Radical reform of tax system on the cards

By Rebecca Durrant, National Head of Private Clients, at national audit, tax, advisory and risk firm Crowe

Today (Friday 17 August) saw the launch of the Treasury Committee’s inquiry into tax reform after the pandemic. It was clear from the discussions that there is an appetite to radically reform the tax system, something which has not been done for decades.

The cost of the pandemic has run in to billions and this deficit will need to be remedied. It is clear that “nothing is off the table” but following the discussion, the three key areas, in our view, are:

  • A review of the tax relief system – there are a number of key tax reliefs which could be under fire; there have already been whispers around changes to private residence relief on the sale of a person’s home which currently costs the treasury £20bn per annum; Entrepreneurs Relief on the sale of businesses has already been reduced but could be removed altogether; the removal of inheritance tax business relief is part of the ongoing review of IHT and tax relief on investments under the Enterprise Investment Scheme (EIS) could also be a target.
  • The ‘three person problem’ – this was mention several times and concerns the different tax treatment of workers e.g. three people all work for the same business, one is self-employed, one is employed and one operates through a personal service company. They all do the same job, are paid the same rate but pay very different amounts of tax.
  • The structure of business – international structures that move the tax treatment of what is essentially UK based income and assets offshore are already under scrutiny and there is a raft of anti-avoidance already in place to try to combat tax leakage here. Clearly if we are to ask people to contribute more via their personal tax system then they need to have clarity over these avoidance measures and be confident they are fair and robust.

This review could essentially be a call to arms for us all to pay a bit more by way of a “solidarity tax” to see us out of this crisis. The debate of who pays more – workers, savers or the wealthy – will continue as the more wealthy older generation could be asked to contribute more to support the younger generation seen to be suffering the most.

Wealth tax in some form is likely play a part. The Chancellor’s requested review of capital gains tax is likely to be the start of this, with increased tax rates as minimum. For investors and business owners an increase to the rate of dividend tax is also likely to be under review, possibly alongside accumulated profits for businesses. This could be part of the wider plan to bring owner-managers in line with the employed.

There are concerns around all the areas highlighted – how would a removal of some of the tax reliefs affect the housing market? Also, EIS is an important source of investment for early stage and growing businesses. Where will the support and funding come from if these are removed?

For the self-employed, any changes to their taxation will need to be balanced with their entitlement to benefits. Is it fair to ask them to pay the same as the employed without the same entitlement to holiday and sick pay, for example? Concerns around this have been highlighted following the financial support the government has provided throughout COVID as many have fallen through gaps here due to their business structure.

In our view, any changes to the tax system need to be simple, fair and robust. Only then will people engage sufficiently. We have danced around the edge of change for a while now. Maybe it is time for the biggest tax overhaul since the 1980s?

There will be a call for evidence with a date of 28 August for submissions.



 Miriam Sherwood, Senior Marketing Manager (Regions), Crowe. Tel: 0121 543 1900

Notes to Editors:

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