In the wake of the Covid-19 global pandemic follows a financial crisis in the making and a huge question is how will the government manage the £300bn deficit? Covid-19 has caused a seismic economic shock and the aggregation of a staggering national debt with the bill rising by £20bn in a fortnight as tax revenue dwindles and state spending soars to head off economic meltdown. The mounting cost of government schemes to help Britain through its worst recession in more than three centuries, will result in a £300bn deficit in the current financial year, a report has forecast.
How will Her Majesty’s Government Manage the £300bn Deficit?
“Tax will have a key role to play” says The Organisation for Economic Co-operation and Development (OECD) along with European Union, suggesting this in terms of both revenue and how tax is structured following the pandemic. Tax-reform will become vital post COVID-19. The OECD report, ‘Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience’ published on 15th April suggests that the UK may be particularly affected, given that the lockdown, in all its forms, has lasted for 15 weeks so far. A fundamental reform of the tax system is to be called for to ensure taxes are supportive of growth whilst being straightforward and manageable by the taxman to quell tax abuse and aid the UK’s recovery.
The longer the period of confinement with a country the greater the loss in tax revenue. Add to this the cost of bailout packages and public spending, we are looking at a significant increase in government borrowing, leaving Her Majesty’s government with a £300bn deficit that eclipses that inherited by David Cameron’s government back in 2010, which preceded austerity. So we expect HMRC to intensify its focus on all revenue sources to manage the £300bn deficit.
What Does this Mean?
In short the national debt has taken a steep jump up whilst GDP has fallen sharply. According to forecasts from the Office for Budget Responsibility, GDP is expected to fall by 35% in Q2 2020, with public borrowing expected to top £337bn or 14% of GDP, while the International Monetary Fund predicts global GDP to contract by 3%. Between March 2019-March 2021, national debt as a percentage of GDP would therefore be 30% points of GDP, equivalent to a rise in the national debt of £600bn.
Evidently Her Majesty’s government is desperate to kickstart the economy before any further economic meltdown. As we have seen with the second ’easing’ of lockdown coming into force last weekend on 4th July, hailing the grand reopening of pubs, restaurants, hairdressers and the like. All have social distancing measures in place by recommendation and enforcement. Except in the case of Leicester who unfortunately remain under lockdown after a recent surge in cases of Covid-19.
What else can be done?
This means we could see new steps taken, as in post-war scenarios, with the introduction of “new sources of revenue” or the modification of “the tax mix in existing systems”.
The crisis will likely naturally increase the adoption of Making Tax Digital, especially since digital service providers are benefiting from increased use of digital services during lockdown. Authorities may well invest in the digitalisation of their own systems to assist revenue collection as “highly digitised tax administrations can increase compliance and reduce burdens on taxpayers.” Says the OECD.
Before the outbreak of COVID-19 crisis, we heard Chancellor Rishi Sunak state in Budget 2020 that “The government is investing in additional compliance officers and new technology from HMRC… enabling HMRC to further reduce the tax gap.”
Indeed sound digital practices should be a lucrative objective for the UK government, which has consistently focused on its efforts to make HMRC one of the most digitally advanced tax authorities globally. We could see an uptick in HMRC compliance staff and more sophisticated technology to help close an additional tax gap of £4.6bn over the next five years.
HMRC plans to “increase its investment in technology to better target those abusing the tax system,” according to a report in the FT, indicating that HMRC sees technological resources as fundamental to closing the tax gap. Its own investment focuses on the Making Tax Digital (MTD) strategy, mandating the adoption of tax technology among taxpayers. The latest tax gap figures show that MTD for VAT alone was already forecast to deliver additional tax revenue of £1.2 billion by 2023 to 2024, with steady state savings of around £300 million each year.
What does this mean for Businesses?
Having benefited from the huge bailout schemes during the crisis, to help businesses weather the financial aftermath, HMRC will be expecting full compliance from businesses, to reaccrue tax revenue which was decimated during the pandemic.
MTD is Top Priority
MTD remains a high priority for HMRC. The digital links mandate has been extended to April 2021, but this is to only to allow businesses the breathing space to concentrate their limited resources on cash flow and surviving the COVID-19 crisis.
HMRC are expected to continue their investment in more sophisticated technology and systems to achieve across-the-board compliance and to root out potential instances of tax abuse or avoidance swiftly and accurately, with detection and investigation and a zero tolerance policy regarding non-compliance.
We can expect HMRC to come down hard on those that don’t comply with the digital links mandate. The argument will be that businesses have been given plenty of time to plan and execute the digital links deployments and should be aware of the filing deadline post April 2021. We shouldn’t expect any leniency that business may have ‘enjoyed’ during the outbreak to continue post Covid-19.
The introduction of a new points-based penalty regime for VAT, scheduled for 2020, will enable HMRC to automatically award points and financial penalties. It signifies the tax authority’s intentions to ensure penalties are awarded fairly and proportionately but also more frequently and effectively through the use of automated systems.
Together, these implications mean that businesses need to use the time made available to them through the extension of the digital links mandate. That means focusing on rolling out an MTD strategy that provides businesses with the capability to demonstrate compliance. It’s crucial for the business to be able to trace amendments and adjustments in order to pinpoint where and how calculations were made. To generate that level of detail, the business needs to be able to create a digital audit trail that tracks back through the process all the way to the source data itself.
How Can Prestige Business Management Help You
Prestige Business Management can help you understand Making Tax Digital, help you pick a vendor like QuickBooks to help you maintain digitised accountancy records whilst helping you to understand the compliance framework.
We will be keeping you abreast of tax-reform announcements as they happen, how these may affect your business and how to remain compliant and protect your business in the forthcoming months and years post Covid-19.
Prestige Business Management can help you understand how MTD works and how digitised accountancy records can be maintained thanks to QuickBooks accounting software. Call us today on 0203 773 2927