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OECD Forum on Tax AdministrationImproving 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 • £309bn output VAT • £252bn input VAT • £16bn import VAT • £73bn net VAT collected
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
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
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.
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.
‘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
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
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
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%
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
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
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
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
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
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
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
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
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