Written evidence submitted by PwC


We welcome the opportunity to respond to the inquiry: Tax after Coronavirus, which was published for comment on 17 July 2020.


We respond in our capacity as a tax adviser to a wide range of businesses and individuals. We help businesses to make informed business decisions, whilst meeting their tax responsibilities.


We work closely with a range of clients, from large multinationals through to small businesses, and have a good understanding of what they need from the tax system. We also produce leading analysis and insight to help inform policy decisions. While we have not carried out any specific analysis or modelling in formulating this response we have drawn on our prior experience and referenced appropriate existing material. Being part of the tax debate and having a view on the challenges affecting the tax system, business and society is important to us; we would be delighted to assist further in the debate.

What are the major long-term pressures on the tax system in the UK, including those arising from changes in working practices, demographics, the environment and other factors? How are these affecting the efficiency of the tax base and the overall level of demand for public services?

  1. Statistics[1] from the Institute of Fiscal Studies show that in 2019 the level of tax collected was high by historical standards (34.4% of national income). However, recent lockdown measures have affected public finances through two channels: increased government expenditure to assist people and businesses during the lockdown; and reduced tax receipts (reduction in employment and an anticipated decline in corporate tax and VAT receipts).
  2. In addition to the immediate challenges from the COVID-19 pandemic, the UK faces longer term pressures on the tax system. Employment tax (Income tax and National Insurance Contributions) is a significant proportion of government tax receipts on average making up 45% of the total[2]. The advancement of technology, an ageing population, and potential long-term unemployment challenges due to the economic effects of the COVID-19 pandemic means this current reliance on employment tax will be a challenge of the future.

Technological change

  1. We are living through a fundamental transformation in the way we work. Automation and Artificial Intelligence (AI) is replacing human tasks and jobs, and changing the balance between labour and capital inputs. These technologies are likely to affect every level of a business and its people.
  2. In our report Sizing the Prize[3], we predict technology will fundamentally change the way our society and economy operates and thereby affect the nature of jobs that are available, the skills needed to do them and the investment needed in learning, development and retraining. As the deployment and uptake of AI increases, the expectation is that capital could become a relatively more important production factor than labour, bringing with it the potential for a significant change in the mix of revenues collected from different taxes.
  3. The labour market will continue to evolve, and therefore we need to plan for a dynamic rather than static future. A key priority must be developing a tax system that can be flexible and adapt to the transformation that will take place in the UK economy.


Ageing population

  1. Statistics and projections produced by the Office for National Statistics[4] (ONS) show that the UKs population is ageing. The projections estimate that in 50 years time, there is likely to be an additional 8.6 million people aged 65 years and over, a population roughly the size of London.
  2. As the UK population ages this will place a greater demand on public spending which will need to be financed through increased borrowing and / or higher amounts of taxation (which might be through changes in rates, reliefs or incidence, through enhanced growth or simply through fiscal drag).

Long-term unemployment

  1. The COVID-19 pandemic will be a significant economic challenge for the UK. During the pandemic approximately 9.4 million employees[5] have been placed on the Government's furlough scheme. There is a risk workers will face job losses as difficult economic conditions persist. Depending on the pace of economic recovery long-term unemployment could become a challenge for the UK.
  2. As tax receipts rely heavily on employment tax any negative impacts on the labour market may contribute further to the pressure on tax receipts.

Reaching net-zero and a shifting society

  1. To achieve net-zero in the UK by 2050 the economy will be required to undergo substantial transformation. A key area of focus will be reducing greenhouse gas emissions from the transport sector. Achieving this will be significant in helping the UK reach net-zero but will place pressure on tax revenues by way of a reduction in the level of fuel duties collected.
  2. Societal shifts in the way we work, shop and travel will impact tax revenues. Consumers are increasingly likely to purchase goods and services online thereby reducing revenues from travel and additional spending at traditional bricks and mortar businesses. In addition, the way we work has shifted for many individuals. This has led to changes in where we work and how we use buildings which will impact revenue collected from business rates and transportation.
  3. The short-term impacts of COVID-19 will continue to lead to uncertainty in the economy which will likely dampen spending and VAT revenues as consumers defer major purchase decisions and discretionary spend. Reduced consumption as a result of office workers spending fewer days in city offices, will mean less money is spent at surrounding shops, cafes and cultural amenities. This decrease in spending has a snowballing effect whereby ancillary workers, such as canteen workers, security guards and waiters, whose jobs rely on workers being present in offices, reduce their own spending in response. Our research[6] suggests the annual economic cost to the UK if people continued to work from home remotely could be £15.3 billion.

What more can the UK do to protect its tax base from erosion as a result of globalisation and technological change, and what further impacts will the coronavirus pandemic have on our tax base?

