COVID-19: Time to Reflect on Our Economic Model

Successive UK Governments have had, at the top of their risk registers, the prospect of a pandemic. Successive UK Governments have completely ignored the prospect of a pandemic – until now.

Unfortunately, as the country experiences its worst crisis since WWII, it is apparent that the consequences will be long felt. The last World War was different in its economic impact. Far from damaging the economy, it reduced unemployment to virtually zero, kept factories and all other workplaces open and came out the other side with measures to control inflation and capitalise on the strength and national unity that prevailed during the war years. The Coronavirus though, means we are fighting a war with a hidden enemy. As one commentator has already said, its economic effect is like that of a neutron bomb, leaving all the buildings no but active people. What’s the end game? When will the country be able to return to any sense of normality? And from an economic perspective, where does this leave Brexit? (Okay, park that for now.) Many people, myself included, have been speculating that we will emerge into a new World order. We have witnessed some astonishing cooperation between companies and countries in order to produce medical devices, personal protection equipment, develop a vaccine and more recently Chinese doctors racing to Europe to support the stretched medical staff of Italy. The European Union, if it can exist in its current bureaucratic form, will no doubt be at the centre of Europe’s economic recovery when this is all over. But what of the UK? On the assumption that the UK continues with its path of self-imposed economic isolation, let’s ponder over what the UK may need to consider, in order not only to recover, but to reduce the risk of future pandemics, from which no country in the future will be immune, no matter what.

A number of things that have emerged as the most critical areas concerning life in the UK are the inadequacy of the health services to be able to cope, the high levels of poverty and the frailty of the ‘gig economy’ in respect of workers’ rights, alongside the prevalence of small business Directors remunerating themselves in a manner that avoids paying the same taxes as their employees. Despite these having been critical areas to address, the Government has largely buried its head in the sand. An election promise to redistribute wealth into poorer areas affected by mining and manufacturing closures over decades came too little too late. Headline figures of X-numbers of billions being poured into the health system does nothing unless there is a clear plan to improve efficiency, invest in people and equipment, and to balance this against potential health risks, including potential pandemics.

When we emerge from the current crisis, a critical area to address will be poverty. It is inexcusable for one of the most wealthy countries in the World to have such high levels of poverty. In order to do this a number of things need to happen. The knee-jerk reaction would be to say that the wealthy should pay more tax. Well, they usually do. Someone paying just 1% on income of one million a year would still be paying more than someone on an average income. However, the more they are forced to pay, the greater the incentive to avoid paying altogether. What needs to happen is a radical overhaul of the tax system in order to create balance. Firstly, the tax system needs to be simplified. It is a consequence of the complexity of the UK’s tax system that enables all number of loopholes which, on a value basis, make it attractive for the rich to exploit, even after paying accountants and wealth managers their fees to do so. The current system that encourages the self-employed to switch to a limited company when their profits reach a certain level is one of the most common means of paying less tax and it is by no means confined to the wealthiest. There are hundreds of thousands of small businesses that do this. Going back over twenty five years when I first began advising businesses, I noticed the lack of adherence to and ignorance of company Directors in respect of their own businesses. I suggested to colleagues at the time that the Government should make it mandatory or anyone starting a limited company (and for any subsequent Directors) that they should pass an exam confirming their understanding of their responsibilities as a Director, basics in company law and insolvency and the basics of business finance. We are now in a situation where the largest group that has not benefited from the Government support measures to date are those small company Directors drawing a low salary on PAYE combined with dividends.

One of the first responses to the Coronavirus crisis made by the UK Government was to abolish its proposed extension of the rules around IR35. This is an HMRC rule defining who should be an employee versus legitimate contractors. The original ruling was to slow the tide of IT workers voluntarily leaving their day jobs to return under contract to the same company doing the same job through various vehicles (their own or umbrella companies) often on the same remuneration, thereby avoiding National Insurance contributions but also enabling their ‘employer’ to avoid paying Employers’ National Insurance contributions. There had been complete panic in terms of the tightening of IR35 for the simple reason that there are now so many people working as either sole traders or through limited companies doing the same across many sectors. The Job Retention Scheme just introduced by the Government now provides an opportunity to wean out the growth of personal service contracts through making the Scheme permanent though perhaps on a smaller scale. Certainly, the entire ‘gig economy’ needs to be reviewed in such a manner that both employers and employees are not prejudiced in the process. Part of the problem is, that for someone to become registered as self-employed, they should not be working solely for one company. However, in all the years I have been advising companies, which has involved sporadic periods of self-employment, I have rarely heard stories of HMRC actually policing this. On the other hand, why should they? A sole trader would normally be paying Class 2 National Insurance contributions topped up through Class 4 contributions on profits but a company Director often does not. Not surprising then that IR35 has always sought to be ammunition for HMRS only to chase those using companies for tax avoidance purposes. There is of course far more to this than can be covered here.

