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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 $500bn in real terms to $11.7tn down from $12.1tn the year before.
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 (eg. VAT on purchases and tax on property transactions).
26 out of 30 countries suffered from a hit to tax revenues. Some of the biggest decreases include the UK which saw tax revenues fall 11%* to $784bn and Russia which also fell 11%* to $296bn (see table below).
At the same time, governments introduced Covid support schemes to help those who were impacted by the pandemic. For example, the UK reduced the rate of VAT for hospitality and leisure businesses, as well as deferred VAT payments for businesses struggling to manage their finances during the pandemic. The UK’s furlough scheme covered 80% of the wages of those out of work, and emergency credit streams for businesses such as the CBIL and BBL schemes were introduced.
The UK government has pursued tax increases to balance its post-Covid budget. National insurance contributions will be rising by 1.25% for both employees and employers from April 2022, as will the rates of dividend taxes. These measures are expected to raise £17bn a year for the economy. Corporation tax is also set to increase from April 2023 up to 25% up from 19% for companies with profits over £50,000. With the UK’s national debt having risen from £1.88trillion to £2.22trillion in a year, more tax rises might be on the way.
Andrew Snowdon, Head of Tax in our London office says, “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.”
“Next year’s increases in National Insurance contributions are going to be a major test both for consumers and employers.”
Tax revenues of major economies take a hit during Covid
Germany’s tax revenues fell 8%* to $858bn in 2020. During the pandemic the German government introduced a number of tax cuts in the hope of boosting the economy. The standard rate of VAT in Germany was reduced from 19% to 16% last year. Businesses in the catering sector, arguably one of the sectors that suffered the most from Covid-19, benefited from an even bigger reduction in VAT from 19% to 7% on food sales.
Another major economy that suffered from a fall in tax revenues was China, falling 5%* to $2.4tn last year. China recognised the impact of the pandemic on smaller enterprises and as a result, introduced a number of tax reliefs focused on supporting these businesses. An example is the significant reduction in Corporate Income Tax, which for small and micro enterprises with a tax income below RMB 1 million, was reduced from 25% to 5% last year. In 2021, it was announced this rate would be cut even further to 2.5%.
Other countries experienced significant variations in their tax receipts this past year. Most notably, Turkey saw its tax receipts increase by 7%. By contrast, the Philippines saw its tax receipts fall by 13% in real terms, and Nigeria, the largest economy in Africa, tax receipts experienced a fall of 17%.
Subarna Banerjee, Chairman of UHY International, comments: “The enormous impact of the pandemic on tax revenues has been felt worldwide.”
“Many governments have been put in difficult positions, having to provide support to those who have been hit hard by Covid-19 while trying to prevent revenues from falling too far. Unfortunately, there will come a time where they need to balance the books and some governments may look to use tax increases to do so.”
“However, governments need to be cautious about any dramatic plans to increase their tax revenues. Sudden, large tax increases will place huge amounts of pressure on taxpayers, many of whom are also still getting back on their feet.”
Global tax receipts fall 4% during pandemic – costing nearly $500bn in real terms to public finances
*Adjusted for inflation
**By increase
