DQ’s head of tax Greg Jones examines the proposals of the Wealth Tax Commission in the UK.

Even as the international vaccination programme gets under way, the Covid-19 pandemic continues to exert its stranglehold on the world’s economy.

Governments everywhere are wondering how society is going to pay for the damage.

Global estimates of the approximate cost of coronavirus on the economy vary wildly from $11-28 trillion; in the UK alone, the Office for Budget Responsibility estimated in November that the cost of funding coronavirus in the current financial year would be around £394 billion.

Add to that the cost of buying and administering sufficient doses of vaccine for the UK’s 67 million population – around £12 billion – and the financial reality becomes difficult to conceptualise (a bit like trying to imagine where outer space ends).

In the Isle of Man, of course, we were until recently operating nearly as normal since summer 2020 and subject to the position when the current ‘circuit breaker’ ends, the initial estimate of the likely cost of funding Covid (around £100 million) may prove to have been reassuringly pessimistic.

Treasury Minister Alf Cannan presents his 2021 budget next month and I would be surprised if he were not able to announce that the Isle of Man economy is fit and healthy, one positive upside to the ongoing travel restrictions being that local people are spending more money on island; hence despite the cancellation of, for example, last year’s TT, retailers and the hospitality industry have just about been able to keep their heads ‘above water’.

This not only alleviates the need for furlough payments (funded by the taxpayer) but ensures that VAT and (up to a point) income tax receipts remain buoyant.

The rest of the world has not been so fortunate.

Low interest rates could mean that governments choose simply to kick the financial problem further down the road by simply borrowing more – although already the UK is looking at government borrowing being at its highest since the Second World War.

Another option being explored, in the UK at least, is the introduction of a wealth tax.

Last month, the Wealth Tax Commission (an independent body made up of two leading academics and a senior tax barrister) produced a report entitled ‘A Wealth Tax for the UK’ (note the absence of a question mark, making the Commission’s brief a fairly unambiguous one!).

The essence of the 126-page report was that a one-off wealth tax (aimed at helping to meet the cost of funding Covid-19 in the UK) was both workable and hard to avoid, and if levied at a threshold of 5% on individual wealth in excess of £500k per person (albeit payable over a five-year period, i.e. 1% per annum), could raise around £260 billion.

To put this figure into context, to raise the same level of cash via the existing UK tax system would require either a hike in the basic rate of UK income tax from 20% to 29%, an increase in VAT from 20% to 26%, or both a hike in corporation taxes from 19% to 25% and an increase in VAT to 24% at the same time!

The Commission pointed to the various historical precedents for a one-off tax which exist both in the UK (eg Gordon Brown’s 1997 tax on privatised utilities) and further afield (in particular the 1946 – 1947 Japanese Levy which raised over 10% of national income in the year it was collected).

The Commission’s proposal is that the one-off wealth tax be imposed on:

l individuals who had been UK resident in four out of the previous seven tax years (this is a ‘backwards tail’ test commonly found in the UK’s ‘double tax treaties’ and serves both to protect new arrivals and catch long-term residents who might otherwise be motivated to leave simply to avoid the tax)

l non-residents who hold UK property or other assets

l and trusts (wherever established) if the settlor and/or any beneficiary is resident in the UK in the year in question.

All assets would be covered, eg property, shares, pensions scheme rights and so on.

The authors of the report point out that public opinion is on their side (apparently most people –perhaps unsurprisingly – would prefer to see wealth taxed more than the fruits of labour), and to pre-empt accusations that a one-off tax based on accumulated wealth is tantamount to retrospective taxation.

The Commission duly observed that in a time of crisis, such as the present, people’s legitimate expectations need to be flexible, and that in any event many tax changes (e.g. an increase in the rate of capital gains tax) impact on accumulated wealth.

Interestingly, the Commission rejected the idea of an annual wealth tax, on the grounds that it would both distort individual behaviour.

For example, it would lead to people choosing to leave the UK in order to avoid paying the tax in later years, and incur significant administration costs (e.g. if wealth valuations were required on a regular basis).

It remains to be seen whether these proposals find their way onto Chancellor Rishi Sunak’s shopping list come the next UK budget or into the wastepaper bin like so many others before them.

It is interesting that they have been met with a deafening silence from the broad ranks of MPs, even those to the left of centre who might otherwise have been expected to champion the cause of higher taxes on personal wealth.

Ultimately, I suppose, it may depend on whether the eventual cost of funding Covid is even higher than the eye-watering revised estimate.

Still – as they say, you can’t take it with you!