Tax

Turbulent times for tax receipts?

Apr 01, 2020
While COVID-19 will take a significant toll on 2020 tax receipts, Peter Vale suggests that the figures should return to current levels at some point next year.

At the time of writing, the coronavirus pandemic looks likely to have a significant adverse bearing on global economic growth, in addition to the substantial societal impact we are all experiencing.

We know from experience that an economic downturn can dramatically affect exchequer receipts – there was a 40% decline in corporate tax receipts alone between 2007 and 2009.

So, what impact will COVID-19 have on tax receipts by year-end and what will that mean for our economy?

Corporation tax

Large companies make their first tax payment six months into their financial year, with a further payment one month before year-end. In Ireland, May and June tend to be the first key months in the year for corporation tax payments.

A company has the option to base its first payment on either current year estimates or the prior year actual liability. Given the expected impact of the virus on the economic activity and profitability of most companies, you can expect that many will choose to base their first payments on current year estimates. It may not be possible to assess the full 2020 impact of the virus by May/June, however; some large companies may take a conservative view and make payments based on the prior year position. Assuming the virus continues to cause economic disruption through to the end of the year, there could be significantly smaller second instalment payments later in the year or large refunds due to companies in 2021.

For many smaller companies, November is the critical month with the ability again to assess the liability based on the current year estimates. All of this means that we could see significantly smaller corporate tax payments this year, likely first evidenced in May/June with a further reduction in November returns, if the virus disrupts economic activity through to year-end.

It is challenging to assess the scale of the potential reduction in corporate tax receipts. In this author’s view, it will be significant and could also impact on 2021 figures. But on the positive side, one would hope that the figures would return to current levels perhaps late next year. This would contrast with a more gradual increase in receipts following the economic crash.

COVID-19 will also impact other tax heads.

VAT

Restrictions on travel and movement, plus enforced closures, will likely have a significant impact on consumer spending and a consequent downward impact on VAT receipts. While online spending could continue, supply chain issues are likely to mean even that option will be curtailed.

Discretionary high street spending may be impacted most, with many shopping trips confined to the purchase of essential goods.

Again, one would expect that any resultant downturn in VAT receipts would be temporary. Still, it could last for the rest of the year and trickle into early 2021 receipts if Christmas spending is impacted.

Income tax and capital taxes

Income tax receipts will also suffer, with seasonal and temporary roles likely to be hit hardest, and a reduction in profits generally for the self-employed seeing tax receipts fall.

While not as significant, capital taxes will also suffer with deal volumes expected to fall across many asset classes, impacting both capital gains tax and stamp duty receipts. 

Impact

The impact of most of the above will be seen before the October Budget, leaving the Minister for Finance facing some difficult decisions, assuming there is no mini-Budget before then. There may be a need for some temporary tax-raising measures in addition to dipping into cash reserves and a considerable increase in borrowing.

While significant on many fronts, COVID-19 is expected to be something we recover from, with many governments already launching initiatives to help individuals and businesses get through the crisis.

The Republic of Ireland is lucky to be home to many large multinational companies that use Ireland as a hub for global activity. It is almost inevitable that COVID-19 will see the profits and tax receipts of these groups fall substantially, with a decrease in domestic economic activity generally also fuelling a significant dip in tax receipts.

While I believe the decrease in 2020 tax receipts will be significant, the figures should return to current levels once the worst of the crisis is over. A best estimate of when this will be is likely at some point next year.

Peter Vale FCA is Tax Partner at Grant Thornton.