With the new year introducing a new lockdown in the UK the only certainty ahead looks like government spending will continue on an upward trajectory in 2021. Political leaders across the world have two basic choices – increase taxes or borrow more, with the latter simply deferring the inevitable to future generations. Neither option is particularly palatable, but the UK’s Conservative Government have the added complexity of dealing with the economic repercussions of leaving the EU. How they re-position the UK in a post Brexit world will be underpinned by tax policy.

Clearly there is a balance to strike between supporting the economy whilst also getting cash in the door. Understandably, those with the deepest pockets will be expected to contribute the most, but how this is achieved will be of much debate. Amidst the chaos of 2020 the asset management industry produced mixed results, but there were some notable success stories with managers recovering from heavy losses to deliver substantial performance as the year progressed. The challenge for the industry now is maintaining the intellectual stamina required to not only navigate but outperform the markets in uncertain times.

The next UK Budget is due on Wednesday 3rd March 2021 when we can expect some major announcements from the Chancellor. However, if the roll-out of the vaccine and lockdown measures are yet to have a meaningful impact by then we may see further delay. Most changes are likely to align to the start of the fiscal year on 6th April, but some may be pushed through on Budget Day itself.

Not surprisingly there has been some clear signalling that headline rates will go up, not just in the UK but globally. It is also likely that we will see a ‘levelling-up’ of various regimes to align effective tax rates. Capital Gains Tax (CGT) has attracted the most attention with suggestions that this will be more closely aligned to Income Tax (IT). As a result, some have taken early action to crystallise gains where possible and those with deferred remuneration may consider the same. If CGT and IT rates do align the long term need for specific regimes such as UK Reporting Fund status could become redundant. However, we feel this is unlikely and in practice we are likely to see incremental increases in both in the next few years, with CGT rising to at least 28% as currently suffered on carried interest and residential property investments, and an uptick of IT across all bands. Not something one would expect to say about a Conservative Government, but probably far more likely than a wealth tax – a topic that has garnered significant discussion. Even if the political desire to introduce a wealth tax existed, to do so would require significant time to design how it would operate and the associated compliance framework. Far more likely is the adoption of a targeted approach as proposed in Belgium where they are looking to impose an annual tax on securities accounts for high net-worth individuals.

A particular area of focus has been the gap between the National Insurance Contributions (NIC) paid as a result of employment versus self-employment. The Chancellor made ominous noises on this point when announcing support for the self-employed suggesting rates will be aligned. With many in the industry opting for a partnership structure for management vehicles this could have a major impact and could lead to restructuring. It would also mitigate some of the longstanding concerns that gave rise to the salaried member and mixed membership rules. Corporation Tax is also a candidate, but we feel that this is less likely as the external message to the rest of the world is likely to be that the UK is open for business and its competitiveness will be paramount. For future changes, it will be critical to understand how tax policy impacts the ability of managers to remunerate individuals, build reserves, reward equity holders and invest in the future.

Importantly, the financial impact of rate changes can take years to flow through the system, and when you need to raise taxes quickly retrospective rate changes are not an option. As such revisiting the fundamental basis of how and what you can tax under current legislation will be high on the agenda. HMRC are likely to come under pressure to re-focus their attention on collection in the current tax year and, to the extent possible, prior years. Managers should be mindful of any open tax risks that could now be subject to increased scrutiny, particularly those making substantial returns in 2020. Many have overlooked or not fully appreciated targeted avoidance legislation such as the Disguised Investment Management Fee (DIMF) rules, but this is clearly a high priority for HMRC given they released the long-awaited guidance in October 2020. The number of enquiries in this area continues to increase, a pattern that looks set to continue.

Internationally, tax authorities are also likely to continue to focus their attention on how value is apportioned and distributed from a tax perspective. Transfer pricing policies that split profits across multiple jurisdictions have long been of interest but have in practice been difficult to challenge. Many across the industry have spent 2020 re-assessing precisely where they want to be physically based and have found the proliferation of remote working has raised a number of challenges from a tax perspective. Increased transparency and legislative tools (for example diverted profits tax and profit fragmentation rules) will support these efforts and are likely to make enquiries more frequent. Globally the OECD’s Base Erosion and Profit Shifting (BEPS) project has seen fundamental changes in the how profits are distributed and taxed, but the major priority now has shifted to resolve the tax challenges arising from digitalisation. The G20 is taking the lead in developing a consensus based long term solution in the form of Pillar 1: Focusing on the re-allocation of profits and revised nexus rules, and Pillar 2: Minimum effective tax rates.

Yet, being a responsible taxpayer is no longer a question of simply paying your taxes and filing your returns in a timely manner. The bar has and continues to be raised. As asset managers look to promote their environmental, social and governance (ESG) credentials their attitude and relationship with tax authorities will increasingly come into question. Tax disputes were once par for the course, but asset managers increasingly care about their reputation with stakeholders and that of the wider industry. Tax enquiries often go unresolved for a number of years and trawling a firm through the courts is undesirable at best. More broadly, corporate behaviour as a whole is under increased scrutiny with HMRC likely to begin to wield their powers under the wide-ranging Corporate Criminal Offence legislation where firms facilitate tax evasion undertaken by other parties. But on a positive note, the draconian reporting measures due to be introduced by the DAC 6 legislation have been heavily curtailed at the eleventh hour thanks to Brexit (we knew there had to be a benefit somewhere!).

In summary, what does 2021 hold from a tax perspective? Asset managers should all be under no illusion, being successful is likely to get more expensive. Society’s perception of what constitutes paying a ‘fair share’ of tax will be redefined in the coming years, but attention will not simply fall on the future. The focus will start at the present and recent past. Those in the fortunate position of seeing their tax bills rise going forward will  be the first to acknowledge that they are far better off than most. How the relationship between the industry and HMRC evolves will be key – greater transparency needs to be rewarded with greater certainty, but trust has to be earned. Regardless, when it comes to picking up the bill for the pandemic, to borrow the words of a previous Conservative chancellor, “We are all still in this together”.