According to a study of tax revenues worldwide by the accountants UHY Hacker Young tax receipts in the UK dropped by almost £68bn during the pandemic. While this underlines why the Chancellor of the Exchequer is pressing ahead with a 1.25% increase in National Insurance in April it seems to ignore that inflation in the UK is reaching a 30 year high, writes David Little, a Partner in our Corporate and Commercial department.
According to Accountancy Today, reported here, UHY’s study showed that globally 26 out of 30 countries suffered from a hit to tax revenues in 2021.
UK tax receipts fell by over £67.9bn in real terms to £549.6bn during the pandemic, from £618bn in 2020. UHY said the fall in tax revenue in the UK worked out at 11%, a far faster rate than the global average of 4%. The study showed tax revenues fell by £377bn in real terms to £8.83tn down from £9.13tn the year before.
The firm said the fall in tax revenues is due to the Covid-19 pandemic, as governments around the world cut taxes for individuals and businesses in an effort to boost their economies. In addition, global tax revenues were hit by a fall in tax on corporate profits and a reduction in transactions that are subject to tax (e.g. VAT on purchases and tax on property transactions).
Interestingly, especially given the current developments on the Ukraine border which will doubtless prove expensive in financial resources at least, Russia’s tax receipts also fell 11% to £223bn.
The Chancellor’s increase in National Insurance is expected to raise to raise £17bn a year. Corporation tax is also set to increase from April 2023 to 25% up from 19% for companies with profits over £50,000. With the UK’s national debt having risen from £1.88tn to £2.22tn.
Germany and China have both elected to boost their economies by lowering taxes on corporation’s profits. This seems eminently more sensible to me. Just when the UK needs entrepreneurialism and investment to re-emerge after Covid taxing success doesn’t seem the way to go.
China has reduced Corporate Income Tax for small and micro enterprises with a tax income below RMB 1 million, from 25% to 5% in 2020. In 2021, it announced this rate would be cut even further to 2.5%.
Quoted by Accountancy Today, Andrew Snowdon, Head of Tax at UHY Hacker Young said: “While the UK economy suffered a significant fall in its tax revenues, many businesses would prefer that this funding gap is dealt with gradually rather than hitting businesses and consumers with major new tax increases.
“There’s a fine balancing act between keeping the National Debt under control through a sensible tax policy and maintaining consumer spending by avoiding tax increases that make the consumer feel noticeably less well well-off. The increases in National Insurance contributions are going to be a major test both for consumers and employers.”
There will clearly be a need for Finance Ministers world-wide to balance their books at some time. That is the responsible course. But it doesn’t feel now is the right time to do it, to me. The Bank of England has already put up interest rates twice within three months, having kept them at 0.25% for three years. The impact of that, and probable further increases, have yet to show their effect.
There’s already pressure on taxpayers. Having been so sure footed through the pandemic I think the Chancellor has called this one wrong.
David Little is a Partner at Bishop & Sewell in our expert Corporate & Commercial team. If you would like to contact him please quote Ref CB277 on either 020 7631 4141 or email firstname.lastname@example.org.
The above is accurate as at 14 February 2022. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.