The Rise of the Robots, and the Role of Taxation

December 14th, 2016 by Robert Leggett - Partner

When not dealing with his party’s internal strife, Labour’s Tom Watson has spent a lot of this year talking about the rise of the robots, and the profound effect that this will have on the UK of the future.  He talks of the benefits of future technology, such as the added safety and efficiency that driverless vehicles will bring, not to mention the potential economic benefits.  But he also predicts a world where as many as 11m UK jobs will be lost in the next decade, as firms seek the cost savings which automation might bring them.

New technologies fascinate me and excite me, but there is no doubt that the impact of such rapid change on society must be carefully managed.  As a tax adviser, I wonder how the tax system will cope with such changes, and even whether it is one of the main drivers behind this change.

The truth is that for many decades, successive governments have been obsessed by taxes on work, whether employed or self-employed; with NIC included, we pay far higher taxes on income from work, than we do on investment income.  This is strange, as normally you would expect taxes to be raised on things that we want to discourage, such as cigarettes and alcohol; surely we want to encourage employment?  Indeed, according to HMRC statistics, PAYE Income Tax and NIC account for 48.6% of taxes collected in 2015/16; the figure will be higher still when self-employed Income Tax is included, but this figure is not published.  A significant reduction in employment would not just see social consequences, and increased Government spending on benefits, but is also likely to have a drastic impact on the amount of tax receipts.

Corporation Tax might seem like an obvious replacement, if the use of machines will increase corporate profits.  But economies currently seem to be competing to reduce Corporation Tax rates to attract business, and bucking this trend might simply see less investment in the country and be counter productive.  Furthermore, profits-based taxes are more susceptible to economic downturns.

Future Governments will therefore need to think outside the box if they are to deal with this, and it is possible that wealth based taxes will have to take up some of the strain from income based taxes.  This must be approached with caution.

But I think we should also ask ourselves whether this obsession with taxes on work is driving automation much faster than would otherwise be the case; perhaps driving automation where there is no underlying social benefit.  Whilst I may be able to see the underlying benefits of self-driving vehicles, do I want to be served my coffee by a robot barista, or would I prefer the social interaction of a real person?  Businesses though, understandably, will seek to automate where there is an economic benefit to them in doing so; in other words, if technology is cheaper than their employees. 

Are employment based taxes and costs preventing workers from competing with their robotic counterparts?

Let us consider that a particular worker expects £20,000 per annum in their pocket.  In order to receive this, the employer needs to pay the worker a gross salary of £24,754 in 2016/17 because of Income Tax and NIC.  Added to this, the employer must pay Employer’s NIC of £2,297, apprenticeship levy of £124, and pay 1% into a pension under auto-enrolment on salary from £5,824 to £43,000.  This rises to 3% from April 2019, at which point it will cost the employer £568 per year.  This brings the total employment cost to £27,743, before even starting to think of the impact of employment rights.  There are no similar taxes and costs on a machine; perhaps a future government will introduce some sort of levy on robotics, but this would be extremely difficult to design, and could hold the UK back in the technological race.

Of course, a company will save Corporation Tax, currently at 20%, on the total employment costs, as this will reduce taxable profits.  But the running costs of a machine will also get Corporation Tax relief, as will the cost of purchase (over time) via Capital Allowances.

So to me, it seems little wonder that there is a rush to automation; by taxing work so heavily, the tax system makes it difficult for workers to compete with their robotic counterparts.  Blue sky thinking in the tax system may not just be required in the future to deal with the consequences of automation, but it might also provide workers with a more level playing field, and stop there being the “wrong type” of automation.

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