If the economic downturn isn?t depressing enough in putting a tight squeeze on personal finances, more gloom lies ahead for taxpayers. When the recovery gets under way they will probably face t
If the economic downturn isn?t depressing enough in putting a tight squeeze on personal finances, more gloom lies ahead for taxpayers. When the recovery gets under way they will probably face the weight of increased taxation. How else are governments going to fill the ?tax black hole? blasted by the financial crisis and huge bank bailouts?
Governments around the world have been digging into their reserves and borrowing funds to kick start a fiscal recovery. More recently, further huge commitments are being made.
The UK national debt is likely to be catapulted through the ?2 trillion mark as the government stands behind its troubled banks debts. The Office for National Statistics expects to have to add between ?1 trillion and ?1.5 trillion to Britain public sector net debt, taking the total national debt to an unprecedented ?2.2 trillion. This would be the worst debt total since the 1950s, when Britain was in the process of paying back its war debts.
European governments have also pledged billions in Euros to guarantee bank lending and the survival of banks. Indeed, Newsweek reported in December that a study by Independent Strategy of London put the total spent by the nine leading European economies on various moves just to shore up wobbling banks at $3.36 trillion.
Currently tax cuts and concessions are being put in place to assist the populace to cope with the financial pressures of the economic squeeze. Eventually, much of the funding for this unprecedented government funding will have to come from increased taxation.
In January The Times reported that UK Treasury faces a ?23 billion shortfall in tax receipts. Other governments around the world are also suffering a slump in tax revenue. The situation in the UK is being exacerbated from a loss in tax from certain areas. Here are just a few:
Housing crash ? The housing market fell dramatically. Economists warned that this will blow a ?15 billion ?black hole? in Treasury coffers. Tax receipts from stamp duty on property purchase and capital gains tax on sales have declined. Inheritance tax (IHT) receipts will also fall as thousands of families are pushed out of the IHT net.
Unemployment ? Data from the Office for National Statistics reveals that by the end of 2008 unemployment leapt to a 12-year high of 1.97 million. Some economists believe it will surge past 3 million. Jobseekers Allowance for those out of work and actively seeking work will cost the taxpayer millions of Pounds in benefit.
VAT cut ? Value Added Tax imposed on purchases was temporarily reduced at the end of 2008, from 17.5%, to 15%, the lowest rate allowed by the EU. A 2.5% VAT reduction would cost an estimated ?12.5 billion a year. Added to an overall drop in consumer spending, VAT receipts could cost the Treasury even more.
Corporation tax ? Businesses are struggling or collapsing. Revenue from corporation tax will undoubtedly fall.
Interest rates ? UK interest rates have crashed to 0.5% from 5% in October. It is the lowest since 1694. Income tax from interest on savings will be lost.
Longevity – As life spans increase so will the demand on the Government?s coffers to meet the expense. There will be pension payments to make for a longer period of time as well as an increase in health care costs and social services for the elderly. As the number of people in retirement grows and the number of the younger taxpaying public falls by comparison there will be a shortfall in revenue to meet the cost of old age.
Moves to recoup tax now?
HM Revenue & Customs (HMRC) is concentrating on its quest to recoup revenue lost through tax evasion. A second Offshore Disclosure Facility (OFC) is expected to be announced shortly to encourage those who have not declared interest from offshore bank accounts for UK taxation.
Back tax and interest will be due as well as penalties which are likely to be capped at between 20%-30%. The first ODF launch in 2007 has so far reaped ?450 million in reclaimed revenue and the penalty was reduced to 10%.
UK prime minister Gordon Brown and other G20 leaders are taking tough action on tax havens, something they believe is crucial to the world economy performance.
UK tax investigators are stepping up the intensity of their investigations using the latest computer software to search for any signs of tax evasion. Tax returns are being scrutinised for discrepancies, expense claims and large purchases. A new unit is being created by HMRC to focus on wealthy taxpayers that will examine their tax affairs for evidence of hidden tax liability.
The European Commission has adopted proposals for new directives aimed at improving co-operation between Member States to help combat tax evasion and fraud. One of the key proposals is that Member States would no longer be able use bank secrecy to reject cross border co-operation.
Pulling in lost tax is already a priority for the Treasury and a huge tax hole due to the economic downturn will need filling in the future. There are legitimate structures available to help you pay less tax and advice from an authorised and professional firm like Blevins Franks can help you with effective tax planning.
by Bill Blevins, Managing Director, Blevins Franks