Rachel Reeves is said to face a £40–50 billion budget shortfall. One fair, simple solution? VAT on financial services. Right now, banks, wealth managers, pension advisers, and mortgage brokers don't charge VAT – a loophole that overwhelmingly benefits the wealthy. Charging the standard 20% rate could raise £8 billion a year and would hit those most able to pay, not ordinary people.
In this video, I explain this exemption, why it's unjust, how post-Brexit Britain can remove it, and why Labour needs to decide whether it will tax the wealthy or protect the City.
This is the transcript:
Rachel Reeves supposedly has a £40 to £50 billion black hole that she's got to fill this autumn.
I've already made some suggestions on how she might be able to address that problem, but let me ask another very simple question.
Could VAT on financial services help plug the gap that Rachel Reeves has?
There is no VAT on financial services at present, and that seems to me to be completely absurd.
This tax would hit the wealthy, and not ordinary people.
Social justice demands that we ask then, why is it not ready being charged?
Let's just clarify what the issue is.
Whether or not Rachel Reeves has a fiscal shortfall of £40 billion is a political question that we don't know the answer to as yet.
We will do, but not now.
But there are options available to her to increase tax if she wishes to, and that's the point I'm making in this video.
I'm talking about one massive area of tax exemption. In other words, a tax base that is not taxed because the government has chosen not to charge it to tax, and that is financial services and the fact that they are exempt from a charge to value added tax, which is charged on most things that you buy at 20%, but not if you're buying the services of banks or investment advisors, or pension advisors, or a mortgage advisor. They don't charge VAT. Now, admittedly, they also can't reclaim the VAT charge to them, but the equation works heavily in their favour, because most of those services do not involve the purchase of many goods.
They are largely labour-based and therefore, the amount of VAT that they would have to pay over if they were subject to that tax would be high, and in fact, I have estimated that it would be at least £8 billion a year. That will be an additional charge to those who use the services of wealth advisors, pension advisors, mortgage advisors, and banks, and most bank charges are levied on people with significant wealth and not on people with ordinary levels of income.
So when it comes down to it, the people who benefit from this VAT exemption are the wealthy, because they use financial services the most. It's very simple and very obvious because they have the largest volume of savings, investments, and pensions. Therefore, they will be the people who will pick up the tab for these fees.
That's why we need to think about this as an issue of social justice in its own right, and also because charging VAT at 20% on these services would raise £8 billion, and when saying that, I have ignored the consequences for the insurance industry because they already are subject to insurance premium tax, which is very much like VAT and curiously is charged on insurance, which is as much consumed by ordinary people as it is by the wealthy because after all you will be paying car insurance and quite possibly household insurance. So the tax system is already rigged against ordinary people, but I've allowed for that in what I'm saying.
So we need to look at taxing an under-taxed sector, and we can do this post-Brexit. We have the right to charge VAT on financial services, and therefore, Rachel Reeves has no legal impediment to acting.
Let's understand the consequences, for a moment.
This tax would challenge the power of the City of London, and that power needs to be challenged.
This tax would challenge the economic power of those with wealth, and that power needs to be challenged.
And this tax would be morally justified because it is not right that the wealthiest should enjoy an exemption from tax when there are no equivalents for most people in the country.
So what should happen? Quite simply, Rachel Reeves should pass a measure in this budget to introduce a tax at 20% on financial services. It's fair, it's possible, and it's urgently needed, and most of all, it's a test of Labour's priorities.
Will they tax the wealthy, or will they tax ordinary working people?
What do you think?
Should financial services finally pay their fair share?
Will Labour take on the City, or will it protect it?
Or is all of this just a game of smoke mirrors that is being put out now to hide Rachel Reeves when she eventually comes to put tax on you and me.
There's a poll below. Let us know your opinion.
Poll
Should Rachel Reeves put VAT on financial services?
- Yes – it’s fair and would be paid by the wealthy (91%, 353 Votes)
- Not sure – I need more information (4%, 15 Votes)
- No – it would hurt the economy (3%, 10 Votes)
- The real problems are elsewhere (2%, 8 Votes)
Total Voters: 386
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As someone in the middle deciles on wealth I’ve used mortgage brokers multiple times over the last 20 years, so such a change would also hit middle deciles of wealth as well.
