The future of tax: what comes next for UK businesses?

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When the new Labour chancellor Rachel Reeves took the keys to Number 11 Downing Street, she reportedly discovered the country’s finances were in worse shape than previously thought. A UK Treasury audit identified a £22bn spending ‘black hole’ inherited from the previous government, which is likely to have a significant impact on the country’s future tax landscape. Since then, press reports about the amount the Chancellor intends to raise on Budget Day have varied, though the Chancellor herself has not commented further on the amount she intends to raise.

For starters, it seems inevitable that there will be more tax raising measures announced in the Autumn Budget over and above those laid out in Labour’s pre-election manifesto, says Amanda Tickel, head of tax and trade policy at Deloitte UK: “The Chancellor has said that she thinks she will have to raise taxes in the Budget, but while she has confirmed that tax rises will not come from increasing the basic, higher and additional rates of income tax, National Insurance, VAT or the main rate of corporation tax, we do not yet know where the tax rises will come from.”

The government is also likely to pursue other measures to boost its revenues. For instance, as was pledged in Labour’s manifesto, the government is already taking steps to close the tax gap—the amount the government is owed in tax relative to the amount it actually receives—by bulking up HMRC to chase down unpaid taxes. The government is also keen to simplify the tax system and reduce complexity.

“They recognise that actually the more complex it is, the more you have to spend on HMRC to administer it; adding extra layers that might outweigh the taxes you’re raising” says Tickel.

Simplifying tax

That complexity can also weigh on productivity for businesses. The more time and money that a business spends on trying to comply with tax rules, the less resources they can devote to their core activities.

While corporation tax is unlikely to be in the crosshairs for any tax rises to be announced in the autumn—Labour pledged to cap the main rate of corporate tax at 25% prior to the election—it will be forced to find revenue elsewhere, potentially through extra taxes on the profits of certain businesses or the costs of employing staff, or by restricting reliefs and allowances.

For context, there are currently about 340 non-structural tax reliefs available—those that are not intrinsic to the tax system—and some of them are out of date and no longer relevant, says Tickel. The summed cost of around 100 non-structural tax reliefs for which HMRC has cost estimates was £204bn in the 2022/23 financial year. Pensions tax reliefs, for example, cost about £50bn during that period.

The problem removing any tax reliefs would create for businesses is that many business cases have been put together based on the understanding that certain tax reliefs would be received for investing in a particular activity—research and development, say. Cutting those reliefs could have a negative impact on future business investment because it reduces both confidence in the stability of the operating landscape and the overall attractiveness of the market, deterring businesses and talent alike.

“It is really important to underline that big businesses or wealthy individuals do have choices of where to establish and how much to invest, and to imagine that the pull of the UK is so strong as to override all cost factors such as tax, that is something which would be a mistake for a government to think,” says Tickel.

The UK’s appeal has also been dented by previous governments reneging on tax arrangements that have wrong-footed businesses who thought they were being tax compliant.

“Controversy over previously agreed corporate tax positions has been rife in the UK and that’s been massively damaging to brand UK,” says Matt Batham, head of the business tax practice at Deloitte UK. “In addition to that, HMRC hasn’t had the resources to quickly resolve those disputes, so they can become exasperating for businesses.”

Aside from the uncertainty this creates, the government must also be cautious that efforts to overhaul the tax system in the name of simplification do not inadvertently blunt growth.

There have been some encouraging statements from the Government as they look to further stimulate growth, adds Tickel. First comes in the form of a review of the HMRC ruling process and second is the intent to develop at least a framework for a business tax roadmap ahead of the Budget in October 2024, both of which will help provide certainty.

Growth challenges

Another growth challenge is that the UK needs to clearly differentiate itself to make the country unique from a business perspective, says Tickel. A potential solution would be to identify a limited number of key focus areas and then join them up with other initiatives such as the Catapult innovation centres, investment zones and Freeport ideas, as well as tax reliefs, incentives or other government funding, then commit to them long-term and promote them consistently, she says.

The Chancellor should also look to other countries for inspiration from their tax systems. Some are trying much harder to reduce taxes to attract or retain talent, such as by using differential income tax rates. For instance, Portugal is seeking to stop young people from emigrating by letting them pay a lower rate of tax. The United States has offered a huge package of funding to stimulate investment in green industries.

“If you don't have an eye on what everybody else is doing, you can quite quickly get left behind by becoming uncompetitive,” Tickel says.

One way the government could help the UK become more attractive is by focusing on innovation and being smarter around the tax treatment of intellectual property, says Batham.

It is also important to get the narrative right around tax changes because how the messaging is perceived can have a huge impact on business and investment decisions, even if how the messaging has been understood is wrong.

“You can't expect to attract investment without attracting the individuals that will make the investment happen,” says Tickel. “The UK’s tax landscape is a jigsaw and you have to consider all the component parts when you’re trying to attract business.”

