July is usually bonanza time for HMRC’s bank account. Not only do individuals make the second payment on account of their income tax liability (this year for 2011-12), but also large companies with (common) December year ends make their first corporation tax payments on account, and those with (equally common) March year ends make their last such payments. It is second only to January (self-assessment income tax payment time) in terms of tax take.
Thus when July tax revenues fall, that is usually a bad sign. For only the third time in fifteen years, government finances failed to record a surplus in July 2012. Corporate tax receipts are a particular problem, particularly from the oil and gas sector, where production has fallen by a combined 15%. This comfortably offset increases in self-assessment receipts, national insurance contributions and VAT income.
This is a particular worry given that the Chancellor has based his corporate tax strategy on an apparently illogical formula that has worked before, typically for Gordon Brown, that reducing corporate tax rates actually increases corporate tax take. The difficulty for George Osborne is that this strategy tended to work for Gordon Brown in times of economic stability and growth, whereas he is now trying to make it work as we enter a double dip recession. And of course he has replicated his corporate tax strategy in income tax terms, where he is cutting the top tax rate from 50% to 45%.
There already appears to be a grave danger that the latter strategy will fail to work in terms of increasing tax take, as a recent survey of UK resident millionaires found that almost half were considering relocating elsewhere, and that tax was only the fourth most important motive they had in mind, after government economic policy, rising prices and general standard of life. It therefore seems to follow that offering them a tax cut will, of itself, have limited impact on their plans. And of course if you cut taxes without stimulating additional profitability, you have made matters worse rather than better. One suspects that Mr Osborne is fervently hoping for a prolonged post-Olympics ‘bounce’ in the economy, otherwise his sums are in grave danger of not adding up in a big way, which is bad news for all of us.