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Here is the winning entry, by Anna Hanif, a third year BSc accounting and business management student. As would be expected the original essay has full source citations but we have removed these for publication in the magazine. Who knows: perhaps in years to come one of these four young people could become a major player in the tax profession. – Andrew Hubbard, Editor-in-chief.
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Covid-19 has proven to be detrimental to all businesses and individuals being described as the UK’s worst recession in 300 years. These unprecedented circumstances have forced governments to act by developing tax policies to minimise economic damage.
Why use tax measures during the pandemic?
In light of this severe recession, governments across the globe have implemented a variety of fiscal policy measures to help businesses and individuals struggling due to the consequences of the Covid-19 pandemic.
During the initial phase of the pandemic, the focus for governments was to mitigate the impact of the economic collapse caused by revenues sharply decreasing and a potential depression. Governments feared the closure and bankruptcy of businesses and consequent job losses as this inevitably leads to long-term economic damage which takes years to reverse. Businesses have therefore benefitted from the introduction of tax measures as cash flows decreased; meaning that they have been able to keep a higher number of their employees (through the CJRS) and they have been able to pay suppliers on time.
Individual taxpayers will benefit as burdens are eased in order to minimise hardships such as tax reporting or payment obligations due to the many restrictions imposed as a consequence of the pandemic.
Although a financial recession will challenge and place difficulties on patients and healthcare systems, tax measures have probably contributed substantially to better keep society’s mental and physical health as people are no longer overwhelmed by financial pressures – reducing stress on the NHS.
This pandemic demands a global response and so countries worldwide are tackling this global recession within the means of their resources and circumstances. The economies of developing countries are using tax measures to protect people’s health and minimise disruptions in supply chains. This is to try to ensure continued access across the globe to essential goods and services for all social groups.
While governments are keen to help businesses and households, tax measures could prove to be critical in the future as once they are removed, economic activity may fall back to levels seen during the beginning of the pandemic. Job losses may increase with firm bankruptcies and worker-specific capital at risk. Therefore, with governments protecting and restructuring their economies, they should continue their efforts in the short term. However with borrowing at an all-time high, it’s unlikely to be sustainable and so governments should seek a trade-off soon, although uncertainty remains due to the pandemic.
Evaluation of tax measures and incentives in the UK
The UK has implemented a variety of tax measures and incentives to help corporations and individuals. These mainly entail providing administrative relief such as delays and extensions on payment deadlines.
For example, taxpayers have been allowed to defer VAT payments; for VAT due between 20 March 2020 and 30 June 2020 taxpayers were given the option to pay it on, or before, 31 March 2021. This incentive was made available to all UK VAT-registered businesses and no applications were required. This measure has been valuable to businesses as they have been able to pay their tax liabilities accrued during this period without any penalties being issued by HMRC. This has helped organisations to manage cash flows during a trying economic climate.
The chancellor also introduced a tax cut in the hospitality and tourism sector, from 15 July 2020 to 30 September 2021, by reducing the VAT rate from 20% to 5%. This has been applied to food and non-alcoholic drinks from restaurants, pubs, bars and cafés. The new 5% rate has also been included for attractions and accommodation across the UK such as hotels and theme parks. The hospitality and tourism sector has been severely hit and this will provide a boost of sales for this sector.
This measure can be compared to the 2008 financial crisis where reductions were made across all VAT-able goods and services with a reduced rate of 17.5% to 15% from 1 December 2008 to 1 January 2010 in a bid to stimulate the economy.
The government has called for more drastic measures during this pandemic. In 2008, shops remained open and travel was not restricted – which meant consumers could still contribute to the economy.
Covid-19 has cut across all sectors and industries with mass closures. This has therefore prompted the government to target this sector specifically, as travel and hospitality were at a minimum and suffered due to successive lockdowns and social distancing.
Income tax has also been deferred with payments due on 31 July 2020 being able to be postponed until 31 January 2021. HMRC introduced a time-to-pay facility allowing the deferred payment to be paid in monthly instalments for a period of up to 12 months. Properties which have closed because of Covid-19 have had business rates completely removed and so the discount for business rates is 100%.
Recommendations of further tax measures
The UK should make a clearer decision on corporation tax – like Canada and Singapore who have deferred it. This will ensure that businesses have time to resurface if anticipating a loss and so should eliminate applications to be excused.
In a move similar to one adopted during the 2008 financial crisis, Germany has implemented a decrease in VAT on goods by reducing their rate to 16% while the UK still remains at 20%. This change will encourage consumers to spend more, boosting the economy.
Conclusion
Governments around the world face an arduous task with unpredictable challenges and tax measures will remain vital in order to rescue and reshape the economy. The application of fiscal policies have a direct link to supporting businesses and households – boosting confidence, morale and preventing the effects of this recession from causing greater damage.
