It is that time of year when people’s minds turn to gifts; both giving and receiving. What effect do changes in consumer tastes and habits have in creating or reducing fiscal black holes.
The traditional Christmas rush to the shops creates a steady stream of taxes for the government. First of all, there is the VAT payable on most of the goods we purchase as gifts. There is the business rates which the shops pay. Added to that, there is the income tax and national insurance paid by those who work in the shops. Finally, the shops pay corporation tax on their profits.
This revenue stream has been disrupted by COVID 19. Indeed, many of the shopworkers are now on furlough and therefore they are taking out from the Exchequer rather than paying in. The shops themselves have received business rate relief and both the streams of VAT receipts and corporation tax will dry up as turnover and profits decrease or indeed disappear.
The effect for the Treasury goes even further. If I am prevented from eating in restaurants, drinking in pubs and travelling substantial distances, then VAT, duties on alcohol and indeed petrol duty decrease as well. On the basis that these are replaced by eating at home there is a loss of VAT as most food is zero rated. If I read books which are zero rated rather than going to the theatre, again the government loses out both in terms of VAT receipts but also in terms of having to spend to keep our cultural sector alive.
Of course, we do not know whether these changes will be a temporary blip, or presage substantial long-term structural changes to how we travel, work and enjoy our leisure time. It is fair to say that most of the industries which are suffering substantially under COVID were industries that were experiencing substantial challenges in their trading environment before COVID struck. This includes famous retailers such as Debenhams and Arcadia. Covid 19 has, of course, accelerated trends which were noticeable and noted before such as the decline of the high street.
There are in my view, very few industries that were doing well before the pandemic that will not recover after the pandemic; business travel may be one of them. It is however mainly the case that the good well-run companies in healthy sectors will recover.
It is however fair to say that the new economy is likely, at least in the short to medium term, to generate less tax revenues than the pre-COVID economy. The way that we shopped and enjoyed our leisure time was guaranteed to bring substantial amounts into the Treasury. New ways of working may mean that this becomes more challenging. Then there is the environmental challenge to consider. Petrol duty brings in around £30 Billion in revenues which will reduce markedly as petrol and diesel cars are phased out. A colleague said to me “well surely the government will just replace that with higher taxes on electricity”. But I pointed out that electricity is also used for essential elements such as lighting and heating and therefore cannot be taxed in the same way.
On the basis that we will permanently be buying more items on line, the ability to raise business rates on retail outlets will be severely circumscribed. The Digital Services Tax will raise nothing like the amounts that is lost through business rate relief.
Other changes in consumer habits could also have a significant effect on tax revenues. For example, as decluttering becomes more popular and there is a greater proportion of the population living in flats or smaller accommodation, will we be so eager to refill our living spaces with so much stuff?
Maybe we will be getting presents in the form of services such as membership of sporting, culture and other leisure organisations. This partially explains why it is that diverse organisations such as English Heritage, the National Trust, The Royal Academy, The British Museum, Kew Gardens, The Royal Horticultural Society, London Zoo, The National Gallery and the Tate are the beneficiaries of a substantial increase in memberships in recent years; often as a result of gifts by relatives and friends. These memberships not only do not carry any VAT but also allow the general to claim gift aid on the contributions. This is another example of where changing consumer habits lead to a decline in tax revenues.
How the Chancellor attempts to balance the books will be undoubtedly complicated by these new trends which will remain present long after we have all been hopefully vaccinated.