Many businesses are struggling to meet their usual tax payment schedules and are seeking instead to delay those payments. There are three ways this may happen:
- Deferral policies. Companies can defer VAT due between 20 March and 30 June until the end of the tax year. The July 2020 payment-on-account for self-assessment income tax can be deferred until January 2021. Some deferred tax will not be repaid.
- Other authorised deferrals. In agreement with HMRC, taxpayers in financial distress can defer payments not covered by the deferral policies. These are subject to a payment plan being agreed through HMRC’s time-to-pay service, which is being scaled up.
- Unauthorised tax debt. Some taxpayers will delay payments without having first agreed that with HMRC. This seems to have been quite widespread early in the lockdown.
In theory, the impact of non-payment of tax liabilities depends on four factors:
- The initial value of unpaid or deferred tax – i.e. the gap between liabilities and cash receipts that is generated via the three sources outlined above. In some cases, this is far from straightforward to estimate. For example, it can take several years for annual corporation tax liabilities to be finalised, in part because losses can be carried back.
- The extent to which deferred sums are eventually paid. Our central scenario deploys three rates of ultimate non-payment. For PAYE income tax and NICs we use 7 per cent, as the ONS has in the public finances data based on evidence from recent years. Elsewhere we assume non-payment rates of 5 per cent where tax streams cover all sizes of firms and 10 per cent where they are likely to be dominated by small and medium-sized firms, for which we would expect firm failures and ultimate non-payment to be higher.a
- When the remaining payments are subsequently made. From a fiscal sustainability perspective, the timing of payments between years is not critical. However, it is likely that the longer payments are deferred, the higher the proportion will be that goes unpaid.
- The statistical treatment of tax debt and its repayment. In some cases, the ONS has adjusted accrued tax revenue consistent with an assumption that debt will be repaid in the year in which the liability is generated (or a proportion of it will). These adjustments are only possible with quality, timely data, and to date only the PAYE and VAT data have been adjusted in this way. This makes significant revisions to accrued tax data more likely than usual and it may take many years for the recorded data to be finalised.
Our scenarios parcel these factors together in the light of recent cash receipts data to generate plausible, if highly uncertain, estimates of how non-payment of tax liabilities affects receipts this year and beyond. In many cases, notably for corporation tax, it is unlikely that we will ever fully understand the contribution of each component to the fall and subsequent rebound in receipts.