This complexity is something that Deloitte is well placed to help with given its broad reach across different industries and its understanding of their tax obligations. What it also understands is that tax uncertainty is a significant headache for businesses, more so than the expense of complying with complicated tax codes and could therefore deter companies from investing in the UK, ultimately having a negative impact on tax revenues.

“Companies can deal with complexity, it’s expensive, but they can do it—but what they can’t deal with is complexity and uncertainty together, it becomes a quagmire,” says Batham.

In other words, certainty is far more important for businesses than simplification when it comes to their tax affairs.

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The global tax landscape is becoming ever more complex for businesses to navigate. Over the past decade, there has been a wave of new tax rules introduced globally to try to coordinate and align disparate national tax systems, eliminating gaps and enabling cross-border information sharing and coordination.

From the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) framework to the European Union’s new Faster and Safer Tax Relief of Excess Withholding Taxes (FASTER) Directive, tax laws are constantly evolving and the demands on multinationals’ tax teams are always growing.

“It’s the tax system for multinationals catching up with the rapid pace of globalisation that happened in the latter part of the last century,” says Alison Lobb, international tax and policy partner at Deloitte.

Part of these efforts is a push for more international coordination on tax reporting from governments and tax authorities to ensure relevant information is received on business’s global operations as well as local ones. At the same time, organisations are also facing new external tax transparency obligations in the EU and Australia, which will make it a legal requirement for large businesses to publicly disclose information on profits, taxes and numbers of employees for select countries in which they operate.

In addition to this, broader sustainability regulations require businesses to report on their social impact, such as the EU’s Corporate Sustainability Reporting Directive. Tax information is not directly mandated, but some businesses may decide that for them tax has a material social impact and therefore they would be required to report their tax information on a country-by-country basis.

Fresh starts, fresh challenges

The new rules are creating fresh challenges for tax teams. According to Deloitte’s recent Global Tax Policy survey, while a majority of respondents said they have a strategy in place for dealing with the new regulations, many are worried about the scale of the task.

“The overwhelming response from respondents to our survey is that they were at least moderately if not highly concerned about all aspects of compliance,” says Mark Kennedy, a tax partner at Deloitte. “Those concerns were about giving the right level of assurance to senior leadership, making sure that they have the right governance and controls in place, sourcing and verifying the data, and just really making sure that they understand the rules.”

Part of this concern is driven by the fact the EU and Australian public country by country reporting rules are different and there are – at the moment at least – significant gaps in the available guidance as to their practical application, Kennedy says. Furthermore, there are potential commercial sensitivities at stake that could create issues for some companies if information is disclosed publicly.

“There are a lot of uncertainties—you’re talking about putting data into the public realm,” he says. “And on top of everything else, it is another reporting process and there is a cost to that even if you are using data that may have been used somewhere already.”

Some organisations see benefits to public tax transparency in emerging market countries that are perceived to have less developed tax systems or governments that are prone to corruption. By publicly reporting tax information, multinationals can make it clear what they are paying.

“Tax transparency allows people to hold their governments to account in situations where that is not democratically embedded within their society,” says Kennedy. “In those circumstances, I think most businesses see that as a significant benefit, and they’re happy to report.”

“Tax authorities already receive country by country data – an outcome of the OECD BEPS project in 2015 – as one element of the information they have access to,” says Lobb. “Country-by-country reporting data, on its own, may not give the full picture.”

Kennedy adds there are circumstances, however, where greater tax transparency can benefit companies beyond reporting requirements. For instance, it might help them better engage with regulators, or it might unlock additional capital market funding from ESG-focused investors where ESG indexes favour companies that provide more tax information. More pertinently, it can also help finance and tax teams understand more about their business.

“The better insight a global business has into its overall tax footprint, the better they will be able to manage their own risk and to get ahead of any compliance issues with the tax authorities and to make sensible changes to manage their tax burden in an appropriate way,” says Kennedy.

Technology and tax

Key to being able to have such insight is having the right technology foundations in place. For starters, tax management is arduous and too often requires significant manual intervention, review and monitoring. In addition to this, changing tax rules and reporting requirements make it difficult to keep pace, piling pressure on often under-resourced tax teams.

“This is a challenge for companies and the more that they can leverage the next generation of financial accounting systems and technological developments like AI, the better it will be,” says Kennedy.

In other words, instead of spending time manually reviewing data, technology can free up time for tax professionals to focus on more value-added work that can benefit the wider organisation.

“The big desire is to take tax people away from processes and help them become business advisors,” says Kennedy.

As the new Labour government settles into power, we have begun to get a better idea of how it hopes to achieve its mission to improve economic growth and competitiveness. Sir Keir Starmer has already pledged to “take the brakes off Britain” with new reforms to the planning system, greater devolution of powers to local leaders, and increased workers’ rights.

