I was in debate with Heinz Zourek, the Director General of EU taxation yesterday at an event I have already mentioned.
During that debate I was somewhat surprised to hear him say it was not worth investing to close the tax gap, including that in the UK, which the latest EU VAT estimate would suggest to be 10.4% for that tax alone so I took that issue up with him and he made clear that what he meant was it was not worth eliminating the while tax gap because that could never be cost effective, but the UK clearly had a long way to go and could at least halve its tax gap.
I accept that point. There is no way we will ever close the tax gap - but it is vast, and much bigger than HMRC estimate. The question is. Then, how much could be recovered?
Start with this table from the EU, published last week, showing their estimate of EU VAT gaps:
The UK loss is a little over 10%. That in the Netherlands is 5%, as it is in Finland. Slovakia, Slovenia, Denmark, Luxembourg and Portugal (rather surprisingly) apparently also do better than us.
In that case it is very clear that we are a long way from being close to our optimal tax gap rate.
If we closed half the HMRC tax gap we would recover £17 billion. That has to be the minimum targeted objective.
If we closed half my estimate we would get £60 billion, which I accept is as good as it might get.
HMRC based estimates are far too low, however. I think the goal has to be much higher than that because it is impossible to think that tax evasion is as low as HMRC say it is. In that case a realistic goal for now might be less than half way between the mid point of the two - make it £30 billion.
Then we'd really be making a difference. And this is, most definitely, possible. Finland and the Netherlands prove it is.
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Hmm…£30 billion a year…that number rings a bell. Ahh yes, the NHS shortfall in five years’ time. Oh and yes of course its bigger than Osborne’s £25bn cuts after the election.
Choices, choices.
VAT is, as far as taxes go, in principle simple to administer both from a company administration view and a tax collector point of view. As long as there is one or more links in the chain between originator and end consumer then it is very hard to evade. You might have issues with the effect of VAT (it has a regressive effect), but that is a different discussions.
What has been seriously buggered up though is the simplicity part of it. Simplify the rules (i.e. get rid of the exceptions like flat rate etc.). One interesting case in the table above is Sweden. There has been criticism raised against VAT in Sweden recently, where the point of contention has been the increased complexity in VAT legislation and administration. Lo and behold, the gap has increased in recent years! Whenever elaborate rules and exceptions are introduced unintended effects will arise, such as different forms of arbitrage or chancers trying to dodge a tax outright. Require any invoice or receipt to specify the VAT separately, regardless of size of business. If you have a receipt, then the VAT is deductible. Then any simpleton can do the books for it.
Seriously, if that is too much to either do yourself or pay your accountant to do for you, then you should seriously reconsider your suitability to run a business or if the profitability of your business makes it worth running.
I have run small businesses in the UK and elsewhere in the EU, and seriously, VAT is the one thing you do not muck about with, regardless of country. It is too simple to get wrong, except in a way that makes it very, very obvious (most commonly the definition of ingoing vs outgoing – the terminology is all wrong for anyone outside the tax agency) and can be easily rectified without need for penalties or court proceedings, just a quick chat with the tax inspector over the phone. If you are found out actively cheating the tax agency will come down on you like a ton of bricks. I know people who have done that, and the end result is not pretty. Small business owners are in general aware of this and it scares them proper. You don’t f**k with the VAT.
Larger companies and those dealing with intra- and extra-EU trade have it a bit trickier, but a large company should be able to afford people that know the rules (or otherwise they should question their worthwhile) and book reserves against cases of ambiguity, or if you are a small firm, then just get to know the rules. Part of the cost of running a business and all that. If in question, call the HMRC. They can, on occasion, be helpful.
As for closing the gap between estimated and real VAT – well, going by personal experience, a certain percentage of your spend is directly with the supplier. Here is where dodging VAT makes sense to the participants. I would guess most of it is there. Then a certain amount of fraud on top of that, but I seriously don’t think it is that big a problem. Also, does these numbers include or exclude VAT that is under dispute?
His argument of cost efficiency makes a lot of sense to me. Beefing up enforcement and regulation would make for an unpleasant place to live, it would require more campaigns with the underlying message “Report thy neighbour”, which is a bit too Stasi for my liking.
To reduce the cash-in-hand type of misreporting of VAT, the two most obvious things to do are: somehow incentivise smaller business grow to a point where dodging VAT is no longer a viable option, or create an interest for the end-consumer to ensure VAT is declared properly as VAT is ultimately paid by the end-consumer.
The former I don’t know how to effect. All I can say is that Whitehall, regardless of which set of clowns are in power, should not get involved. For the latter, allow certain types of consumption to have VAT reclaimable to a certain point seems like a viable option. The efficacy of that is something I would leave to a proper economist to investigate, and if it still looks good after a proper investigation, trial it in a specific region for a year to see what the impact is in real life.
I’ve posted this but am not sure why
There is so much wrong with it I do not recommend anyone read it
So we’re doing pretty well by EU standards.
Look at Germany!
Agreed