Could The Shift Towards Home Working Bring About A UK ‘Tax Crisis’?

Many observations – both positive and negative – have been made about the greatly heightened tendency towards remote working in the UK since the onset of the COVID-19 pandemic. However, one factor that arguably hasn’t been discussed as deeply as it perhaps ought to be, is the impact the home-working revolution could have on the country’s tax takings. 

This has been the focus of a new research paper, “The Impact of Digitalisation on Personal Income Taxes”, published in the British Tax Review.  

The study was led by Professor Rita de la Feria, Chair in Tax Law at the School of Law at the University of Leeds, and Dr GiorgiaMaffini, a tax policy expert and Leverhulme Trust Fellow at the Oxford University Centre for Business Taxation. 

The researchers said that while recent global tax discussions had centred on solving challenges digitalisation has posed to corporation tax, a much bigger crisis could loom as a consequence of the transition to widespread home working amid the coronavirus situation. 

 

“Very significant challenges to personal income taxes” 

In words that are likely to interest clients of accountancy services in Plymouth, Wellington and other parts of the UK, Professor de la Feria commented: “The acceleration of digitalisation and the spread of remote working internationally as a result of the pandemic poses very significant challenges to personal income taxes.

“Newly mobile workers are likely to be at top of the income distribution, and even a small number could result in significant revenue losses to the UK, of between £6bn and £32bn.” 

Professor de la Feria suggested it was probable this would lead to more stringent employment rules, new rules on tax avoidance, and “increased personal income taxes competition with countries fighting to attract new mobile workers.” 

She said the impact of such labour changes was likely to be more significant in countries like the UK that greatly depended on income tax, particularly from small numbers of high-earning, and now possibly mobile, taxpayers. 

“How big these challenges are, and how countries will react to them, will be a key issue in the coming years.” 

 

Worries about the tax consequences of a “digital economy” 

Income tax paid in the UK totalled £187 billion in 2018-19, with the 4.2 million higher-rate taxpayers responsible for 35% of that; 31%, meanwhile, came from additional rate taxpayers. 

It is estimated, however, that almost a third (31%) of UK jobs can be carried out remotely, and it remains to be seen what share of those in such roles will be internationally mobile. 

The researchers said that even if only higher and additional rate taxpayers enjoyed such global mobility, this could still equate to between £3.8 billion and £19 billion less income tax being paid each year. That would be between 2% and 10% of the total revenue. 

If annual Social Security contribution losses of £2.7 billion to £13 billion are accounted for, this could mean a total income tax revenue loss of between £6.5 billion and £32.5 billion per annum.

Professor de la Feria stated: “This crisis has the potential for much wider economic and societal ramifications than the challenges to corporation tax. The challenges of adapting our tax systems to a digital economy are far from over; indeed, they have just started.” 

 

If you are presently on the lookout for the accountancy services in Plymouth, Wellington or nearby that could help you to manage your finances more efficiently, the TS Partners team would be pleased to hear from you at either our Devon or Somerset offices.