However, the relative cost to many middle wealth individuals affected would be of the order of £100 or so every few years when remortgaging. If you can afford a deposit and are earning enough to get a mortgage then a couple of hundred extra in fees is not going to strain much.
The burden would seem likely to be overwhelmingly directed towards the rich, hence voting in favour of the policy on the poll.
In proportion to the cost of moving home the charge would be small. And you pay VAT on the lawyer’s fee.
Can you give some examples of financial services on which VAT could be charged?
All of them. But not inertest charges.
Bnaks charges.
Mortgage arrangement fees.
Pension advice.
And so on.
Not sure if van insurance is financial service ,but I just saved myself £200 by comparing my existing provider with Go Compare. Both were with the same company and the online discount was £152.
Having spoken and complained about the auto renewal to my provider , they reduced it again by an extra £48 per year.
Personally I would deem this a financial service. However would taxing inflate prices?
Personally I think we are being screwed, left right and centre and there are too many fat fingers in the pie.
Insurance is already effectively subject to insurance premium tax, which is the equivalent of the VAT charge in all but name.
Thank you for your clarification! .
Just as long as that £600 last year and the £400 this year is taxed,
To what extent I wonder are most of these services a ‘make work’ service?
Back when I bought my first house The Building Societies basically offered a single mortgage product, a variable rate mortgage and it lasted for the term of the loan.
These days the standard variable rate mortgage is more than twice the price of a fixed rate deal
Why?
Short term interest rate uncertainty.
But are you comparing similar types of loan in both cases? .
They could have done what you suggest instead of charging VAT on private school fees. That was a mean move as it doesn’t hit the wealthy, because they can well afford it, but it does hit the middle class.
They should have done both.
Another open goal unlikely to be scored for justice by a supine Labour government.
VAT on financial services is one of several policies from the Taxing Wealth Report 2024 that are commitments in the Green Party Manifesto 2024, amounting in total to estimated tax increases on the rich of £49 billion a year. (Of course, there may be some differences in detail.)
Page 13 states…
“We would also propose a range of changes to VAT reducing it on hard-pressed areas like hospitality and the arts and increasing it on financial services and private education.”
Thanks for noting that
So if I pay a pensions adviser for advice about avoiding tax by means of pension savings or on pension drawdown, that is VAT-free?
But I pay 5% VAT on my green electricity?
And the wealthy who can afford this tax, and the financial services who already get substantial government subsidy and regressive tax exemptions on their earnings and profits, are howling “unfair” from the poverty-stricken City of London?
The omnibus passengers down here are currently rolling around on the floor hooting with laughter.
🙂
[…] Source: taxresearch.org.uk […]
Do normal people not have mortgages?
Yes
And they also get ill
And have children
And you’re being crass because a mortgage advisory fee a few times in a life is not an issue.
So is my understanding correct that we couldn’t charge VAT on financial services while in the EU? If so my first question is why not? If however it is actually a ‘Brexit Benefit’, I shall try emailing my MP about it. My MP is unfortunately, one Mr N Farage who’s never in the past answered any of my emails, we will see if it is different if I’m able to thank him for something.
The EU exacted such services to be exempt. We can decide now.
To my mind, whether or not this is a good idea comes down entirely to whether “most bank charges are levied on people with significant wealth and not on people with ordinary levels of income” is a true statement – it would be interesting to see statistics on that. Certainly a single wealthy individual will consume more financial services than a single individual with an ordinary level of income, but this isn’t the right perspective. Given that pretty much everyone consumes financial services and that there are many, many more people with ordinary income than there are those with significant wealth, it seems perhaps likely to me – based on intuition only, hence why data would be helpful – that the burden of this would still mainly fall on the ‘ordinary’ population.
Look at the wealth stats.
Of course that suggestion is true.
The financial services industry exists to serve the wealthy.
My statement is one of the bleedin’ obvious.
I think you said near the beginning of the video that the financial service industry isn’t able to reclaim vat. I’m not sure that is correct, or am I missing your point?
If I were an independent financial adviser working out of a small office and I am vat registered. I believe, If my landlord charged me vat on my rent, I could claim that back, along with vat paid on stationary etc. As I understand vat, each quarter, I would be paid money by HMRC.
Not if all your supplies were exempt, you could not.