How will a change in the Capital Gains Tax regime benefit the government

Summary

• The UK’s Office for Tax Simplification has found that aligning the Capital Gains Tax rates with the income tax could raise an additional £14 billion each year for the exchequer.
• Chancellor Rishi Sunak had earlier asked the Office for Tax Simplification to carry out a review of the CGT, for simplification and exploring the scope of raising tax collections.
• The review was also required to make the tax as seamless as the income tax, and to clearly determine the incidence of tax in both cases.

The United Kingdom could be moving into a new Capital Gains Tax regime where these taxes can double up from their current levels, according to the Office for Tax Simplification (OTS). UK Chancellor Rishi Sunak in July had asked the office to review the complete capital gains taxation structure. Two detailed reports have come up with new recommendations on the proposed rates.

The OTS report stated that the simplification of rates is essential for reducing the administrative cost. It added that the new process will bring in additional tax collections worth £14 billion a year for the British exchequer.

Need for an overhaul

The tax system needed an overhaul because of many reasons. First, a greater clarity was sought in distinguishing the tax on income from that on the capital gains. This would not just simplify the capital gains tax structure but will also allow the government to reduce its size of the tax administration and the associated costs. 

Second, the tax structure needs to reflect the changing dynamics of an economy and is aligned with the way companies function at present. Today, companies reward their management in the form of stock-based options which easily bypasses the income tax net and should not ideally escape the tax net.

Tapping on the rising wealth disparity

Wealth disparity is calculated by measuring the distribution of wealth in a society. The less equal the distribution, the higher is the wealth disparity. A higher tax rate on the rising wealth of Brits could bring in the otherwise drying up tax collections into the system, especially in a pandemic scenario when raising the income tax rate is tough.  It will also bring in social equality and would come from people who are least affected by the outbreak. 

Moreover, most other tax revenue streams are transaction based. For instance, the taxes on salary income, sales, property, excise or customs. They can’t be raised without hurting vulnerable sections of the society. 

Finally, over the last few months, several high-profile M&As and corporate transactions have taken place. It has led to the wealthy getting wealthier at a contrasting time when the number of job losses is reaching new heights.

Broadening the tax base

The government has taken massive debts since March to support its various stimulus programmes. These measures were crucial to support the ailing businesses and fight off the adverse trading conditions. The current unemployment rate in the country is 4.9 per cent. The government debt is expected to reach a new high of £370 billion by the end of the year. This amount is unsustainable in the long run and the government has to find ways to raise its tax revenue as much as it can. 

Moreover, the government has already lowered tax rates such as VAT and stamp duties to spur business activity. So, tapping the income which goes untaxed otherwise is a good way to begin with. 

A simplification of the capital gain tax structures would also lead to a lower tax avoidance rate. It will accordingly lower the government’s possible litigation expenses.

At present, the government does not want to go down the austerity lane to reduce its debt. Sunak has expressed that raising public spending stimulates growth that creates a large base to collect taxes later. In this regard, taxing the capital gains is a good option. Nonetheless, it is yet to be seen how the government reacts to the recommendations by the OTS.