The Taxing Wealth Report 2024 is about the way in which tax in the UK can be transformed to raise revenue the government might well need from those best able to pay it whilst simultaneously reducing the inequality that the current system of tax in this country promotes as a result of the bias within our tax system towards those with wealth.
There are some obvious ways in which this bias is apparent to almost anyone looking at that tax system. I have already addressed one of these in my first recommendation for change. This was to scrap the obviously unjust tax relief on pension contributions at higher rates of income tax provided to those who are already likely to be amongst the more wealthy in this country.
The Taxing Wealth Report 2024 is, however, seeking to suggest changes that move beyond the obvious and familiar demands, although it will inevitably address most of these over time. In that case, the second recommendation being made is one that few might expect, and is to withdraw the VAT exemption enjoyed by financial services in the UK:
As the report summary says:
Brief summary
This note suggests that:
- Reform of the UK taxation system to ensure that those with the highest incomes and wealth pay their fair share of tax does not only require that direct taxes (income tax, national insurance, corporation tax, capital gains tax and even inheritance tax) be considered. It also requires that the role of indirect taxes (such as value added tax) in creating inequality as a consequence of their unreasonably subsidising the consumption of the wealthiest in society should also be taken into account.
- The VAT exemption that the financial services sector enjoys means that this tax is not charged on the supply of financial services to those who consume them in the UK.
- The UK Office for National Statistics estimates[1] that 48.6% of UK wealth is owned by the top 10% of wealth owners and 67.4% is owned by the top 20% per cent of wealth owners. In that case the benefit of this VAT exemption is going almost entirely to those in the higher echelons of wealth owners, and most likely of income earners.
- In that case the withdrawal of this relief, which has been made possible by Brexit, should now take place.
- The withdrawal of this relief would, according to HM Revenue & Customs, result in an additional £16.3 billion of tax revenue being raised a year. Against this must be offset the tax lost from insurance premium tax if VAT was to be applied to that sector. This would amount to £7.6 billion, leaving a net sum of £8.7 billion of VAT to be recovered. That change with regard to insurance premium tax is likely to be neutral with regard to those on lower incomes.
Discussion
This suggestion is, of course, only possible because of Brexit. Since, however, the UK's two largest political parties seem to have no intention of returning the UK to the EU, it seems opportune to make a suggestion that exploits that fact.
Unsurprisingly, most financial services products are consumed by those with wealth. The exemption of financial services from VAT charges does, therefore, inherently favour those with wealth in the UK by reducing the cost to them of buying these services, whether directly or indirectly, for example, via their pension funds.
As the recommendation notes, this suggestion would also extend VAT to insurance products. However, these are already subject to insurance premium tax to reflect the fact that they are not subject to VAT. If the VAT exemption was removed the cost of supplying many insurance services would fall, thereby reducing the cost of them before VAT was applied. As such, so long as insurance premium tax was abolished at the time that this change to VAT exemption was made this change, which could otherwise have an impact on those on lower incomes, is unlikely to have any significant impact on their well-being.
The likely revenue raised by this change would be £8.7 billion based on HM Revenue & Customs data and estimates. This means that the first two Taxing Wealth Report 2024 proposals might raise £23.2 billion between them.
The note on which this blog post is based is available here.
Footnotes
[1] https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/totalwealthingreatbritain/april2018tomarch2020
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Hello Richard,
pension c0nstrinutons -> contributions
Angus
Sorry – I cannot find that
Perhaps a compromise or stepping stone to this could be to extend the Insurance Premium to all financial services.
That is illogical though
IPT is only a substitute for it so why not get rid of it?
Have you looked at removing the VAT exemption on food. The argument over whether a cake can be a biscuit did make the current system look silly. It’s regressive too as far as I know
It is progressive as it stands – but there are better ways to achieve progressivity.
However, it’s not on my list right now.
Should it be £23.2 billion, not million in the last sentence?
Yes
Thanks
The ability to do this is one of the few genuine Brexit benefits, albeit not one that many Brexiteers would happily take advantage of. However I doubt that removal of VAT exemption for financial services would be a serious barrier to re-joining the EU. I suspect that the worse scenario would be that we would have to commit to reversing the decision eventually. On the other hand if the UK does this many EU governments might want the freedom to do it too.
Thanks
Lots going on and maybe the topic is finally getting some traction thanks in part to your tireless efforts. Great work.
