This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.

Welcome to the European Tax Blog.

Some of Europe's brightest legal minds look at the tax issues across Europe which could impact multinational businesses.

| 4 minutes read

The next normal: what comes after the "new normal"?

The last few months have, I think, made it clear that there will be no single sweeping return to "normal". However, as restrictions start to lift (however temporarily) and the end of both lockdown and the Brexit transition period appear on the horizon, the questions COVID-19 has raised still linger.

Should tax be liberated from physical presence?

For many, lockdown meant that remote working was no longer a vague possibility but a necessity. A number of multinationals have announced that some staff will work from home permanently, and even banks are mulling putting their branch networks to use as satellite offices. The technology already exists to enable co-workers to cooperate across both real and digital worlds, and it seems unlikely that the novelty of returning to the office is enough to bring an end to the pre-COVID trend towards distributed working. If by 2025 it is quite plausible that no two co-workers at a meeting are physically co-present, and even the servers might not have a permanent physical location, the current system of allocating taxing rights by physical presence seems even more outdated than it did back in 2018.

Of course, the sprinkling of digital services taxes across Europe represents legislators' first steps towards taxing an economy seemingly independent of any physical base. But will this be a myopic singularity, aimed squarely at a pre-existing, known market, or might it signal a broader shift towards the allocation of taxing rights by "value-add"? If the latter, we might expect to see tax treaties take on more of a transfer pricing hue as directors become simultaneously more mobile and less obliged to travel. Of course, this relies on tax authorities' ability to agree on a fair allocation.

What does it mean to be employed?

The convergence of remote working and flexible working also raises questions about what it means to be employed. Control over working hours and locations, provision of equipment, integration and supervision have been used in the UK for the last 20 years as indicators to classify an individual's working relationship with their employer - which in turn can impact that individual's rights and their tax liabilities, and the responsibilities the employer has towards them. Even before the pandemic, it was not unusual to see these classifications challenged before the courts and tribunals.

A continued focus on flexibility may mean that new types of relationship emerge, alongside the familiar worker, employee, self-employed individual or contractor - which in turn leads to policy questions about how those relationships should be governed.

Take for example the temporary exemption from income tax and National Insurance contributions on employer-reimbursed costs of home-office equipment. This was necessary because current reliefs only apply where the employer retains ownership of the equipment, or where the employee incurs costs solely in the performance of their duties. However, the fix is both temporary and limited. It doesn't, for example, cover circumstances where an employer who maintains no offices might wish to reimburse an employee for the costs of renting co-working spaces. Going forward this potentially puts employers in an uncomfortable position: by helping employees to work remotely, you risk exposing them to additional tax. Give employees too much flexibility and you erode the distinction between your employees and your contractors.

What is a business?

One of the more heartening aspects of lockdown was how quickly UK businesses were able to find creative solutions to lockdown restrictions, "pivoting" their business models to stay afloat within the new framework. Others have had to furlough staff and put their businesses into suspended animation.

However, a cessation or major change to a company's business can have a number of consequences under UK tax law. Where such changes are temporary, one might hope that HMRC takes a sensible view, but it is not yet clear what the impact will be on businesses who decide to maintain their new models in the longer term - and what precedent this might set for a continuance of trade in the context of rapid change.

Will the way we administer taxes change?

Between the pandemic and Brexit preparations, pressure on government and HMRC resources may mean progress on Making Tax Digital is slower than might otherwise be hoped. Yet the project's landing page was subtly updated in July, removing references to "concerns about the pace of change" and the 2017 promise that "the pace of mandation would be slowed". Of course any inferences from this are pure conjecture. In its 10-year strategy to build “a trusted, modern tax administration system”, the government has, however, made clear that it intends to further digitise the administration of VAT and, from April 2023, also of income tax.

Like the rest of us, tax authorities have had to adjust to a new way of working, with an increased use of emails and telephone conferences rather than hard-copy letters. Even the UK stamp office is (finally) accepting documents by email, but how long it can insist that this is only temporary remains to be seen now that it is demonstrably possible. Indeed, the government has invited comments on the extent to which these temporary changes should be retained.

An eye to the future?

Necessity, they say, is the mother of invention. The pandemic has not only driven massive change in the way we live and work, but has provided a potent catalyst for innovations and product developments that may well continue to drive change over the next few years.

Tax has, historically, been reactive: a need for revenue, met by identifying an existing source of economic productivity. Government measures to protect and stimulate the economy during the pandemic will inevitably result in an increased need for revenue, but it is difficult for legislators to keep pace with a rapidly changing economic environment, in which the revenue drivers of tomorrow may well not exist today. Might the future hold a more proactive approach to tax?

For years, alterations to tax have just involved tinkering with existing taxes, varying the rates. But, for many reasons, it's time to question why we have this structure and whether the tax system created for the country in the 19th and 20th centuries is still fit for purpose.

Tags

shine, slaughterandmay, uk tax, digital economy, tax residence, fiscal policy, employment, covid-19, stamp duty