COVID-19 has caused a seismic economic shock and the aggregation of a staggering national debt, forcing the UK government to intensify its focus on all revenue sources. Both the European Union and the Organisation for Economic Co-operation and Development (OECD) have said that tax reform will become vital as economies emerge from the COVID-19 pandemic. According to Law360, a European Commission draft document states that the OECD’s reforms will be “particularly relevant for the recovery phase, during which member states will need to broaden their tax bases to finance the growing deficits.”
In the OECD report, ‘Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience’ issued on 15 April, the organisation analyses the effects of the pandemic and evaluates potential recovery plans. It states that the “extent of the reductions in tax revenues will be seen in countries that are heavily affected by COVID-19…[with] confinement for longer periods… [and] have a greater exposure to the global economy,” suggesting the UK may be particularly affected, given that the lockdown will last a minimum of six weeks. It goes on to say that the cost of bailout packages, public spending and loss in tax revenue will “lead to a significant increase in government borrowing, translating into quickly deteriorating budget balances and public debt levels.”
Growing national debt
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. So just how will the UK government deal with a national debt that eclipses that inherited by David Cameron’s government back in 2010, leading to the subsequent austerity drive?
The OECD report suggests that “tax will have a key role to play” both in terms of revenue and tax structure post-COVID-19. 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 OECD further suggests the crisis could spearhead adoption of its global Digital Tax, given that digital service providers are benefitting from increased use of digital services during lockdown. And it goes on to make the point that tax authorities may well invest in the digitalisation of their own systems to help spur revenue collection as “highly digitalised tax administrations can increase compliance and reduce burdens on taxpayers.”
Digitalisation would certainly seem to be a primary objective for the UK government, which has consistently focused on its efforts to make HMRC one of the most digitally advanced tax authorities in the world. Even before the development of the 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.” Consequently, we can expect to see over 1,300 additional compliance staff who, armed with more technological resources, will be brought in to close an additional £4.6bn of the tax gap over the next five years, every penny of which will be needed to help offset the spend on COVID-19.
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 resource 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, creating a peculiar kind of arms race, with both regulator and corporation transforming together. 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.
Implications for business
So, if HMRC is armed with more resource and is under mounting pressure to deliver further tax revenue, what does this mean for the corporate tax payer?
- Expect digitalisation to continue apace in the commercial and public sector. The digital links mandate has been extended to April 2021, but this is to allow businesses the breathing space to concentrate limited resource on cashflow and surviving the COVID-19 crisis. Make no mistake, MTD is still very much on the government’s agenda. We can also expect HMRC to continue to invest in more sophisticated systems to enable it to detect and investigate potential instances of tax abuse or avoidance.
- Zero tolerance policy regards non-compliance. Given that businesses have been granted extra time (of a year or six months in the case of deferred businesses) we can expect HMRC to come down hard on those that don’t comply with the digital links mandate. The argument will be that we’ve all had the time to plan and execute our digital links deployments and should be aware of our filing deadline post April 2021.
- Enforcement through new penalties. While HMRC has taken its foot off the pedal when it comes to penalising companies during the COVID-19 crisis, don’t expect that leniency to continue. 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 you 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.
AlphaVAT is a dedicated MTD compliance platform that ensures compliance and boosts operational efficiency. Designed specifically for the MTD process, it mitigates error, increases accuracy and reduces workloads. To find out how AlphaVAT can help you prove your compliance and stay ahead in the digital arms race, contact us today for a demo.