However, the bulk of this additional tax burden would fall on entrepreneurs (who, subject to certain conditions, are currently entitled to a tax advantageous rate of 10 per cent on their business asset disposals of up to £1mn), and owners of agricultural and commercial property. However, taxes raised on gains from sale of listed shares and residential property will diminish due to inflation-indexing of gains.
This type of reform would represent a radical shift in the business-friendly landscape that the governments of different hue have been providing and the new government has reaffirmed.
This may well damage the goodwill of the business community, which the government has been so keen to retain and raise to contribute towards achieving its investment and growth objectives.
It may also cause fundamental changes in business behaviour, flight of capital and talent abroad, and difficulties in raising additional taxes due to avoidance and evasion, all of which could result in lower than expected revenues.
Tax neutrality
A relevant concept in structuring taxes is neutrality of tax rates as applied to diverse types of economic activity and internationally across the borders. This is to ensure that no activity group is favoured by government policy.
International tax harmonisation has been topical in this context, as governments in higher rate tax countries have been genuinely concerned about the erosion of their tax revenue bases through unfair competition by much lower rate tax countries.
Tax neutrality is broadly compatible with the principles stated above and would still give a leeway for the government’s political decisions about the overall tax take. However, the governments of different hue have used their tax-raising powers to generate additional taxes from windfall gains by specific sectors such as banks and energy companies.
An issue of particular significance to our current tax system is its ever-increasing complexity. Tax simplification has become a topical issue, and various proposals are continuously being developed to reduce the number of allowances and deductions as well as restructuring some taxes. These measures could also generate additional revenue.
A number of allowances and deductions are historical legacies that may no longer be required, and others are quite new like 100 per cent unlimited capital expensing first year allowances for companies introduced in the March 2024 Budget.
It is important to examine the merits and potential monetary impact of each simplification proposal, not only on public funds but also on individual groups, particularly in the context of equity and efficiency.
Punitive policies may well contribute to flight of capital and talent from the country, whereas achieving higher economic growth is contingent upon attraction of capital and talent to the country.
