BDO: Sunak faces all sorts of challenges
In many ways the first Budget of 2021, which is set to take place on Wednesday, feels like a significant one. It’s against a backdrop of an ambitious roadmap recently unveiled by the Prime Minister to take us out of lockdown, while at the same time the deficit is the highest seen in the post-war era, meaning the Treasury coffers need urgent replenishment.
Chancellor Rishi Sunak therefore has a big challenge: to increase the tax take and support the individuals and businesses most severely impacted by Covid-19. We asked over 1,000 business leaders from SMEs which tax changes they would support Mr Sunak in making.
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The response was emphatic: the government should expand digital taxes to cover a wider range of online sales. Some 85 per cent of respondents indicated that with many online businesses flourishing while many traditional businesses have struggled, a trend that has increased during Covid-19, much-needed revenue should be raised by taxing online sales.
On Thursday it was reported that Mr Sunak is expected to announce a sharp rise in corporation tax rate with some suggesting the rate could rise to 25% or more over the course of the parliament. When we asked how Mr Sunak should raise the money to finance additional Covid-19 support measures, over one in three supported higher corporation tax rates as long as it was targeted at businesses whose profits come mostly from online sales.
Those in the industry are abundantly aware of the challenge – how to get digital companies to bear the burden of the increased tax rather than pass it on to consumers. A global consensus on digital taxes would be the ideal solution, and is espoused by many countries. This has not however stopped many of the same countries, including the UK from adopting their own version of the tax. But, the new US administration may provide a better opportunity to recommence international discussions.
Expanding digital taxes is not the only area that respondents would like the government to change. When asked how the Chancellor should change Business Rates for 2021 considering the difficulties that hospitality, retail and other high street businesses have faced, only one in five would opt to abolish Business Rates. Instead, more than one in three would like Business Rates to be based on rents actually charged or for property owners to be charged a percentage of profits.
Although the temporary exemptions introduced by the Chancellor have been helpful to some businesses, Mr Sunak should certainly consider a potential long term solution to how this corporate tax operates.
Meanwhile, the green agenda appears to be another priority for businesses, with 53 per cent believing that the government should use post-Brexit freedoms to increase business innovation in the UK through supporting CO2 reduction. This could be achieved by giving tax reliefs where companies innovate and invest to meet environmental standards. Some environmental taxes are already in existence, most notably the climate change levy on electricity, but there is certainly scope to expand this essential initiative.
Finally, opinions were divided about how the Chancellor should deal with the issue of intergenerational wealth, which has come into sharper focus as younger generations have borne more of the economic burden of the pandemic. 44% would like a well-funded skills-based programme to be established in order to train individuals whose jobs no longer exist. Whereas, one in three would rather the government prioritised simplifying Inheritance Tax to help the older generations pass on their wealth. The impact of Covid-19 on younger generations has been huge, and so intergenerational fairness should be a key consideration for all future fiscal policy.
Overall, it is clear that business leaders are looking for the government to introduce progressive steps to help individuals and businesses flourish: embodied by the fact that most business leaders accept higher taxes on companies will be a key component to the post-Covid-19 recovery. This a complicated and fast-moving situation, but if Mr Sunak is able to bring the tax system into the 21st century while overseeing a successful Covid-19 recovery, he would leave a mighty impressive legacy.