Q&A: KPMG head of tax policy discusses ‘levelling up’ and Truss’ tax cuts

In a conversation with Accountancy Age, Tim Sarson, head of tax at KPMG, discusses using the tax system to support the leveling up of infrastructure and living standards in the UK, and the new prime ministers tax cut promises.

Do you agree with Prime Minister Liz Truss’ proposals to make tax cuts?

Most of the proposals affect businesses in one way or another. The reversal of the health and social care levy, for example, impacts individuals. But ultimately, it is something that is administered by businesses, and it is something that affects the cost of employment. So, I think all of the proposals to make tax cuts are pretty relevant.

The reversal of the corporate rate rise does have a definite impact internationally, mobile capital that is investing in either things like IP, or headquarters deciding where to put headquarters operations. I think where it doesn’t have such an impact is on the decisions of UK domestic businesses or multinationals that have been based in the UK a long time. But I think it would be wrong to write off reversing the tax rate rises as a complete waste of time.

I think with the reversal of the health and social care Levy, we always felt people slightly distorted that levy anyway, for all the reasons that have been commonly stated. It is taxing people of working age, it’s not taxing pensioners, it’s essentially national insurance with a few whistles and bells and there are probably other ways to raise the money.

But it does beg the question as to how you’re going to pay for it. Because the fact is it was raising a very significant amount of money. It seems that Truss’ plan is that she finds that through extra borrowing are sort of reading between the lines essentially, it’s fiscal expansion and some cuts but just it’s easy to promise cuts or efficiencies when you’re not in power once you get there and the department starts telling you what they need to spend money on.

How do you think the government should use the tax system to support leveling up?

I think devolution needs to be considered as a component of leveling up. In an ideal world you would get greater investment in the north, south coast, and the west country, and no expense to London and the southeast at all. But, in reality, you are talking about shifting investment to some extent.

You can shift investment through infrastructure, such as HS2, or you can do it through targeted grants and subsidies, which is a lot of what the leveling up proposals have been about.

The tax system has not been used as a leveler for leveling up, or for regional equalization. I think if personal taxes were a few percentage points lower in certain deprived areas, in addition to having cheap house prices and lower corporate rates, I am almost certain that you would see significant flows of people come into those areas because it would be worth it. If the north was cheaper than the southeast or London, tax wise, I might think about moving.

What tax relief do you predict businesses can expect from the next budget?

We know we are going to get a reversal of the health and social care levy and a moratorium on the green energy levy.

There has been speculation whether the UK would unilaterally abandon pillar two. I have been asked that question by American colleagues and clients as well. I think that is vanishingly unlikely. I may be proved wrong.

I think if BEPS two pillar one and pillar two fail it is because it is going to collapse internationally, rather than the UK doing its own thing. I just think there is too much international pressure, and the UK was at the forefront of kicking this process off in the first place, it seems highly unlikely we would do that. I suspect the Treasury and HMRC will just keep planning on with it.

Do you think cutting VAT will be a positive step, especially for helping businesses?

The trouble with cutting VAT is it’s inflationary for a start and it is extremely expensive. The government have been fairly silent on what to do.

A VAT cut could help businesses, but the aim of a reduction of VAT as a policy is to take the pressure of consumers. I think there are other things businesses would be keener to see first.

If you are a B2B business, it doesn’t really matter one way or the other, if you are retailers, it is obviously much more important.

How can automation help changes in tax policy?

HMRC really had to pause a lot of their industry, particularly making tax digital, because of Covid. They have a digitization agenda, which I think will continue and make things more automated overtime.

This tends to mean more work in the short term for multinational because they have to adapt their compliance systems and improve the nature of their data.

There is pillar one and two coming in which, assuming they do happen, there will be a whole load more admin, you’ll certainly have it in some larger multinationals. You will need to have at least one person dedicated to managing pillar one and two, then long term, the more you automate the easier things become.

HMRC go through cycles of focusing on compliance and enforcement, and then cycles of looking to be a bit more business friendly. A few years ago, they went quite compliance and enforcement focused. They introduced things like the diverted profits tax and divergence compliance facility, for example. They were very reluctant to give prior variances or rulings on anything because they were concerned that might be something that was reportable under EU rules.

I am getting a sense that they are probably pivoting back a little bit more and wanting to work with businesses and wanting to make sure they are incentivizing businesses to do the right thing.