Bloomberg Tax
Free Newsletter Sign Up
Bloomberg Tax
Advanced Search Go
Free Newsletter Sign Up

Rethinking the U.K. Tax System: How Far Will Chancellor Rishi Sunak Go?

Feb. 17, 2021, 8:00 AM

Chancellor of the Exchequer Rishi Sunak’s second budget is expected to look beyond the pandemic: most of the government’s plans for financial support for businesses as they emerge from lockdown are expected to be announced on February 22. This provides the Chancellor with the opportunity to rethink his tax strategy to deal with the medium- as well as short-term challenges facing the U.K. economy.

The Chancellor faces the twin challenges of providing sufficient economic stimulus, including incentives for business to achieve growth in the short term, while setting out a longer-term plan to restore the public finances. This is a formidable challenge and is likely to lead to more complexity in the U.K. tax system.

Corporation Tax

There have been rumors that the Treasury is considering a rise in corporation tax rates to help shore up government finances. This might not seem very supportive of struggling businesses but perhaps a limited rise in corporation tax rates for larger companies that have fared well during the pandemic is possible. This would not directly hurt loss-making businesses or small businesses and probably would not have an immediate impact on consumer spending. However, if this measure were introduced alongside a range of investment incentives as part of a post-Brexit “corporate tax roadmap” it would be more likely to win public support than other tax rises.

Digital Services Tax

The online businesses that pay Digital Services Tax (DST) have done well from the pandemic, so many would argue that they should pay more tax. The U.S. has recently announced that it has suspended penal tariffs originally planned for imports from France because it applies a DST—thought to disadvantage the U.S.’s digital giants. The change in administration in the U.S. might mean that the risk of U.S. retaliatory action on the U.K.’s levying the DST is reducing, and it is therefore possible that the Chancellor will feel able to increase the U.K.’s DST rate (currently 2%).

The government may also consider lowering the entry threshold to bring more businesses within the existing DST or even widening the scope of tax beyond services, to capture a wider range of online sales. This may sound like another sales tax on top of value-added tax (VAT), but now the U.K. is outside the EU this may be an attractive medium-term option.


It seems likely that the VAT cut (the 5% rate) for tourism and hospitality will be renewed for the rest of 2021–22. Along similar lines, it would not be too surprising if the Chancellor announced a new “go out to help out” scheme to support all dining and cultural venues when it is safe to do so, possibly later this year.

A wider cut to the standard rate of VAT cannot be ruled out completely but it would very expensive so is likely to be time limited. Post-Brexit, the government may also make a range of small technical changes to the VAT rules that HM Revenue & Customs has sought for many years—most of which can be expected to increase the VAT take.

Other Potential Measures

Boosting business investment will be high on the Chancellor’s agenda so increases to capital allowances—particularly those that support the government’s carbon reduction agenda—are quite possible. Such increases might be linked to the freeports that the government is creating and possibly new enterprise zones created in areas hit hard by Covid-19. Similarly, although the U.K. is continuing with some EU grant schemes for now, announcing new growth grant schemes for businesses in certain areas and regions will be attractive for the Chancellor.

Post-Brexit, there may be scope for the government to simplify the existing patent box regime in the U.K. to make it more effective. Simplifying and broadening the rules for U.K.-based research and development may also be on the government’s agenda. Whether the Chancellor seeks to create similar tax incentives, for example for exporters, remains to be seen.

Of course, post-Covid, businesses may struggle to borrow to fund growth. To partially address this, it is possible that the government may relax the qualifying rules and increase the investment limits for existing incentives such as the Enterprise Investment Scheme, Seed EIS and Venture Capital Trusts. Alternatively, innovative new schemes may be announced and plans for a national infrastructure bank may be fast-tracked to support the economic recovery.

It should be noted that under the U.K.’s trade deals there remain limits over the government’s ability to provide grants and incentives. The Department for Business, Energy and Industrial Strategy recently launched a consultation on replacing the EU state aid rules with the U.K.’s own subsidy control system. This consultation will not be concluded before the budget and new rules are not likely to be finalized for some time. Therefore, it may well be that the Chancellor only consults on new incentives for the time being, until the new rules on subsidy levels are finalized.

Post-Brexit, it should be possible to implement simpler and more flexible rules but there will have to be some limits so as not to trigger disputes with the EU under the free trade agreement and to make it easier to sign new trade deals with the U.S. and other trade blocs. The most likely scenario is that the Chancellor will announce short-term measures to help businesses with the import and export difficulties that have emerged since January 1.

Green Taxes

Press coverage of the government working on carbon tax proposals ahead of the Climate Change Conference in November has led to much speculation and I would expect to hear more on this on budget day. President Joe Biden is taking great strides in his environmental agenda and Prime Minister Boris Johnson will want to be able to demonstrate that the U.K. is taking radical action as well.

There may also be increases in existing green taxes across the board for businesses, although fuel duty might again be frozen to protect individual consumers. Alongside the new plastic packaging tax, the government may choose to resurrect the Packaging (Extended Producer Responsibility) Bill as a long-term measure to help develop the “circular economy” in the UK.

Taxes like the Climate Change Levy could also do with an overhaul—it seems counter-intuitive that businesses buying electricity from wholly renewable sources still have to pay the levy! With the new U.K. subsidy control system in mind, perhaps environmental objectives will be made part of the qualifying criteria; for example, ensuring that any new tax reliefs or incentives are only given where there will be an environmental benefit—a radical step, but it would show that the government is taking climate change seriously.

Boosting Employment

Across the board cuts to National Insurance Contributions (NICs) would be popular after the pandemic to boost employment, but they would be expensive so are probably unlikely. However, the government is already introducing NIC cuts for employers who take on former armed services personnel from April 2021 and further specific NIC incentives for employers who take on young employees may be popular after the pandemic.

Throughout the pandemic, the Chancellor announced direct grant and support schemes to boost employment of younger workers—the age group most likely to have lost their jobs as a result of lockdowns. It seems certain that the Chancellor will revive and extend these for 2021 to boost youth employment as the country comes out of lockdown.

Rishi Sunak was prepared to take “innovative” steps to help the economy through the pandemic and I hope he is prepared to take a similar approach to rebuilding our economy. If he does, I suspect there will be short-term measures to encourage growth, particularly in targeted areas, with longer-term measures flagged as part of a consultation process.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Paul Falvey is a Tax Partner with BDO who has considerable experience of working with international businesses and regularly advises on a range of corporate transactions including acquisitions and disposals, restructuring, and international tax planning.

The author can be contacted at: