Written evidence submitted by Deloitte LLP


Deloitte is pleased to respond to the House of Commons Treasury Committee’s call for evidence in connection with its inquiry on tax after coronavirus.

We are responding and submitting observations as a major professional tax adviser with around 20,000 employees and partners in the UK working across tax and legal, audit and risk advisory, consulting, and financial advisory. Our clients predominantly comprise large businesses, smaller businesses and individuals, together with trusts, the public sector, charities and others, and include UK residents, non-UK residents and international organisations.

COVID-19 presents numerous challenges but may also provide an opportunity for a bold reconsideration of the UK’s long-term fiscal and economic strategy and how the tax system can facilitate this. We have enclosed our comments concerning the economic context, strategies to increase the tax base, reform of the tax system and an approach to reviewing the UK’s tax reliefs. We have also enclosed some general principles for tax reform.

Please note that our not having commented on a particular matter referred to in the call for evidence should not be regarded as suggesting that we think the current system is perfect, but rather that there are no specific matters we wished to raise on that aspect.

We would be delighted to expand on the points raised in this submission and assist the Committee through the course of this inquiry.

Section 1 – Our detailed comments

Economic context


The July 2020 Fiscal Sustainability Report published by the Office for Budget Responsibility (“OBR”) notes that the central and downside scenarios of its long-term fiscal forecast indicate that “in almost any conceivable world there would be a need at some point to raise tax revenues and/or reduce spending (as a share of national income) to put the public finances on a sustainable path”.[1] The OBR goes on to note that under its central scenario of forecast long-term public sector net debt, ‘fiscal tightening’ of £64 billion per decade will be required to return to a debt-to-GDP ratio of 75%.[2]

This fiscal tightening could be achieved through a mixture of reductions in government spending or increases in tax revenues, however given that the political environment may necessitate higher public spending (which was subject to growing pressure even prior to COVID-19),[3] an increase in tax revenues may need to form a significant element of the fiscal tightening. For context, this £64 billion represents 10.1% of HMRC’s £635 billion estimated total tax revenues for 2019-20.[4] The scale of this challenge necessitates a wider public conversation about tax in the context of the pressures on the public finances arising from the structural deficit, exacerbated by COVID-19, and factors such as demographic change.

There is a finite amount of tax which is possible to be levied on the UK’s existing tax base - if taxes are raised past a certain level, behavioural responses may limit the additional tax revenue raised. While there are specific areas of the tax system (discussed below) that would benefit from being reviewed, the government may have greater success increasing tax revenues by widening the tax base as opposed to simply increasing the rates applied to the existing tax base.

Bringing multinational businesses’ headquarters to the UK (and retaining those currently here) may provide an incremental amount of corporation tax, but on-shoring of management and other high-earning individuals could have a significant impact on tax revenue from other areas, including income tax, National Insurance Contributions (“NICs”) and VAT. A modern, attractive, and practical tax system could also result in fewer incentives for corporations to undertake profit shifting.

COVID-19 could provide an opportunity for a bold reconsideration of the UK’s approach to raising tax revenue and the tax system can act as a driver for making the UK an attractive location for business. Brexit could also play a role in facilitating this; depending on the final terms of the UK’s exit from the EU, Brexit may give rise to additional flexibility in terms of the UK’s tax policy, for example around State Aid and VAT rates.

Increasing the tax base


Strategies for widening the tax base could include a review of how well the UK tax system functions for industries in which the UK excels, such as financial services, and industries in which the UK is aiming to lead, including data technology, artificial intelligence and environmentally-friendly finance.[5] The recent HM Treasury consultation on the tax treatment of asset holding companies in alternative fund structures[6] highlights the dominance of the UK in this type of market where the UK’s importance as an international hub could widen the tax base.

