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OECD Forum on Tax Administration Improving VAT Compliance in the United Kingdom. Richard Summersgill United Kingdom. VAT in the UK. VAT introduced in UK on 1/4/1973 Standard rate of 17.5% against an EU median of 19.5% Registration threshold £60K 1.8m VAT registered businesses In 2003-04

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OECD Forum on Tax AdministrationImproving VAT Compliance in the United Kingdom

Richard Summersgill

United Kingdom


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VAT in the UK

  • VAT introduced in UK on 1/4/1973

  • Standard rate of 17.5% against an EU median of 19.5%

  • Registration threshold £60K

  • 1.8m VAT registered businesses

  • In 2003-04

    • £309bn output VAT

    • £252bn input VAT

    • £16bn import VAT

    • £73bn net VAT collected


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Tackling Losses from Indirect Taxes - Tobacco

  • 1990s – major problem from smuggled tobacco – but how big?

  • Measured illicit market share – problem was growing

  • Identified the mechanics of the fraud

  • Developed a range of tactics to tackle the fraud from disruption to prosecution


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The Strategic Approach Six Key Steps

  • Understand the size and dynamics of the problem

  • Understand the nature and extent of the problem

  • Identify resources and tactics needed to tackle losses

  • Quantify realistic outcomes (impact)

  • Agree and implement tactical plans with clear accountabilities

  • Continuously monitor, direct and re-direct operational/policy and tactics


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Estimating VAT losses

  • Two separate but complementary approaches:

    • top-down - difference between theoretical amount of VAT that should be due and actual VAT receipts = “VAT Gap”

    • bottom-up – uses operational and intelligence data to corroborate top-down approach and attribute losses to specific problem areas.


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Top-down (VAT Gap) estimate

Involves…

  • assessing the total amount of expenditure in the economy that is theoretically liable for VAT;

  • estimating the tax liability on that expenditure;

  • deducting actual VAT receipts; and

  • assuming that the residual element - the gap - is the total VAT loss due to any cause including error, non-compliance, avoidance and fraud.


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‘Bottom-up’ estimates

  • Top-down measure is comprehensive but gives no indication of the nature of the loss

  • Use operational and intelligence data to corroborate the top-down approach, and helps attribute losses to particular problem areas


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Missing Trader Fraud

Avoidance

Failure to Register for VAT

General non-Compliance

£1.06bn - £1.73 bn

£2.5bn - £3.0 bn

£0.4bn - £0.5bn

£2.5bn - £4.0 bn

Bottom Up Estimates



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Non Compliance

Voluntary

Compliance

Deliberate Chancers

Evasion Avoidance Failures

Triers Compliant

Enforcement/ Disruption / Assurance / Advice / Education/ Marketing

Law Enforcement

Help for business

Analysis

Compliance Spectrum

?

Assure or Educate?

RISK


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UK VAT Strategy

  • Launched April 2003 to reverse the trend of an increasing VAT Gap

  • Create an environment that fosters voluntary compliance and deals robustly with those that choose not to comply

  • Create an environment in which VAT fraud and avoidance become less economically viable

  • Target: to deliver over £2bn additional revenue by March 2006 = reduction in VAT Gap from 15.8% to no more than 12%


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MTIC

Avoidance

Compliance Management

Audit assurance

Shadow Economy

Debt

Total

108 - £1270m

45 - £537m

158 - £138m

907 - £305m

122 - £130m

150 - £195m

1490 - £2575m

Additional Investment Extra Staff Extra Revenue


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Minimising the Hidden Economy

  • Encourage the voluntary transition from informal to formal economy

    • Incentive scheme

    • Business awareness, publicity

  • Target high risk areas and sectors

  • Dedicated resources and teams


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Tackling Avoidance

  • Create a downside to avoidance

  • Identify and challenge schemes – litigation

  • Block loopholes through legislation

  • Anti-avoidance legislation – disclosure rules

  • Getting tax on the boardroom agenda


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Tackling Non-Compliance / Fraud

  • Increase the perception and probability of being detected

  • Make non-compliance financially disadvantageous

  • Well developed understanding of risk and losses by business, sector, region and type

  • Targeted Campaigns

  • Range of integrated and escalating interventions

  • MTIC fraud


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Improving Voluntary Compliance

  • Increase the range and scope of outbound contact with business:

    • 2002 approx 140K businesses contacted

    • 2004 approx 410K businesses contacted

  • Improve education, advice and support

  • Fundamental change in approach to improve compliance in the longer term


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Does the Strategic Approach work?

  • Baseline 2003 – VAT Gap 15.8%

  • Target to reduce the VAT Gap to 12% by 2006

  • At April 2004 the VAT gap was 12.9%

  • At April 2005 receipts have continued to grow and the Strategy is on track to deliver the required outcome


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Benefits of a Strategic Approach

  • Focus on outcomes not outputs

  • Prioritisation, co-ordination and targeting of activity and resources

  • Clarity for staff, what the goal is and what is expected of them

  • If published, can send a deterrent message to potential fraudsters

  • Demonstrate proportionality of actions

  • Provides a rationale for making tough or presentationally difficult decisions

  • Knowledge of whether tax losses are rising or falling


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Downsides to the Strategic Approach

  • Estimating Tax Gaps/measuring outcomes is difficult

  • Presentational issues relating to the size of losses- How did losses get so high?- What are you doing about it?- Why have you not done anything about it before?

  • Delay in outcome data and visible impact

  • No direct link between operational outputs and strategic outcomes

  • Accountability for success or failure of the Strategy


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Lessons Learned

  • Strong focus on common purpose needed

  • Activities need to be interlinked across the compliance spectrum

  • Concentrate on sustained improvement in compliance: outcomes not outputs

  • Understand better the business populations and the impact of our interventions

  • Flexible delivery mechanisms

  • Collaborative working with stakeholders

  • Engage staff

  • Hold your nerve


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