The above issues just cover a small area of the garbled nonsense which constitutes the UK’s tax system. Time perhaps for a complete overhaul of the company and personal tax and National Insurance regimes. Of these, personal income tax has often been at the centre of political manifestos: the left wishing to tax the rich to give to the poor (though there’s little evidence they ever have) and the right leaving more in the pockets of the rich whilst largely ignoring the poor. My own manifesto would be as follows. Pay everyone resident in the UK over the age of 21 from their 21st birthday until death a Universal Basic Income (UBI) of £1,000 per month, increasing annually by the same annual rise in the Consumer Price Index, or no increase if the Index remains static or goes negative. This should be tax free and paid to everyone regardless of status. Thereafter, all earnings should attract tax and National Insurance (the latter rules and rates remaining the same for now). The first tax band should be on the first £13,000 of earnings at 10% and thereafter at 25% until we reach £100,000 of income, at which point a 40% rate kicks in with no cap. The UBI should not be taken into account for any tax purposes. Tax on interest earned on personal savings should be completely abolished and tax on pensions income, dividend income and capital gains on shares, bonds etc, and property should be 10% across the board. State pensions should continue to be paid and form part of taxable earnings on top of the UBI. For those with no other income apart from UBI or those with earnings of less than £13,000 per annum, the Universal Credit system can kick in so that no one has a mean gross income of less than £25,000. Inheritance tax should be reformed to remove the allowances in favour of every estate paying duties of 10% of all the inheritance, regardless as to who it is left to. The charitable legacy allowances can therefore be scrapped. This will help incentivise individuals to save for a rainy day but also enable those in retirement to better enjoy their lives outside of work and feel more comfortable in terms of their legacies. For individuals resident overseas but enjoying, for example, UK properties and income from those properties and other assets such as dividend income, there should be a 20% withholding tax at source. This should apply regardless as to whether the assets are held in personal accounts or through companies domiciled in the UK or overseas.

So the big question is, how will this all be paid for? There are a number of ways. Firstly, the system will remove some of the incentives for an admittedly small proportion of UK citizens to try and avoid paying personal taxes, through, for example shifting assets (on paper) overseas. It will encourage more people that (for example) are genuinely self-employed, to continue as they are, rather than try to reduce the tax they pay through a limited company. Long-term, it is likely to collect more in income tax than the current regime. (As an aside and in illustration, a friend of mine who has been self-employed since college, has now reduced his workload to avoid his profits going over £150,000 as he resents the 45% tax rate which kicks in at that point. He would need to earn considerably more than that to make it worth his while. It should be noted that he’s never used a limited company to reduce his tax bill - a measure he sees as unethical.)

Let’s move on to other measures. VAT could be increased on certain goods, e.g. electronic and luxury items. We had a period in the nineteen-seventies where this was the case. If this were raised to 25% it would boost the Treasury considerably. The Department of Transport has recently slipped through a paper outlining its transport strategy. Environmental groups were astonished in that it seemingly dooms the car as a means of transport. Perhaps now is the time to increase road tax significantly across the board for domestic vehicles? This could be combined with a licence (through a test) annually renewed for cyclists. It’s all very well urging people to cycle but I suspect I’m not the only one puzzled that many cyclists do not appear to know the meaning of traffic lights. Additionally, mandatory insurance should apply to cyclists.

In combination with these ideas, the Government should also consider re-nationalising all transport operators, utility and telecoms companies. (I never in my wildest dreams expected to see myself writing something like this!) However, it should treat them as going concerns, aiming for profit businesses. It should review pricing to make companies competitive enough to be able to offer fair fares and charges but balance this with the need for surpluses to invest for the future without the need for further subsidies, with the exception of major capital infrastructure projects. If necessary, those companies may raise funds on the bonds markets in order to raise additional capital. With no shareholders apart from the Government on behalf of the citizens, the size of profits for reinvestment, even at a lower level than previously, should still be achievable. If we look at some of the talent drawn into the Civil Service from industry in recent years, finding managers that can run these companies should not be too difficult.

Alongside the above, the Government should set up a Sovereign Wealth Fund (SWF). This could be funded initially through a 1% contribution from each of the following: VAT revenues, ticket prices on buses, trains and planes, and a 0.5% turnover tax on all Limited Companies and Public Limited Companies, drawn at source through business bank accounts. The aim of the SWF would be to “provide for those most in need in society and for all in times of a national crisis”. It could be used in tandem with Lottery funding and charitable work to help re-balance the conditions within which those with the most and those with the least endure.

In order to create a more equitable society, the priorities in order for Government spending should be:

• Health and well-being
• Housing and communities
• Education
• Supporting research and development to maintain and improve on the UK’s excellence in science and technology
• Transport and infrastructure to create a greener economy
• Food security
• Defence should be relegated to a minimal level based on an annual risk mitigation basis, rather than a NATO-driven contributory or influenced basis

The final thing that needs urgently addressing is boardroom pay. In 2017–18 UK CEOs earned 117 times the average worker. This should be capped at 50 times as a matter of urgency, alongside a cap on share options, pension contributions and other perks. Listed companies need to redress the imbalance in pay across their entire workforce. It’s not difficult to do. Companies enjoy hiring consultants for ‘transformation’ projects. A phrase which has replaced downsizing, resizing, corporate restructuring and a host of other euphemisms which all amount to ‘who do we make redundant to reduce costs?’ They could start by looking at their layers of managers and start flattening their structures in order to reduce (over time and largely through natural means) the numbers of middle mangers. They should also look at reducing the numbers of subsidiaries where more than one is carrying out similar activities. This would reduce the numbers of higher-paid managers. They should also embrace worker boardroom representation at all levels.

The ideas suggested may be contentious to many but hopefully they are food for thought. We all know that the Coronavirus crisis has been a wake up call. Will the Government just carry on regardless when it’s over? Or will it take measures to use the crisis as an excuse for re-balancing society and stimulating the economy through levelling the playing field within society? Time will tell. The one thing that is certain is that life as we’ve known it will never be the same again. With some thought though, we can all make it better.