  1. Encouraging business innovation and protecting jobs is crucial for the future of the UK economy, and supporting the creation of new jobs in emerging or growing sectors will be vital for the COVID-19 recovery, as will a high level of upskilling be needed to compensate for increasing levels of automation.
  2. The UK has many strengths that can be leveraged to create a strong labour market: a unique geographic position, a world class university system, a stable environment, a global financial centre (London). Other nations look at the UK financial sector with desire, and tax policy must not undermine this advantage, recognising that many sources of capital are potentially mobile.
  3. The UK should use the Post-Brexit environment as an opportunity to focus on differentiating its workforce and positioning itself as a high-tech service economy for the future. We need a workforce that can adapt to provide the skills that will be needed in a highly technology driven society. To achieve this, the UK should focus on:

        Upskilling workforces and providing employees with the skills that will be needed in the future. The UK Government will need to explore what role tax can play in incentivising this behaviour;

        Providing conditions that incentives entrepreneurship, innovation, and capital expenditure; and

        Creating a tax system that can be flexible and adapt to the transformation that will take place in the UK economy, including flexible and cross-border working practices.


  1. We believe that the UK should also focus on creating an attractive business environment by prioritising simplicity and certainty in the tax system. Ensuring business thrives in the UK is key to ensuring tax receipts are sustainable over the long-term.

Do these pressures need to be met with tax reform, and if so, is this the right time for reform?

  1. Governments around the world are constantly faced with fiscal policy challenges as they seek to deliver public services. This is more evident than ever as the governments address the COVID-19 crisis.
  2. The COVID-19 crisis has resulted in a fundamental rethink of many aspects of our daily lives. It is important that the UK takes this opportunity to promote beneficial change.
  3. Taxation has a part to play in how we recover from the COVID-19 crisis. When making policy changes, Governments should take the opportunity to improve the neutrality, proportionality, practical administrability and long-term sustainability of tax revenues.
  4. It is unclear what the UK economic landscape will look like as we emerge from the crisis. However, it is clear the tax system will be need to:

        generate revenue to support ongoing government expenditure;

        assist in ensuring clearly defined goals on equity, particularly intergenerational equity given the impact of the economic contraction on the young and their role in long term sustainable growth in the UK economy; and

        support economic growth.

  1. As Governments make changes to tax policy they must be clear and specific about their objectives. Individuals and businesses are more likely to support policies they understand, and which have a clear road map.
  2. It will be important for tax changes to consider not just the incidence of the tax but also where the liability is borne and the knock on consequences of changes (companies, for example, cannot bear tax themselves; it is effectively passed on to stakeholders such as shareholders, employees, customers and suppliers). International developments and the relative attractiveness of the UK compared to other comparable economies will also be key.

What overall level of taxation can the economy bear without undesirable or counterproductive harm to economic growth?

  1. We do not have analysis to inform an answer to this question.

Which areas of the tax system are most in need of reform, and which are best left alone?

  1. Any changes to the tax system should support progress against the challenges faced by the UK. In particular, the tax system should be used to help drive the UKs goal to be carbon neutral by 2050.
  2. Other areas that should be targeted by the Government should be those that create distortions or unnecessary complexity in the economy. For example, many commentators have suggested that business rates cause distortions as the burdens fall disproportionately on retailers with physical premises, compared with on-line retailers. Commentators also highlight distortions created by differing rates of national insurance contributions.
  3. Technology is also changing the global framework for what we tax and where. Securing international consensus on how to tax digital activities that dont sit neatly within global boundaries is proving a challenge, however we believe it is important that a compromise is reached to avoid a myriad of unilateral measures being implemented by different countries and creating double taxation.

What reforms should be considered in response to the pressures on the tax system?

  1. We do not have analysis to inform an answer to this question.

What is the role of tax reliefs in rebuilding the economy and promoting economic growth and efficiency? Does the current regime of tax reliefs perform this role well?

  1. Tax reliefs can be a useful mechanism to support economic growth and influence behaviour. Tax reliefs may also be used for practical purposes such as making the tax system simpler to use.
  2. While tax reliefs can be effectively targeted they can also fail to deliver the intended outcomes, receive the requisite take up, and can result in inefficient distortions in the tax system. This can be particularly the case if reliefs are not kept regularly under review. A report[7] published by the National Audit Office repeated previous concerns about the effectiveness of HM Treasurys and HM Revenue & Customs management of tax expenditures. The report found that there is no formal framework governing the administration or oversight of tax expenditures, and that while HMRC and HM Treasury have begun welcome steps to increase their oversight of tax expenditures and more actively consider their value for money, these will not be sufficient on their own to address value-for-money concerns.
  3. The National Audit Office concluded that as of October 2019, the UK had 1,190 tax reliefs. The sum of the estimated costs of tax expenditures in 2018-19 (tax reliefs supporting government objectives) was £155bn.
  4. Any tax reliefs that emerge as a consequence of the COVID-19 crisis need to be targeted, aimed at a specific purpose and introduced for a specific time (or with a dedicated review period).

What are the areas for simplification?

  1. The Office of Tax Simplification has published research and evaluations which provide recommendations about how to make the UK tax system simpler. These reports should be used to identify where simplification of the tax system is needed.

Is there a role for windfall taxes in the post coronavirus world?