Apologies if I am premature with this one. Taxing aviation fuel would raise circa £5bn. Not a lot in the big scheme of things however there is a wider environmental consideration. As with ULEZ there is the risk of a political backlash. The EU initiative is currently stalled
It his on my long list. It has not been written as yet. The problem is the cross border issue that makes it more com pled than many I am suggesting.
Always wondered why no Value Added Tax on financial services. I assumed it was because no Value was added!
🙂
A bold proposal.
Financial advice and much investment management already bears VAT, but financial services goes much wider than fund management.
Adding 20% VAT to all financial services would include: money transfers; supplies of credit such as interest on bank loans and credit cards; issues and dealings in share and bonds; and the operation of current and deposit accounts.
Banks would charge their customers VAT on overdraft fees and interest, and would pay VAT to businesses that have positive bank balances.
Many in the financial sector would be delighted that they would no longer have to deal with the problems of full or partial exemption limiting their input tax recovery.
I think you overstate your claim. VAT would be charged on arranging those things, not the money movements themselves. But why shouldn’t these things be subject to VAT?
I think the argument here is probably that you either scope the VAT charge very widely or you will need to have lots of anti-avoidance provisions.
For example if there is VAT on the charge for arranging a loan, but no VAT on the interest on a loan, why not scrap the loan arrangement fee and instead have a first year interest surcharge? It would neatly step outside the requirement to charge VAT on an arrangement fee (there wouldn’t be one), but the bank would still have the ability to reclaim its input VAT because it isn’t providing exempt services.
Similarly instead of bank charges why not pay less interest. In essence we already have this situation with personal accounts where you don’t typically receive much interest (taxable), but you don’t pay bank charges (on which you would want to add VAT).
I am sure these things can be dealt with, but it would be very messy to come up with rules that caught everything you were aiming for.
A proper general anti abuse rule could eliminate such abuse
Surely the removal of the exemption which restricts recovery of VAT would mean that the banks etc would then be able to recover the VAT? And have to charge it on services including interest? Have you read the Mirlees report on the exemption?
Banks could recover input VAT.
Interest is a cash movement and is never a vat chargeable supply.
The revenue estimate is from HMRC
What has Mirrlees to do with anything now?
Interestingly, this is a way to levy some tax from the large amounts of capital inside pensions and ISAs, without directly addressing the reliefs granted to those tax wrappers.
Some might therefore call it a stealth tax, as they did some of Gordon Brown’s tax reforms. But really, it’s more like closing a stealth tax exemption (or tax loophole).
Hi
The EU is going ahead with proposal to implement VAT on financial services. I think a proposal is due before end of this year.
UK was large blocker over last time this was attempted in about 2010.
Now they are both free of each other, they could go ahead with their own versions.
However, until inflation is tamed, unlikely to make much progress over fears that banks/insurers would pass on VAT.
Richard
Inflation is going….
Yes, the rate of inflation growth is dropping. But, as we all appreciate when we shop, prices have gone up by almost 20% in 18 months. Wages will take years to catch-up.
So UK + EU now fear that adding financial services VAT onto cost of living crisis politically and economically a non-starter. How long for? I’d guess 5 years min for economic conditions to unwind and then 5 years for design, consultation, implementation etc.
So 2033 (maybe!)
I have often wondered whether the reclamation of input vat is of any real benefit compared to the admin costs and/or potential for manipulation such paying for a new machine over a number of VAT quarters instead of one.
My theory is that if input vat was not recoverable the overall rate could be reduced and the same amount of tax overall could be achieved. Perhaps reducing rate from 20% to nearer10%?
I’d be interested in your opinion on this.
I have an opinion
It is that the suggestion would massively – and I mean massively – distort prices and markets and would result in massive injustices because VAT would be charged and not recovered at every stage in a process.
It’s a horrendous idea
[…] The Taxing Wealth Report 2024 recommends removing the VAT exemption for financial services in the UK to raise revenue and reduce wealth inequality. This exemption primarily benefits wealthier individuals, and its removal, made possible by Brexit, could generate an additional £8.7 billion in tax revenue annually, according to HM Revenue & Customs. This change would also extend VAT to insurance products, but if insurance premium tax is simultaneously abolished, it is unlikely to significantly impact lower-income individuals. In total, the first two proposals in the report could potentially raise £23.2 billion in revenue. Source: taxresearch.org.uk […]