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Restarting the Economy – what UK Tax Policy changes might we see?

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In the wake of the COVID-19 pandemic, the UK Government faces two key economic questions. First, how do they re-stimulate the UK economy and protect jobs, and second, how do they plug the estimated £337 billion deficit caused by the pandemic.

Tax changes will be part of the Government’s response to help answer both questions. So what could we expect the Chancellor of the Exchequer Rishi Sunak to announce in the highly anticipated ‘Economic Update’ on 8 July and, looking ahead, in the Autumn Budget? Will he go further than tax rises and use this opportunity to make more fundamental reforms to the UK’s tax system?

In this article we consider some of the tax changes that may be on the horizon with a particular focus on the taxes that generally bring in the biggest tax revenues for the Government (income tax, National Insurance contributions, VAT, and corporation tax).

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Tax measures to re-stimulate the economy

Alongside other policy levers, tax policy has a key role to play in re-stimulating the UK economy – targeted effectively it can support investment and consumer spending. Read Big economic policy choices for Johnson and Sunak – can history help them? for a previous article exploring these policy issues in more depth. So, what tax policy measures might we see from the Chancellor?

VAT

There are increasing calls for the Chancellor to follow the likes of Germany and cut VAT to boost consumer spending and help the economy bounce back from lockdown.

The rationale for a VAT cut is that it aims to leave consumers with more money in their pockets which they can then spend. It also seeks to encourage consumers to bring forward purchases of big ticket items (for example household goods).

There is of course a precedent for such a move – Alistair Darling temporarily cut the standard VAT rate from 17.5% to 15% in response to the 2008 financial crisis.

The jury is out on whether this would have the desired impact on day-to-day consumer spending that would justify the significant cost to the Treasury. Studies from the 2008 financial crisis suggest that this would not necessarily be the case.

Another option open to the Chancellor would be to make targeted VAT cuts as in Germany and Austria to help industries worst-hit by the COVID-19 pandemic such as tourism and hospitality.

If the Chancellor does decide to make VAT cuts, we can expect the changes to come into effect swiftly. Of course, a VAT cut now may pave the way for later increases in the headline VAT rate, as was the case in 2011.

National Insurance contributions

With a number of businesses already announcing job cuts, there are real concerns that UK unemployment levels could increase to those seen in the 1980s, particularly once the furlough scheme ends in October.

Employer National Insurance contributions (NICs) are the single largest labour cost for employers other than wages. Therefore, we might well see a reduction in the 13.8% employer NICs rate or an employer NICs ”holiday” for certain employees, which would make it cheaper for employers to retain staff.