Yet hopes for radical change are tempered by the UK’s significant fiscal challenges. And Labour’s ambitions in the key areas of tax and trade policy are still being fleshed out, leaving businesses to guess at what may lie ahead.

So, what should C-Suite executives realistically expect from the new government’s growth agenda - and how can they help it succeed?

1. The scope for greater tax competitiveness

The new government has pledged to cap the headline corporate tax rate at 25% – which is welcome – but there’s far more to consider than rates. There is wide agreement that the UK’s tax rules have become too complex with years of layering in new taxes, reliefs and data gathering requirements, creating a significant compliance burden for business. Streamlining them could significantly boost the competitiveness of UK firms.

“The UK now has over 20,000 pages of tax legislation and 65,000 staff in HMRC to administer the tax code,” observes Amanda Tickel, Head of Tax & Trade Policy at Deloitte. “Sometimes businesses have to navigate hundreds of pages of legislation and guidance and still can’t find the right answer. Creating a more certain tax environment for business to operate in so they can design and implement their growth plans with confidence should be a top priority for this government.”

Tax reporting requirements have also become more onerous and the impact of the increasing drive for transparency is now the most pressing concern for tax leaders, according to Deloitte’s 2024 Global Tax Policy survey of more than 1,000 C-Suite executives.

By tidying up the statute book, simplifying tax codes, and enabling HMRC to provide clear answers the new government could free up businesses to focus on growth and productivity. This is a key area that would be a proactive opportunity for the Government to collaborate with businesses within the current Parliament.

2. Green energy plans

Labour remains committed to many of the previous government’s plans to reach net zero by 2050, but it has pledged to step up efforts in some areas. This includes restoring a ban on sales of new petrol and diesel vehicles from 2030; changing the planning rules for onshore wind farms; and producing renewable energy via GB Energy, a new nationalised utilities company.

But there are limits to what can be achieved without new tax incentives or subsidies to spur investment and demand, so expect changes in this area.

“The key will be to use the tax system in a way that is clear and secure enough for business,” says Tickel. “Often when new tax breaks are brought in, others are unceremoniously scrapped which creates unforeseen costs and complexity in sectors which are de-prioritised. New policies should also be implemented with an eye on what other countries are doing.”

The US is leading the way internationally with its Inflation Reduction Act, which has ploughed billions of dollars of subsidies into green businesses and tax breaks on electric vehicles.

The UK will struggle to match this scale, but initiatives such as GB Energy and the new National Wealth Fund could significantly boost growth if implemented well – and if businesses receive enough forewarning to lean into such changes.

“Building a business case for investment, then delivering it, can take years” says Tickel. “So, the government needs to stick with tax decisions it makes for the long term if it wants to see business buy-in and drive real change.”

3. Ramifications on trade and growth

The impacts of Brexit and a more protectionist global trading environment have altered the UK’s trade landscape over the last few years. Labour now hopes to improve relations with the UK’s biggest trading partner, the EU, to make life easier for exporters.

The prime minister wants rules on the import and export of animal and plant products to be streamlined to smooth the movement of goods in and out of the bloc. He’s also seeking a new deal on services and better security cooperation, which could also include issues such as energy security.

More than half of tax leaders think the upcoming review of the UK-EU Brexit agreement will result in an improved trading relationship, potentially including greater market access, according to Deloitte’s Attitudes to Trade survey.

“Labour wants to deepen our trading relationship with the EU, to gain better access to its market and our survey data suggests there are high hopes we can achieve this,” says James Caldecourt, Head of International Trade at Deloitte UK. “The question is whether there is a mismatch between what business wants and what the government can deliver.”

On non-EU trade, Labour has committed to continuing to work on proposed new trade deals such as those with India and the Gulf Cooperation Council. The outcome of such thinking will be eagerly awaited by business leaders looking to unlock growth in markets they previously had unfettered access to.

4. The impact of tax changes in the boardroom

Until the new government sets a firmer course on tax and trade policy, business leaders must remain alert and agile. UK firms already operate in a complex legislative environment, and executives at board level are more liable than ever for any failure to adhere to new rules and reporting obligations.

In October 2024, the new UK chancellor, Rachel Reeves, will present her first budget and has already made clear that she plans to raise taxes. Capital gains tax, inheritance tax, tax reliefs associated with pensions and employers’ national insurance contributions have all been raised as possible cash-raising targets.

Given the uncertainties here, business leaders must look to plan for all eventualities and ensure they have the right skills to manage the impacts of any additional compliance burden.

“Business leaders naturally tend to focus on the immediate future, but it pays to think longer term to ensure you’re prepared for any changes ahead,” says Caldecourt. “Firms should also engage as much as they can with the government as it shapes its tax and trade agenda to ensure they are well-equipped to adapt to a changing policy landscape”.