TThe homework shift caused by the pandemic could cost the UK economy up to £ 32 billion in income tax losses annually.
Highly paid workers who live abroad but work in the UK pay their income tax in their country of residence rather than to HMRC – which could cost billions each year, researchers say.
This new labor mobility can also affect where corporate tax and value added are paid, as well as VAT and where goods and services are bought.
"The international spread of teleworking as a result of the pandemic poses great challenges for income taxes."
Professor Rita de la Feria, Faculty of Law
Professor Rita de la Feria, Chair of Tax Law at the Leeds School of Law, co-led the new research with Dr. Giorgia Maffini, tax policy expert at PWC, London
Her paper "The Impact of Digitalization on Personal Income Taxes" was published today in the British Tax Review.
Professor de la Feria said: “The acceleration of digitization and the worldwide spread of teleworking as a result of the pandemic are major challenges for income taxes.
“New mobile workers are likely to be at the forefront of the income distribution, and even a small number could result in a significant loss of income in the UK of between £ 6 billion and £ 32 billion.
“The likely impact will be tightening employment rules, introducing new tax avoidance rules and increasing income tax competition with countries struggling to recruit new mobile workers.
“The impact of these changes in the labor market is likely to be stronger in countries like the UK, which is heavily reliant on income tax, especially on a small number of high-income – and now potentially mobile – taxpayers.
"How big these challenges are and how the countries react to them will be a central topic in the coming years."
The total income tax paid in the UK in 2018-19 was £ 187 billion, with 35% paid by the 4.2 million higher rate taxpayers and 31% paid by the higher rate taxpayers.
An estimated 31% of UK jobs can be done remotely – an as-yet-unknown proportion of which will be internationally mobile.
Assuming only taxpayers with higher and additional tax rates are internationally mobile, the researchers say the potential loss in income tax would be between 2% and 10% of total revenue – between £ 3.8 billion and £ 19 billion per year.
Including losses on social security contributions between £ 2.7 billion and £ 13 billion per year, the total loss on income tax revenues would be between £ 6.5 billion and £ 32.5 billion per year.
The researchers say recent global tax discussions have focused on solving the corporate tax challenges posed by digitization, but the pandemic-induced shift to remote working could represent an even bigger crisis.
Professor de la Feria said: "This crisis has the potential for far wider economic and societal repercussions than the corporate tax challenges. The challenges of adapting our tax systems to a digital economy are far from over and have only just begun."