What tax lessons can we learn from the pandemic?

March 2020 was a peculiar time to be a tax adviser. Like most office workers, overnight, we went from being in the office every day, talking to clients who were also in their offices, to dialling into video calls multiple times a day, and adjusting our work attire to smart from the waist up.

But it quickly became clear that the tax system was going to be used as a way to deliver much-needed funds to those who couldn’t work during the pandemic, in the form of the “furlough scheme” dreamt up by Rishi Sunak (the then-chancellor). Under the scheme, the government provided grants to employers to enable them to pay non-working staff during lockdown via the PAYE system for the hours that they didn’t work, with the employer then able to reclaim the cost from the government. 

Not all countries did it this way – for example, the US made a subsidy to employers, and then separately increased its unemployment benefits substantially. Using the PAYE system made sense – the payment systems were in place, the government already had oversight of the submissions via the usual payroll real time information (RTI) systems, and people still received most of the income they were used to.

One of the quirks of the UK’s tax system is that, following an announcement, HMRC is often scrambling to interpret a new rule at the same time advisers are, typically when a surprise Budget or Autumn Statement announcement is made. This was certainly the case with the furlough scheme. It sounds easy to pay employees 80% of their normal wage – but how do you calculate the “normal wage”? What about bank holidays, commission, bonuses and benefits? HMRC was continuing to write and update guidance long after the first payroll submissions had been made, and we as advisors are still finding examples of employers who “got it wrong” due to having to move quicker than HMRC could.

The second and long-lasting impact is that of hybrid working, which continues to cause issues for the tax system which as yet, has not caught up. There are many of those office workers mentioned that have not gone back to the office full time. HMRC’s response during the pandemic was to increase the tax free “working from home allowance” paid by employers and intended to cover the costs from £4 to £6 per week, which maybe just about covered my coffee and milk bill! As a temporary measure, HMRC also allowed employees to claim tax relief on the allowance if their employer chose not to pay anything. Whilst employers can still pay a tax-free home working allowance, the ability for employees to claim tax relief where their employer chooses not to pay has now been revoked, even if those employees can’t go into the office because it’s full. We are looking to the chancellor in this Autumn Statement to have a good look at the tax system for home workers, but we may need to wait until Spring to see further movement on this.

The third impact is a budgetary one. The furlough scheme kept millions in work and was effective at it, but it was also extremely expensive. The NHS quickly became overwhelmed, which was very expensive. The vaccine rollout was very expensive. All of these have to be paid for, and the tax system is feeling the impact, with a corporation tax main rate hike of six percentage points in April 2023, a temporary National Insurance contributions hike for the health and social care levy which was then reversed, and many thresholds frozen in an effort to keep tax receipts high enough to pay for the spending that was necessary. 

We look forward to the outcome of the Covid-19 public inquiry and hope the government continues to look to the tax system to serve a post-pandemic country and workforce.