UK economy lost £47.6bn last year as cross-border tax complexity stifles growth
- Research from Cebr, commissioned by tax technology firm Avalara, finds cross-border tax complexity is costing UK businesses an average of 16% in revenue loss from EU exports a year
- 3 in 5 UK exporters have reversed plans to sell in some European countries over fear of fines and compliance issues
- The pressure is setting in, as almost two thirds (64%) of businesses agreed that staying compliant with tax obligations and regulations is the most stressful thing about running their business
BRIGHTON, 18 MAY 2022 – Cross-border tax complexity cost the UK economy £47.6 billion in lost revenue last year — an average revenue loss of 16% on total EU exports — according to new research commissioned by tax compliance technology company Avalara, Inc. (NYSE: AVLR) from the Centre for Economics and Business Research (Cebr). The report finds the stresses of navigating complex regulations post-Brexit continues to hold back growth for UK exporters, and is causing significant anxiety for business leaders.
Access the full CEBR research report HERE
Complexity is costing growth potential for UK exporters
As the economy works to recover post-pandemic, many UK businesses remain optimistic for future European growth opportunities, with nearly three quarters (72%) of respondents stating they have plans to expand to at least one more EU market.
Yet, in practice, the weight of compliance burdens and the realities of sweeping EU tax reforms on sales from outside the bloc appear to be impacting these plans. Just under a third (32%) of respondents currently exporting to the EU are planning to exit at least one market, and 3 in 5 (62%) of businesses revealed that the fear of being fined for tax compliance has recently caused them to reverse plans to sell goods in a European country.
With little set to change in terms of the levels of tax compliance obligations on UK exporters, the research predicts that the investment loss due to cross-border tax complexity is expected to result in a further £16.1 billion of value lost to the UK by 2026.
Alex Baulf, Senior Director of Global Indirect Tax at Avalara, said: “From the toll of Brexit-based regulation changes, to the uncertainty of the pandemic — anxiety levels have been skyrocketing as tax complexity has become a major red tape headache causing business leaders many a sleepless night. The compliance burdens on businesses are becoming almost unmanageable, and the fear of falling foul of compliance standards is hampering growth opportunities for British exporters. This is hurting the economy. Businesses need greater support and clarity from regulators to help them navigate these changes and remove hurdles, and must invest in digitisation to take more of the administrative and compliance burden away.”
Nina Skero, Chief Executive at Cebr, said: “Our analysis shows that, if the EU was part of the domestic market, exporters were set to make just over £300 billion in revenue, instead of the £252 billion they actually earned. In addition to these missed sales to the EU, the export activity which does take place comes with a higher administrative burden which led to an additional loss of £386 million in gross value added (GVA) last year.
“These firm-level losses are impacting economic growth prospects, preventing an estimated £8.7 billion worth of investment which could support GDP by a further £16.1 billion in the longer-term. This means that if UK businesses were unhindered by EU cross-border tax complexity UK GDP in 2026 could be 0.63% higher.”
Stress over tax is causing UK business owners sleepless nights
Change is uncomfortable at the best of times, but the constant flow of new regulations and the increased amount of work to stay compliant is causing significant stress for business leaders.
A third of those surveyed (33%) said they had lost sleep more than once due to anxiety caused by tax and compliance issues, with almost two thirds (64%) agreeing that staying compliant with tax obligations and regulations is the most stressful thing about running their business.
The anxieties weighing on leader’s minds include fearing the legal consequences of non-compliance (49%), worry over the complex terms and conditions they need to navigate (43%), concern that keeping up with compliance means they will lose time needed for other tasks (33%), and the fear of fines (31%).
The time spent on administrative tax tasks in particular is damaging productivity, with the research estimating that this caused a loss of £386 million in gross-value added (GVA) overall. To reduce the administrative burden of compliance, businesses are increasingly investing in technology to free up capacity and automate these processes.
Cebr partnered with Sapio Research to conduct a survey to understand how businesses are affected by cross-border tax complexities. The questions focused on the effects of firm revenues; the cost of time spent on tax administration; the effects of non-people costs; the value realised from marketplace sales; and the opinions of exporters on IOSS and other EU VAT reforms. The survey was conducted among 250 business decision-makers in organisations based in the UK that export to the EU.
Besides UK-level estimates, Cebr also paid specific attention to three industries: manufacturing, retail, and software & digital services. Throughout the report, 2021 trade data was used to estimate the effects of Brexit and the EU VAT reforms. After calculating the firm-level impacts, Cebr also analysed the wider economic impact of the reforms, and how they will affect the domestic economy in the longer term. Cebr summed up the GVA changes derived from the firm-level impacts, then estimated loss of profit and investment. Finally, they applied long-run growth coefficients to estimate the long-run fall in GDP that results from decreased investment as a result of tax complexities. Cebr assumed a 5-year period to reach the long-run growth in GDP from this additional investment. Hence these are modelled as percentage changes relative to 2026 GDP forecasts.
Additional Data Appendix
Respondents indicated that revenue from EU sales could have been approximately 15.9% higher in the absence of tax complexity-driven costs. The manufacturing industry was also significantly hit, with the sector responsible for more than half of the overall decline, £24.4 billion (14.8% of manufacturing revenue from EU exports). For firms in the software & digital services sector, 17.1% of potential revenue was estimated to be lost, as businesses in this sector contended with the challenges of understanding complicated rules determining the customer jurisdiction in which VAT occurs.
Avalara helps businesses of all sizes get tax compliance right. In partnership with leading ERP, accounting, ecommerce, and other financial management system providers, Avalara delivers cloud-based compliance solutions for various transaction taxes, including sales and use, VAT, GST, excise, communications, lodging, and other indirect tax types. Headquartered in Seattle, Avalara has offices across the U.S. and around the world in Brazil, Europe, and India. More information at avalara.com.