George Bull

Written by: George Bull

George Bull

Senior Tax Partner

£128 billion coronavirus hit for this year's tax receipts

While it would be tempting to write a piece on the effect of the Coronavirus on the ups and downs of UK taxes during 2020/21, the latest report from the Office for Budget Responsibility suggests that the Chancellor will not be able to take comfort that any tax will yield more than budgeted. Instead, based on a projected decline GDP of around 15 per cent, the OBR can see only tax shortfalls totalling £128 billion in the current tax year.

Excessive concentration on bad news is never a good thing, but these figures are so striking that it’s worth exploring them. Here’s a summary which we have prepared from the OBR report.

 Tax 
 Budget £bn OBR scenario £bn  Shortfall £bn
 Income tax and NICs 385   300  -58
 VAT 141 111  -30 
Corporation tax  58  48  -10
 Excise duties 52 42 -10
Capital taxes 34 28 -6
 Business rates reliefs 0  -14  -14

Source: OBR Coronavirus Reference Scenario 2020 and RSM

It’s important to be clear about what’s included in these figures and what is not.

Under the heading of income tax and National Insurance Contributions, the projected loss is less than might be expected because the furlough scheme and the equivalent for the self-employed have the effect of protecting workplace income. However, the actual shortfall may be greater than that shown if cash flow problems mean that some businesses cannot afford to pay their PAYE liabilities to HMRC. The effect of the self-employed deferring their 31 July 2020 tax payments to 31 January 2021 is self-cancelling as both dates fall within the same tax year. The shortfall may also increase as lower interest rates impact saving income, and as rental holidays reduce landlords’ tax liabilities.

By contrast, the reduction in VAT and excise duties exceed the fall in GDP. This reflects lower consumer expenditure which will be concentrated in standard-rated goods and imports liable to excise duties. Air passenger duty receipts will also suffer a dramatic decline.

Lower profits and lower oil prices will reduce the corporation tax yield. Many companies anticipate large losses in the current period. The rate at which tax losses can be used is now restricted. Tax losses from the current year will therefore be spread over several years meaning that the reduction in corporation tax yield may only recover slowly.

Reductions in equity prices and in the number of property transactions account for the shortfall in capital taxes. The downturn in dividends may also contribute to the reduction in income tax. While the accelerated payment of capital gains tax in respect of property sales will cushion the blow for the Treasury, the decline in sales of investment properties will offset this.

Two government policies are not reflected in these figures. Each will increase the shortfall.

First, time-to-pay agreements which allow taxpayers to postpone part or all of their tax bills into the 2021/22 tax year have not been included in the OBR figures.

Second, the cost of the exemption for NHS suppliers from paying customs duty and import VAT on specific medical items from outside the EU will not be known until the volume of these products can be established.

It’s difficult to find much comfort for the Chancellor in these figures. However, there may be one slight glimmer of hope. As we reported recently, although not mentioned by the OBR, it’s possible that the rise in video-streaming and gaming during the lockdown may add a few millions to the yield from the new digital services tax.

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