The OBR commissions forecasts of onshore CT receipts from HM Revenue and Customs for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then use a model to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are then used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two or three rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks.
The onshore CT model breaks receipts down into three sectors: industrial and commercial companies, life insurance companies, and financial sector companies (excluding life insurance). The model starts by aggregating the items included in the CT liability calculation for each of these sectors. This means grossing up data on the income side (e.g. profits, capital gains, foreign income) and then subtracting any deductions (e.g. capital allowances, group relief, trading losses carried forward). These individual income and deductions lines are then projected forward using the appropriate OBR economic determinants and/or econometric equations.
The model then generates forecasts on a cash basis (when the tax is paid). To generate this cash-basis forecast, various timing adjustments are made (based on historical trends) to convert the liabilities forecast into cash. In particular, larger companies pay CT in Quarterly Instalment Payments (QIPs). Separate timing adjustments are made for QIPs and non-QIPs payers due to different lags between liability and payment. Future changes to the tax system (announced as Budget measures) and other ‘off-model’ factors (such as the effect of increasing incorporations) are also included in the forecast.
Finally, the model converts the cash-basis forecast to the National Accounts time-shifted basis. Although this time-shifting approximates to the liabilities forecast, the results are not identical. The conversion requires two steps. First, based on previous patterns of payments over the financial year, a monthly profile for cash receipts is generated consistent with the financial year cash forecasts. Second, the monthly cash figures are shifted back to the appropriate months in accordance with the ONS methodology.
Main forecast determinants
The main determinants of our onshore CT forecast are those related to the tax base and those used by the Government in setting parameters of the tax system. See the ready reckoners section below for more information on the effects of these determinants on onshore CT receipts.
Main forecast judgements
The most important judgements in our onshore corporation tax forecast are related to the economy forecast that underpins it – most important of all being the outlook for company profits and investment growth. Alongside those, we need to make a number of other forecast judgements. These include:
- The use of trading losses – Losses generated by companies can be used to offset against tax liabilities. The total stock of losses that is available to be used, and the extent to which they are used to offset against tax liabilities, is an important forecast judgement – particularly so for the financial sector, which still carries a large stock of losses related to the financial crisis;
- Incorporations – Our PAYE, SA, NICs and CT forecasts are affected by our assumption that incorporations will continue their rising trend. Employment income is taxed more heavily than profits and dividends, so when formerly employed or self-employed individuals incorporate, their tax bills generally fall. While this reduces income tax and NICs receipts, it boosts CT revenue (See Box 4.1 of our November 2016 EFO for more detail);
- Assumptions on payment timings – Our forecast model uses assumptions on profits, investment and allowances to generate a projection for the amount of tax that is liable. But actual payments of tax by companies are adjusted to reflect previous changes in circumstance as well as anticipating future changes in profits or investment. We base our payment timing assumptions on historical trends. The new time-shifted accounting treatment for corporation tax receipts is less sensitive – although not completely insensitive – to changes in payment timings as cash receipts are spread over earlier months.