Total tax revenues across the UK dropped by £33.4bn last year, according to the annual revenue release from the Organisation for Economic Co-operation and Development (OECD)
The 2021 edition of the OECD’s annual Revenue Statistics publication includes analysis on the initial tax revenue impact of the Covid-19 pandemic, with the OECD stating that government support measures contributed to the ‘relative stability of tax revenues’ by protecting employment and reducing corporate bankruptcies to a considerably greater extent than in the global financial crisis in 2008-09.
The OECD stated that the sharp reduction in economic activity in 2020, reduced labour force participation, household consumption, and business profits, further affected tax revenues, although the shock was shorter and more sector-specific than the global financial crisis.
The report also found that many of the tax policy measures implemented to support households and businesses often had a direct revenue cost via reductions in tax liabilities, enhanced tax credits and allowances, and reductions in tax rates.
The total UK revenue from taxes fell to £692.2bn during the last financial year 2020-21 down from £725.6bn during 2019-20. The UK ranked 23rd out of the 38 OECD countries in terms of the tax-to-GDP ratio during 2020-21 with a ratio of 32.8% compared to the OECD average of 33.5%.
The OECD stated that the UK tax structures are characterised by higher revenues from taxes on personal income, profits and gains, property taxes, and VAT.
Overall, the OECD report shows that the OECD average tax-to-GDP ratio has risen slightly to 33.5% in 2020, an increase of 0.1 percentage points since 2019. Although nominal tax revenues fell in most OECD countries, the falls in countries’ GDP were often greater, resulting in a small increase in the average tax-to-GDP ratio.
The report shows that countries’ tax-to-GDP ratios in 2020 ranged from 17.9% in Mexico to 46.5% in Denmark, with increases seen in 20 countries and decreases in the other 16 for which 2020 data were available.
The largest increases in tax-to-GDP ratios in 2020 were seen in Spain at 1.9%, which experienced the largest fall in nominal GDP and a lower fall in nominal tax revenues.
The OECD report found that VAT revenues decreased by an average of 2.3%, with falls seen in 24 OECD countries and as a share of GDP, they decreased by an average of 0.03 percentage points with falls in 19 OECD countries.
The OECD stated that the changes in VAT revenues were relatively correlated with changes in GDP in 2020, resulting in a relatively small and even spread of changes around zero as a share of GDP. In 2020, VAT changes had a correlation ratio of 71.6%, compared to 45.3% in 2009.
The possible contributing factors to the limited falls in VAT include lower levels of corporate bankruptcies and the increased level of government spending that offset a fall in household expenditure.
The OECD also stated that the effects of the Covid-19 pandemic did not ‘dramatically affect annual revenues in 2020 as the financial crash did in 2009’. The pandemic primarily affected quarters two (Q2) with a more limited impact in Q3 and Q4.
The OECD also stated that the nature of reporting was another contributing factor as the deferrals of VAT payments adopted by many countries in the crisis may conceal some VAT revenues that will not be remitted in the future, with the impact in 2020 being more pronounced given the greater use of deferrals relative to the financial crash.
The OECD reported that VAT liabilities were introduced in almost all OECD countries and were often combined with the suspension or reduction of interest and penalties and were targeted to particular sectors, SMEs, or the self-employed.
VAT refunds were accelerated in 15 OECD countries to further enhance cash flow and relief for bad debts was often expanded and a range of administrative simplifications and tax filing extensions were also introduced to reduce compliance costs.
The report also found that cuts in VAT rates were widely seen across the OECD which were largely targeted towards the hospitality industry, restaurant services, and cultural and sports sectors. The majority of those reductions were initially limited to a period of three to six months with Germany reducing their rates from 19% to 16% until the end of 2020 and Ireland reducing from 23% to 21% until February 2021.
In both countries, this contributed to a fall in VAT revenues in nominal terms and a share of GDP. In Germany, reduced VAT rates were also lowered. Similarly, Norway also lowered their reduced VAT rates in response to the crisis.
Over half of all OECD countries introduced temporary zero or reduced rates for medical equipment and personal protective equipment and no OECD countries increased their standard VAT rate in 2020.