Much media attention has focused on the effect Wednesday’s Spring statement will have on UK households, however there are potential implications facing UK businesses and investors as a result. In total the measures Rishi Sunak declared will, according to the OBR, add about £20 billion to the state’s borrowing for financial year 2024-25. However, Sunak’s concessions, which include a 5p reduction in fuel duty, a lift to the NICs threshold, and – by 2024 – 1p reduction to the basic rate of income tax costing £6 billion per annum, will increase pressure on government finances. In practice, this will mean a more proactive approach from HMRC with large businesses and investors offering an easy, and perhaps popular, target for increasing revenues.
Sunak’s tax-cutting hand was forced by the UK’s developing cost of living crisis, which has been building since Covid support measures began to recede. The crunch has been exacerbated by Russia’s invasion of Ukraine and the ensuing disruption to oil and gas supplies. Moreover, the UK’s rising inflation rate is now forecast to peak at 8.7% during the fourth quarter of the year, almost double the OBR’s forecast in October 2021. These problems are not unique to the UK.
Unfortunately for governments, the need to support individual taxpayers comes at a time when macroeconomic pressures demand increased revenues. Generous government responses to the Covid-19 pandemic were enormously costly and put public finances under stress around the world. Meanwhile rising interest rates are pressurising already heavy state debt commitments such that the UK is due to pay its highest-ever interest bill on national debt, roughly £83 billion, in its next financial year. In combination, these factors create an undeniable need to raise revenues. Without budget cuts or other measures, that can be achieved almost only through increasing taxation revenues.
To balance the books without compounding the cost of living crisis, governments are looking to raise money in ways that won’t affect individuals directly. This week the European Commission announced it will consider a windfall tax on companies in the energy sector, for example. That’s likely to appease individual taxpayers for several reasons, not least the huge profits the utilities and oil and gas majors have realised due to steadily increasing energy demand and the war in Ukraine. The EC’s move follows similar proposals in the United States a few weeks ago, where Congressional Democrats suggested similar taxes on oil and gas companies. US legislators have no doubt calculated that additional taxes on energy companies will be more palatable to voters facing generally rising costs than taxing them directly.
The windfall-tax proposals are part of a much broader trend. At Brockwell we are seeing a notable increase in proactive work by tax authorities in the UK and elsewhere to increase the tax take from corporates and investors who are popularly perceived as being better able to bear more taxation. The increased frequency of tax investigations and proactive tax policy comes across in the tax due diligence we see relating to M&A transactions, and in the number of requests we receive for standalone tax insurance regarding ongoing tax authority audits and disputes. It is normal for tax authorities to seek to collect revenue, but what is interesting is some of the seemingly benign matters being pursued and the increased number of investigations.
To assist with identifying opportunities to collect taxes, tax authorities now possess more information about taxpayers than ever before. New disclosure regimes for example, such as the Automatic Exchange of Information agreements between tax authorities and the UK’s Uncertain Tax Treatment rules, makes this data readily available. Authorities are also increasingly improving their technological capabilities to identify potentially lost revenue.
The equation is simple. As governments seek to balance the national accounts this will likely lead to more robust attempts by tax authorities to collect revenue. If governments cannot reasonably collect from voters who are struggling with cost of living increases, companies and investment firms provide a tempting, well-capitalised alternative. All of this makes tax liability insurance more useful than ever. The insurance indemnifies policyholders against identified tax risks, allowing them to reduce or eliminate certain tax exposures. In a challenging tax environment, the ability to mitigate or reduce risk grows ever more important and tax insurance can be used very broadly to cover any financial loss, not just tax, triggered by a ‘tax event’ and provides certainty regarding the interpretation of tax law. This is helpful given that the complexity of tax law, which is increasingly rushed into force as governments respond to new developments, means that getting comfortable with interpretation risk can be difficult. More information about how tax insurance works is available here.
About Brockwell
Brockwell Capital Limited, an Optio company, is a market-leading provider of international transactional insurance products including W&I and tax liability insurance. The team comprises some of the most experienced transactional insurance underwriters globally with more than 75 years of combined experience.
Brockwell specialises in offering insurance relating to M&A transactions and institutional investors’ activities. For more information visit www.brockwellcapital.com