The COVID-19 crisis has brought an unusual opportunity for major tax changes. Difficult decisions about the tax system lie ahead for the government in order to strike a balance between using tax cuts to support the recovery but also increasing taxes to return public finances to a ‘sustainable footing’.
The government will need to be ambitious and take big steps towards the wider tax reforms that are needed. But what does this mean for family businesses?
By giving the self-employed the same level of support as employees during the crisis, the Chancellor has paved the way for a future reduction in the tax advantages of self-employment. Post COVID-19 it would be an easy sell politically for the Chancellor to raise the self-employed class 4 National Insurance Contributions (NICs) to 12%.
There are also increasing voices in favour of increasing taxes on company owner-managers, for example by increasing dividend taxes with a view to aligning overall marginal rates on all forms of income. Higher taxes on the self-employed would make this case stronger by otherwise increasing the tax incentive to incorporate.
Increasing taxes on company owner-managers in the aftermath of the crisis might be more difficult politically given that their incomes are not well supported by the COVID-19 policy response. However this has been viewed as a distortion and many business owners may live to regret telling the Chancellor in lobbying that they follow a strategy of paying themselves a small salary and taking most of their income in tax-advantaged dividends.
In this year’s Budget the government announced a fundamental review of business rates. One of the objectives of the review is to ‘reduce the overall burden’ of the business rates system, recognising concerns about its impact on the high street. Since then, COVID-19 and the social distancing response has paralysed the high street. The government has responded by providing various forms of rates relief which taken together, cost £28 billion, almost as much as a full year’s business rates revenue in normal times.
What businesses really need is for the government to create a strategy for how different forms of gains and income should be taxed and a road-map for getting there over the next five years. This would aid transparency and help businesses to plan, facilitate discussion of a range of related tax issues and reduce opportunities for arbitrage.
For more information on the issues discussed in this update or to discuss your business’s circumstances in more detail get in touch with your usual Crowe contact.