Learning from past financial crises: 5 post-Covid VAT predictions
From Malawi to Macedonia, Senegal to Sweden and, indeed, in almost every country around the world, VAT has been used as a tactical tool to combat the drastic fiscal impact of Covid-19.
While the pandemic is undoubtedly the gravest economic disaster in living memory, it’s not the first time (and it won’t be the last) that the globalised economy has been forced to act quickly and robustly to tackle a financial crisis.
So what can we learn from previous financial crises? And how are governments likely to leverage VAT in the coming months and years to get their damaged economies back on track?
Here are five VAT predictions for the next five years:
1) Industry-specific rate cuts are here to stay
While the future of national standard rates is up in the air, one thing that is clear is that governments will continue to provide relief to the hardest hit sectors for some time to come.
Some industries will bounce back from the pandemic in no time at all; some may not have even been affected in the first place. But others – such as hospitality, leisure and travel – are likely to take years to fully recover.
We’ve already seen governments apply a wide range of industry-specific rates in the last year. The UK imposed a reduced rate of 5% for hospitality, while Germany decreased its from 19% to 16% until 31st December 2020 and Ireland is taxing hospitality and tourism businesses at just 5% until the end of this year.
Over the coming years I expect these temporary rates to be introduced on a sector-by-sector basis – the market volatility is real – and sometimes without all that much warning. It means your tax team will need to be up to the challenge of staying up to date with all the latest figures.
2) VAT will become more popular than ever
The popularity of VAT around the world has been growing in recent years. From being responsible for less than 5% of global taxation in the 1960s to making up around 20% today, VAT is on the up; seen as an effective, fair and (perhaps most importantly) politically acceptable source of revenue generation.
Many countries have traditionally relied on income tax and corporate tax to balance the books, but by introducing a VAT regime or implementing base-broadening measures, they are able to avoid increasing direct taxes while driving the tax revenue they desire.
That’s never been more relevant than it is today. I expect few countries to take the difficult route of raising direct taxes, with almost all countries instead opting to focus on VAT.
Stand by for more countries to adopt VAT for the first time and for existing regimes to be overhauled to maximise income.
3) Reform is on the horizon
Even before the pandemic, one of the most inherent problems with VAT was the legal minefield created by factors such as exemptions, reduced rates and goods-specific treatments. How easy is it to check the correct regulations have been applied to every transaction, especially if businesses are managing VAT manually?
In the post-Covid world, governments will want VAT systems to be as simple as possible to ensure maximum compliance, as well as to improve efficiency and accuracy in transactional reporting.
Expect many VAT loopholes to be removed and the number of options available to businesses to be minimised.
I’m not saying that some countries have let VAT slip under the radar. We already know that week by week there’s some kind of announcement somewhere in the world that a tax authority is ‘cracking down on VAT fraud’, ‘working to close the VAT gap’ or ‘digitalising VAT processes’.
But expect all the goodwill to disappear; I reckon fines will be dispensed if you don’t follow the letter of the law and efforts to police VAT compliance will increase tenfold. The idea is that by actively looking for compliance issues, governments can recover easy money by issuing fines. Keep in mind that the ‘hotness’ on VAT will step up.
4) Reporting will go fully digital
A combination of the threat of VAT fraud and the rise of the digital economy in almost all aspects of business means it is inevitable almost all nations will make digital tax reporting mandatory in the coming years.
We’re seeing a shift towards real-time, fully-digital tax reporting, meaning it is essential that businesses have systems in place that ensure accuracy and efficient processing of all transactions. There will be no second chance to get it right and, while the rules and regulations in each country will be different, as I said before, companies that fail to maintain comprehensive, up-to-date VAT records will be increasingly penalised.
In the UK, there have been so many steps towards ensuring ‘Making Tax Digital’ works for businesses, but it could be that the dynamic switches and businesses have to work for the government instead.
The monies that have been injected into economies have to be repaid somehow and tightening rules around how businesses account and report VAT is not going to deliver a yield that is anywhere near substantial enough. No, it’ll be the penalties that bring in the big bucks, so if you’re left exposed, now’s the time to act.
5) And the final prediction is… it’s impossible to predict
Okay, go with me on this one. Ending a series of predictions by refusing to make a final prediction is an unusual approach, but I do so with good reason.
Quite simply, this is because the pandemic has ripped up the rulebook on how tax and other fiscal measures are deployed to tackle an economic crisis.
In a typical financial crash, governments often lower VAT rates to encourage consumers to increase spending. But such a strategy relies on:
- A large portion of the population having money to spend.
- Presenting people with the opportunity to spend.
With unemployment across the world soaring, many consumers simply don’t have the spare cash required to treat themselves right now. And with lockdowns looming in many parts of the world and parts of Europe about to shutdown further, vast swathes of the retail industry are currently off limits and there is no chance to boost spending in this way.
Unable to rely on trusted policies designed to increase demand, many governments have so far opted to adjust their VAT regimes to support businesses and households through the storm.
Once this firefighting stage is over, I expect some countries to take the traditional approach of slashing VAT rates to drive consumer spending. There is continued debate among economists as to how effective this is and the difference it makes to wallets – and the cynics among us may see tax cuts as politically motivated rather than economically driven!
But faced with lower income tax and corporate tax receipts, I also believe many of the world’s largest economies will maintain or even increase VAT rates to make up the deficit. We’ve already seen early signs of this with rates in Belgium, Ireland and Norway either increasing in the first quarter of 2021 or due to rise in the next four months.
Whatever the future holds, however many rates change and new VAT regulations are announced, we can ensure guaranteed compliance with every single law in over 150 countries around the world. Get in touch today to find out more about how our automated tax determination and reporting solution can transform the way your business manages tax.