively little difference in the amounts paid compared to the value of housing.

All of this has been brought much more sharply into focus by the lockdown, as we have all been confined to our houses. As has been commented on across the globe, people with nicer houses are having a nicer lockdown. Being confined to a £2m detached house is a very different experience to being confined to a £200k flat.  Whilst the capital value may be ten times higher, the council tax assessment is probably only three times higher.  The fairness of that has been called into question and an increase in council tax for higher value properties seems more likely now in future.

Other ideas are that a wealth tax is now more likely to be introduced as one of the few viable sources of revenue and perhaps justified by an agenda of trying to tackle asset wealth inequality. As much of the economic damage to the economy is to help protect the elderly, should they be paying a greater share of their wealth as a contribution towards the tax revenue required?

International competitiveness

There has been a drive to reduce corporate tax and income tax rates over the last two decades, justified by the need to be internationally competitive.  This has been paid for in part by reducing tax relief on capital expenditure as the focus has been on intellectual property.  That pattern may now reverse as countries worldwide look to increase tax revenue and so will probably all increase tax rates at the same time.

If the aim is to re-balance the economy and increase manufacturing in the UK then plant and machinery allowances and the structures and buildings allowance may be made more generous to help recompense those companies looking to put in major investment.

Certainly it seems reasonable to expect a shift in focus away from an economy based around consumption and debt towards lower consumption and more investment.  The agenda for various Chancellors of the Exchequer in the recent past has been over the need to increase productivity within the British economy.  Part of the reason for the low productivity might be because of the very high rates of employment, many of whom have been in low value added jobs and so productivity per worker is inevitably lower.

If unemployment increases substantially (as it is likely to do) then it is very possible that the productivity stats will improve as a matter of course.  Regardless of that, the focus is likely to be on improving productivity and on increasing manufacturing as a proportion of the British economy.  Encouraging investment in businesses and spend on new factories and production lines is therefore likely to be encouraged by the tax system.

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: 

Part two: The post-coronavirus economy

Part three: How are we going to pay for the NHS?

FEATURING: John Endacott
John is the firm’s head of tax. He provides high level tax advice combined with commercial acumen in terms of managing and advising on personal… read more
Back To Top