  1. A windfall tax can be described as a one-off tax on profits. The goal of a windfall tax is generally to tax benefits received by the owners of the companies that have performed well over a period of time. In their purest forms windfall taxes are targeted at the beneficiaries of economic rents i.e. an excess profit that has accrued without any special acumen, risk or investment.
  2. In principle, a windfall tax would operate against the characteristics that we would encourage in any tax system; certainty and stability. Therefore, the implementation of windfall taxes may compromise business investment, economic growth and employment levels. Windfall taxes, even if carefully targeted, may therefore have hidden costs owing to the broader impact on confidence and investment.

What is the right balance between taxation of work, savings/pensions and wealth?

  1. Savings and in particular pensions are in practice a timing difference on individuals consumption and as such (and as currently in the UK tax system) there is an inter-play between the incidence of taxation. As such they need to be considered together.
  2. For the majority of individuals most of their wealth comprises the family home and retirement savings/pensions. Again these need to be considered together taking into account such factors as illiquidity and the impact on asset values and economic activity of tax charges.
  3. We would expect other potential aspects of the tax system to be considered alongside these questions including taxation of consumption, the role of the tax system in incentivising positive/reducing negative behaviour (eg green taxes and reliefs).

What is the best way to tackle tax reform, including what changes might be needed at HMRC to support implementation, and how should the Government consult with stakeholders and parliament?

  1. The COVID-19 crisis has provided an opportunity for renewed focus on tackling the UKs challenges and rethinking the tax system. However, tax reform can be a challenge and any reform will inevitably create winners and losers. It is important that reforms take a long-term view and dont focus excessively on the short-term issues of the COVD-19 crisis. Certain risks of tax reform can be mitigated by ensuring reforms are driven with key principles in mind.
  2. Any successful tax reform needs to be coupled with certainty and stability. Both characteristics are critical in ensuring that businesses have the confidence to start up, grow and invest. An example of an effective reform effort was the Business Tax Roadmap, released by the UK Government in 2016. It signalled to UK businesses what the long-term plan and direction of tax policy were and allowed them to operate and invest within a stable tax environment. We would encourage the Government to adopt a similar approach to all significant areas of tax policy.
  3. When assessing the impacts and expected revenue contributions from tax measures it is important to conduct dynamic rather than static modelling i.e. individual tax measures should not be considered in isolation of the overall tax system. Tax measures often interact creating a risk that raising revenue in one area may reduce revenue collected in another. In addition, any impact analysis should consider the cost of administration and compliance. Both these factors have potential to reduce economic output which could ultimately lead to a net reduction in revenue collection. It is necessary to assess the individual yield of tax measures against the total impact on the tax system.
  4. Tax reform should adopt long-term objectives and balance the need for immediate change with future spending demands. This is increasingly important because of the fiscal pressures outlined previously such as the impact of technology, demographic, and economic challenges. Longer-term strategic approaches to tax policymaking will have more impact than shorter-term measures. In general, measures that broaden the tax base are seen as growth enhancing and sustainable because they reduce the scope for tax-driven economic distortions and special treatment for certain groups of taxpayers. They also help limit the size of the informal economy, which otherwise reduces the tax take and can significantly undermine tax morale for compliant taxpayers.
  5. Tax reform should focus on developing coherent policy frameworks that are workable for government, business and individuals. The frameworks should be adaptable to changing business models and technologies that are expected to develop with increasing technological change. Acknowledging and preparing for change during tax reforms will ensure tax systems are able to respond and operate as intended in the future. Similarly, measures that simplify the tax code make it easier for taxpayers to understand and contribute. If tax reforms are poorly designed, or if the policy is not clearly articulated, or is frequently changed there is a risk they will leave taxpayers feeling frustrated, and will disengage from the tax system. The uncertainty will also hinder decision making and economic activity leading to reduced economic growth and yield.
  6. It is critical for policy measures to undergo evaluation and review to ensure that the intended policy objectives are being met and no distortions or unintended consequences are present. As and when tax policy is amended or introduced a period for evaluation should be established.
  7. The recent report by the Institute for Government (IFG) Overcoming the barriers to tax reform[8] highlights some of the key challenges faced by governments when embarking on and implementing tax reform.
  8. Finally, tax proposals should be developed using the Government's Tax Consultation Framework, using the 5 stage process:

        Stage 1 Setting out objectives and identifying options.

        Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.

        Stage 3 Drafting legislation to effect the proposed change.

        Stage 4 Implementing and monitoring the change.

        Stage 5 Reviewing and evaluating the change.

  1. We would encourage the Government to engage interested parties on changes to tax policy and legislation at each key stage of developing and implementing the policy.


September 2020


[1] How high are our taxes, and where does the money come from?, IFS Briefing Note BFHN 259

[2] Economic and fiscal outlook March 2020, Office of Budget Responsibility, 2020

[3] Sizing the prize Whats the real value of AI for your business and how can you capitalise?, PwC, 2017

[4] Living longer: how our population is changing and why it matters, Office of National Statistics, 2018

[5] Coronavirus Job Retention Scheme statistics: July 2020, Gov.uk

[6]The economic impact of returning to the office, PwC, September 2020

[7] The Management of Tax Expenditure, National Audit Office, 2020

[8] Overcoming the barriers to tax reform, Institute for Government, 2020