There are a number of areas where the existing tax system causes businesses a significant amount of administration to comply with the rules in exchange for a small amount of tax revenue for the government. Examples such as the levy of withholding tax on interest payments, and the trading company/group requirement for businesses to qualify for the Substantial Shareholding Exemption relief, risk making the UK less attractive as a holding company location while only giving rise to a small amount of tax revenue. Removing such provisions could in the long-run more than pay for themselves if they attract more businesses (and high-earning management) to move to the UK.

Some of the fiscal deficit could also be reduced by economic growth widening the tax base. This could be achieved in part through increases in productivity in the UK which (as noted at the launch event for this inquiry by Sam Mitha CBE, former Deputy Director of Central Policy at HMRC) has been a concern in the UK for a number of years. As part of a wider reform package (which could incorporate other measures such as targeted spending on infrastructure), tax policy measures such as the following could be considered to stimulate productivity:


Reform of tax system


As noted above, a key focus of the strategy to reduce the fiscal deficit could be to increase tax revenues by through a wider tax base generated by making the UK a more attractive location for businesses and individuals. Investors seek certainty and stability to make investment decisions, however reform to the tax system can bring with it uncertainty; businesses and individuals have a number of other concerns in light of COVID-19 and Brexit, therefore wholesale reform to the tax system should not be considered lightly.

This is particularly true for corporates who have seen a number of significant tax changes in recent years, some of which came out of the OECD’s Base Erosion and Profit Shifting project (for example the anti-hybrids rules and Corporate Interest Restriction). Tax changes which impact corporates should be limited as reform could be challenging and counterproductive; indeed, consideration could be given to simplification rules for small businesses. In this context it should be noted that where countries in the Middle East have reformed their tax system in recent years, there has often been a focus on implementing indirect taxes (typically VAT/GST) rather than corporate taxes. With 2018-19 UK VAT receipts almost 2.5 times the corporation tax receipts[9] the UK could take inspiration from this approach, although a disadvantage of a focus on indirect taxes is their impact on the progressiveness of the tax system.

With this said, we have noted below comments on potential changes to certain specific taxes for consideration by the Treasury Committee. These focus on smaller changes to encourage growth rather than wholesale reform. There are always areas that could be simplified, but tax will continue to be difficult in certain areas due to the fundamental complexity of the modern economy and financial system. A comprehensive review of the existing tax legislation could significantly reduce compliance and administration costs in certain areas for businesses with only a marginal decrease in tax revenues. If this resulted in increasing the attractiveness of the UK as a holding company location, there is likely to be a significant increase in employment and investment in the UK with a corresponding benefit on tax revenues.

A key objective of reform should be the ability for businesses to obtain certainty and stability as this is critical to investment decisions; in this context, a review of HMRC’s non-statutory clearance process could be valuable. Investment should also be made in HMRC’s resources not only to help close the tax gap but also to promote the attractiveness of the UK’s tax system via an efficient and modern tax authority.

Digitalisation of the economy

We would reiterate the importance of continuing to work with the OECD/G20 Inclusive Framework to agree a global approach and move away from temporary unilateral measures for taxing digital activities such as the introduction of Digital Services Tax (“DST”) in the UK, effective from 1 April 2020, and the introduction or development of DSTs in a number of other jurisdictions. An internationally-agreed framework in this area would benefit UK businesses operating overseas as well as encouraging inbound investment, whereas turnover-based taxes are distortive and can be damaging to innovation in the medium to long term. A global approach, rather than unilateral measures, would help to meet a number of the guiding principles identified below, including providing tax certainty for businesses and avoiding double taxation which is fundamental on an international level.

National Insurance Contributions

A significant focus of the inquiry launch event was in respect of the ‘3-person problem’, that is, the hypothetical scenario where three individuals could perform the same job but be subject to different levels of tax as follows:

  1. An employed worker would be subject to income tax and Class 1 primary NICs; the employer would be subject to Class 1 secondary NICs.
  2. A self-employed worker would be subject to income tax, Class 2 NICs and Class 4 NICs; the employer would not pay any NICs.
  3. An individual working through a Personal Service Company may pay corporation tax on profits made by the Personal Service Company together with income tax and Class 1 primary NICs on any salary taken out of the company (with a corporation tax deduction), and taxation on any dividends taken out of the company (without a corporation tax deduction); the employer would not pay any NICs on the dividend element.

