Annual tax take down nearly 8% due to pandemic

The pandemic has taken a toll on tax revenues as the latest figures show total tax receipts for the tax year 2020 to 2021 are £584.3bn, a significant £49.1bn lower than in the same period a year earlier

While total revenue was down 7.7%, tax take was not hit across the board with income tax and national insurance receipts up on the previous year. VAT take was hit sharply by the lockdowns throughout the year and various government covid-19 measures to defer payments and offer reduced 5% VAT rates to hospitality, one of the worst affected sectors during the pandemic.

Cash receipts from VAT fell by £28.8bn to £101.1 bn while corporation tax was down by £11.4bn to £54bn. There was also a hit to fuel and air passenger duty (APD) as coronavirus restrictions affected typical consumer patterns with international flights grinding to a halt and drivers staying at home. Air passenger duty receipts were down by a crushing 84% to £600,000, compared with the previous year’s £3.1bn.

Conversely, income tax, capital gains tax and National Insurance contributions (NICs) were up by £3.2bn, protected by the furlough scheme which allowed companies to keep staff in employment although they were not working due to government support. Over the year, the number of paid employees fell by 2.4%, while median monthly pay increased by 3.9% compared with last year.

In the latest release on tax receipts, HMRC said: ‘There has been a significant impact on tax receipts due to the Covid-19 pandemic, the government policies announced in response to it and emerging economic impacts. The full effects of these will take time to feed into tax receipts data due to time lags between the economic activity occurring, and when the subsequent taxable liability is required to be paid to HMRC.’

Nimesh Shah, CEO of Blick Rothenberg, said: ‘Total HMRC tax receipts are down by £49bn over the last 12 months (compared to the same period in the previous year), which represents an 8% drop in tax take. But given the impact of the pandemic and lockdown measures in this 12-month period, the effect is not as bad as once feared, and relatively impressive.

‘Whilst there has been recent speculation of tax rate increases, a fully functioning and growing economy would likely have the largest contribution to increased tax revenue to pay for the cost of government borrowing throughout the pandemic."

‘It is also telling that total income tax receipts are up £2.5bn (or 1%) higher. The slightly higher income tax and PAYE receipts suggest that the furlough scheme had a contributory factor in keeping more people technically employed.

‘The results are more interesting given that the UK employment rate in the three months to January 2021 had increased to 5% (up by 1.1% compared to the same period in the previous year) suggesting earnings of those who remained in employment continued to be stable.’

The biggest hit was to VAT revenues although this was limited to the initial stages of the pandemic and first lockdown. VAT partner at Blick Rothenberg, Alan Pearce said: ‘VAT receipts this month have gone up to more than pre Covid levels with £12bn being received by HMRC but figures over the year are down.

‘VAT revenue in April, May and June 2020 was down but in July 2020 the VAT tax take bounced back and since then it has been keeping pace with expectations.’

Another hard hit area was corporation tax, which saw a substantial drop in revenue.

Heather Self, a partner at Blick Rothenberg, said: ‘Corporation tax receipts have seen a significant fall, down by almost 18% compared to 2019/20 with total receipts coming in at just over £50bn, compared to £62bn last year.’

She added: ‘We have now seen a full year of the impact of the pandemic and the fall in corporation tax receipts is dramatic, at almost £12bn. Business profits have been hit hard by the disruption caused by lockdowns, and sadly there is likely to be more pain to come – full trading is still not available to many companies.

‘This does call into question whether the Chancellor is right to seek to raise the corporation tax rate to 25% in 2023, as businesses seek to get back onto an even keel.’

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