Treasury warns on tax receipts

Click to follow
The Independent Online
THE TREASURY warned yesterday that the next recovery may fail to deliver the vigorous upswing in corporation tax receipts that proved so critical to the swing out of budget deficit and into surplus in the late 1980s.

In its latest bulletin the Treasury says that the historically low rate of corporation tax, those losses not yet claimed against tax and other reliefs from tax are likely to dampen corporation tax growth in the short term, although a recovery can be expected once economic activity picks up again.

Moreover, it adds that some factors driving the boom in receipts in the late 1980s were unique events such as the temporary fall in capital allowance following the 1984 reforms.

The potential impact on the public-sector borrowing requirement in coming years is illustrated by the fact that growth in corporation tax receipts accounted for one-third of the swing from deficit into surplus between 1984 and 1985, and 1988 and 1989. The expansion of corporation tax receipts in the five years following 1984/5 was particularly rapid, averaging around 25 per cent a year.

The latest forecast available, for 1992/3, shows that corporation tax receipts will fall further, to 2.6 per cent of national output compared with a peak of more than 4 per cent in 1989/90. The Treasury admitted that this was 'an important factor behind the rising PSBR'.

Corporation tax rates have fallen from 52 per cent in 1984 to 33 per cent today. The 1984 reduction was accompanied by a reform in capital allowances, since when allowances can no longer be claimed in the year of expenditure, but which are claimed over several years after investments are made. As a result, allowances are lower during an upswing and higher during a downswing, which helps to explain the present dampening impact of allowances on corporation tax receipts.

Receipts in the late 1980s were also underpinned by one-off events like the sharp growth in receipts from financial companies that followed the 'Big Bang' liberalisation of financial services in 1986. Between 1984 and 1989 tax payments of financial companies grew by 150 per cent.