This type of scenario has been driven by new working models, under which determining an individual’s tax position can be more challenging and less certain than in previous decades when the delineation between employment and self-employment was often clearer. The ‘gig economy’ has grown significantly in recent years[10] and the increase in flexible working driven by labour market changes resulting from COVID-19 could make such new ways of working even more prevalent in the future.

The ‘3-person problem’ is a classic example of the complexity of the UK tax system damaging the tax base, being confusing for taxpayers and impacting other areas (such as the lack of alignment between an individual’s position under the tax system and under employment law). Current methods of remedying the situation, such as the off-payroll working rules (“IR35”), can have their own problems and complications.

This situation is therefore a good example of where simplification of the tax system could result in lower administration for taxpayers along with an increase in tax revenues, and could also provide an opportunity for a wider conversation about productivity-enhancing benefits which could be provided in exchange for payment of NICs by self-employed individuals (such as subsidised training, holiday pay or sick pay).

The tax system is now catching up with these changes with regard to Personal Service Companies, but there will always be a trade-off between rules which can adapt (which could be vague) and certainty. To encourage investment, certainty from a tax perspective is required. A key function of the tax system should be to avoid any perverse incentives where individuals or businesses adopt artificial arrangements based on the corresponding tax position.

In order to fix this specific issue, there are essentially two approaches:

  1. The employment status test could be made more fair and robust, through an objective test that gives greater certainty or via making the current system, which generally gives fair outcomes but can be unpredictable in borderline cases and challenging to administer, easier to apply; or
  2. The tax and NICs outcome could be aligned regardless of status outcome so that the test result itself matters less.

Each option presents its own difficulties; for example, an objective test could be subject to manipulation, and aligning the tax and NICs outcome regardless of status would be a significant policy change with a substantial impact on a wide element of the population.

From a personal tax perspective, a key principle should be that individuals in broadly the same position should be taxed in the same way and be entitled to the same benefits. This applies to examples such as the ‘3-person problem’ and in any other areas of reform considered, including any reforms arising from the Office of Tax Simplification’s review of Capital Gains Tax.

Entrepreneurial risk

The tax system should continue to reward entrepreneurial risk; the function of Entrepreneurs’ Relief (‘Business Asset Disposal Relief’ from 6 April 2020) has been criticised, however if entrepreneurs were taxed in the same way as employees, this may stifle growth and investment. It will be particularly important to make the UK an attractive location for entrepreneurial business after COVID-19 and Brexit, building on the UK’s existing success in certain start-up industries such as financial technology.

Environmental taxes

Given the pressing challenge of climate change, tax policy that encourages environmental sustainability should be a key priority of tax reform, specifically policies that shift the tax burden from actions with social benefits (such as the development of ‘green’ technologies) to those with negative impacts on wider society, while also encouraging the development of new ‘replacement’ industries. This should be framed as tax policies to help shape the future UK economy, particularly if it seeks global leadership in sectors such as clean energy, as opposed to strictly revenue-raising measures. If appropriate policies were adopted and implemented effectively, there may be an increase to tax revenues in the short term, but as economic activity shifts towards more sustainable behaviour, taxes levied on activity with negative externalities should decline. This decrease in revenue would ideally be offset from the fiscal benefit of wider, and more sustainable, economic growth in the longer term.

Where reforms such as environmental taxes are designed to change individual or business behaviour, public engagement and wide understanding of the policy rationale are key to acceptance and approval of the reform by taxpayers. Widespread public messaging could be undertaken through established government messaging channels, for example postal information sent to households, or through a mechanism similar to the public statements used to disseminate information on COVID-19 health and social measures. Public engagement could also be organised through online consultations or local government. 

