Changes in UK government revenues, and the impact of Covid-19 on environmental and digital services taxes

Total UK Government receipts for 2020/21 were £795bn, £34bn down on the previous year (see here).  In this article, we focus on how the environment and the digital economy contribute to this result and the future implications.  In future articles, we will consider how other jurisdictions are reacting to developments in this area.

The £34bn shortfall included a £14bn drop in VAT collections and £10bn drop in business rates collections.  There was also a £10bn drop in collections from fuel duty and air passenger duty (APD). 

In isolation, it is tempting to postulate that reductions in VAT, business rates, fuel duty, and APD were all related to the impact of Covid.  We have been travelling less, spending less, and businesses operating in the UK have been given support through reductions in business rates.

Customs duties and alcohol duty collections have increased by around £2bn.  These may perhaps be caused by Brexit and a greater consumption of alcohol during the pandemic, but there were falls in other areas, for example stamp taxes on land.

It is difficult to assess the impact of Covid-19 on income and corporation tax collections.  Collections for these taxes have increased by around £7bn.  This may partly be explained by the fact that corporation tax is partly collected based on business profits from 9 months before.  Of the £7bn increase, approximately £1bn relates to increased CGT collections and £4bn to increased PAYE collections.  The Government CJRS support (subject to PAYE) would have contributed and concerns over future rates may have contributed to sales subject to CGT.

What can the UK Government take from this?

Perhaps the most striking impact from these figures is the £10bn reduction in collections from fuel duty and air passenger duty.  Although the fall in VAT collections will have resulted from several areas (for example from catering and entertainment), part of the reduction will have resulted from lower fuel use for traveling. 

If this reflects a trend of people consciously living in a way that reduces their carbon footprint, then it is clear the Government needs to have a plan for replacing these revenues.  The Government may well want to use the tax system to incentivise environmentally friendly activity. There are already benefits for using more environmentally friendly cars, so this reduction in collections from carbon emitting sources looks set to continue.

Where might the UK Government look to replace such revenues? 

The change in the way we live is heavily linked to our increased use of digital technology.  Indeed, this trend may have contributed to the difficulties many traditional high street businesses have experienced with business rates.  One possibility might therefore be for the Government to find new ways of taxing our use of technology-related activity. 

The new digital service tax contributed £306m to 2020/21 collections, ahead of the £275bn predicted in the original tax information and impact note.  However, this amount is small compared to the drop in collections from fuel duty and APD.  Further policy thought is needed here, in part to avoid disincentivising the use of what is a helpful tool enabling us to live and work more efficiently.  The subject of where and how the digital activity is taxed is a hot topic being considered at a global level (see our article on the G7 communique here).

UK receipts from the EU emissions trading scheme and other environmental levies were relatively flat across the two years at £9.6bn and £9.8bn.  However, perhaps collections in this area may increase as further thought is given to introducing a carbon border adjustment mechanism.  This was referred to in Dr. Liam Fox’s speech on the matter – see here).

Tax and the environment have been on HM Treasury’s radar as revealed in their latest minutes (see page 17 onwards) in response to the Public Account Committee’s (PAC) review of environmental tax measures.  In summary, the Treasury agrees it should:

• Become an exemplar finance department in supporting government’s environmental goals like net-zero;
• In November 2021, set out a clear vision of how it will work to help the UK achieve net-zero;
• Consider the implications for tax revenue from net zero and the need overtime to set out a plan for the replacement of fuel duty revenues (but in contrast to the PAC declined to set a timetable for how this should be done);
• Consider the pros and cons of publishing a roadmap that signals a clear trajectory to taxpayers for how tax measures will be deployed to contribute to net zero.

HM Treasury does not consider it practical, cost effective, or possible to consider detailed environmental impacts for every tax change from Budget 2022.  However, it agrees that by winter 2021, HMRC should have sufficient information to assess the impacts of existing environmental taxes, including whether they are achieving their objectives.  Assessing the impact of environmental taxes on other Government departments’ responsibilities for environmental objectives, is a longer-term project for the Treasury.

It is disappointing that there is currently no clear policy on how to replace the expected drop in fuel duty and related tax revenues, but perhaps circumstances will force the Government to reassess this sooner rather than later.

In contrast, the UK Chancellor of the Exchequer, Rishi Sunak, commented in his 1 July Mansion House speech on his ambition for the UK to be a leader in green finance.  This initiative will include new regulatory provisions for sustainability reporting and labelling, and funding for ‘green’ projects from new ‘green gilt’ issues, and a ‘Green’ Government savings scheme.

Businesses and individuals will need to consider the impact of these changing trends on their business and how the Government may react.  Environmental and digital taxes are not the only particular concerns affecting the UK economy at this point, but it is clear these will form an important consideration for the Government, businesses, and individuals going forward.

For a further discussion of the local and international tax implications of these trends on your business or personal situation, please get in touch with a member of the Mazars international tax team in the UK, or globally.