The pandemic has blown a massive hole in the UK's finances. After a decade or so of austerity measures, whatever financial improvement resulted has been made totally irrelevant after a few extremely painful months. UK public sector net debt at the end of October 2020 stood at £2.08 trillion. That equates to 100.8% of GDP, a level which was last seen in the early 1960s. Further, the overall debt figure is not the only relevant consideration, the rate at which it is increasing is also a factor. Here again the picture is not a rosy one. Public sector net borrowing in October was £22.3 billion, a record for that particular month of the year. The toll that the pandemic has taken on the economy is a major concern and leaves the government with a conundrum. Standard economic theory (as it is normally practised currently) is that governments should try and spend their way out of recession but the major blow that government finances have suffered makes this in some ways an unappealing prospect.
Chancellor Rishi Sunak may be looking for a way around some of the issue at least by focusing on areas where the tax system as currently established is unfairly configured in favour of the taxpayer. The Treasury this week published a consultation document which highlighted some possible targets. Two particular names sprung to mind when reading through this which in recent years have become well-known, specifically Airbnb and Uber. Individuals who provide services using such vehicles (if you will pardon the pun…) often fall below the threshold for VAT registration, currently at £85,000 p.a. These are typically self-employed contractors but if they were employees of a company rather than being self-employed then the company that they work for would normally have to charge VAT at 20%. This could obviously be a significant sum of money for the Treasury if this were to be charged.
Let's give some perspective to the numbers involved. The consultation document suggested that the value of UK transactions for such platforms was around £7 billion in 2016. This figure is predicted to rise to about £140 billion by 2025. The VAT due on that latter sum, should it be charged in the future, would be in the region of about £28 billion. Given the fact that the Office for Budget Responsibility (OBR) highlighted a gap of around £40 billion per annum in public finances even if only a part of that potential additional VAT were recovered then it could make a very useful contribution. On the other hand, service providers are probably not going to take kindly to have to pass on the VAT charges to end users who will often not be VAT payers themselves and will therefore not be able to recover it. At the time of writing no comment has been seen from them but it is probably unlikely to be positive.
Of course at the heart of the issue here is a very basic reality. Many have benefitted greatly from financial support during the pandemic (though political opponents of the government might on occasion suggest that the arrangements have not been generous enough); but even though interest rates are at historically low levels sooner or later steps will need to be taken to protect the overall fiscal position. Faced with the current worrying state of public finances, there will come a point when measures will be taken to try and close the gap. This will not be an easy period for Chancellor Sunak; it is easy (or easier) to be popular when giving money away. It is when he starts trying to claw it back that the true test for him personally will come. It is a fact that he is probably well aware of. In response to the recent spending review he commented that he might look flexibly on suggestions that local councils might raise their council tax bills by more than the rate of inflation to fund improved social care. Whilst that might have some logical merits it could also mean that any taxpayers who want to complain at paying more tax will be directing their criticisms at the local town or city hall rather Whitehall, something which he presumably might welcome.
Wayne Bartlett is an author for accountingcpd. To see his courses, click here.
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