Tax reliefs

HMRC and HM Treasury’s technical ability, and the data available to them, should be used to analyse the effects of taxes and tax relief on an on-going basis and apply a dynamic approach so that the tax system can react to taxpayer behaviour and ensure that the intended policy results are actually happening. This process is particularly important given the recent concern expressed by the Public Accounts Committee[11] regarding the oversight of tax reliefs, their cost, and which types of taxpayers benefit from the tax reliefs. The expansion of real time data available to HMRC, including via the future application of Making Tax Digital for income tax, should enable HMRC and HM Treasury to review and evaluate tax changes effectively.

Tax reliefs have a valuable role in the attractiveness of the UK as an economic location, and there needs to be a focus on key areas that could drive growth (such as Research & Development reliefs), rather than having a wide variety of reliefs which may not continue to have their intended policy effect. We would welcome a review of tax reliefs so that businesses and the government can concentrate on the most important reliefs. The benefits of this would include decreased complexity and administrative costs for businesses, and it could enable HMRC to monitor the costs and benefits of tax reliefs more effectively.

There are some areas in which a review of tax reliefs should provide long-term certainty (rather than be subject to dynamic change). For example, long-term questions such as tax relief on pension contributions may need to be considered. While the mechanism of relief is clearly a political decision, whatever method of relief is chosen in such areas should provide certainty and not be subject to change in the short to medium term.

Section 2: general principles for tax reform

While we have made some comments above on specific areas of taxation, the scope and quantum of changes to the existing tax system is largely a political decision. However, it would be useful to identify a number of key principles which can guide this decision making process and the recommendations that policymakers – including the Treasury Committee – make on future tax measures.


We have outlined below one further set of principles which could be useful to the Treasury Committee when considering the design and implementation of any reform of the UK tax system.


Ottawa Principles


The Ottawa Principles were developed at the OECD Ministerial Conference in 1998 in connection with the taxation of the digital economy,[14] however they may be useful principles to apply when considering reform of taxes more widely:

  1. Neutrality: taxation should seek to be neutral and equitable between forms of electronic commerce and between conventional and electronic forms of commerce. Business decisions should be motivated by economic rather than tax considerations. Taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation.
  2. Efficiency: compliance costs for taxpayers and administrative costs for the tax authorities should be minimised as far as possible.
  3. Certainty and simplicity: the tax rules should be clear and simple to understand so that taxpayers can anticipate the tax consequences in advance of a transaction, including knowing when, where and how the tax is to be accounted.
  4. Effectiveness and fairness: taxation should produce the right amount of tax at the right time. The potential for tax evasion and avoidance should be minimised while keeping counter-acting measures proportionate to the risks involved.
  5. Flexibility: the systems for taxation should be flexible and dynamic to ensure that they keep pace with technological and commercial developments.


September 2020
















[1] https://cdn.obr.uk/OBR_FSR_July_2020.pdf

[2] https://cdn.obr.uk/OBR_FSR_July_2020.pdf paragraph 4.21, as widely reported in the media (for example https://www.ft.com/content/a3ba1acc-5cf7-42de-86dc-176285af7715).

[3] https://www.ifs.org.uk/publications/14553

[4] https://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk

[5] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/664563/industrial-strategy-white-paper-web-ready-version.pdf

[6] https://www.gov.uk/government/consultations/tax-treatment-of-asset-holding-companies-in-alternative-fund-structures

[7] https://www.gov.uk/government/publications/apprenticeship-levy/apprenticeship-levy

[8] https://www.gov.uk/government/consultations/the-scope-of-qualifying-expenditures-for-rd-tax-credits-consultation

[9] https://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk

[10] https://www.ifs.org.uk/publications/8872

[11] https://publications.parliament.uk/pa/cm5801/cmselect/cmpubacc/379/379.pdf

[12] https://www2.deloitte.com/uk/en/pages/tax/articles/tax-education-gap.html

[13] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/904944/Measuring_tax_gaps_2020_edition.pdf

[14] http://www.oecd.org/tax/administration/20499630.pdf