Improving VAT Compliance in the United Kingdom

Improving VAT Compliance in the United Kingdom

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 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 Chart 1: Market share of smuggled cigarettes (%) 40% 35% Projected m arket share if no action taken 30%

Target 25% 20% Sm uggling Estim ate 15% 10% 5% 0% 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001

2001-2002 2002-2003 2003-2004 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 Bottom Up Estimates Missing Trader Fraud 1.06bn - 1.73 bn Avoidance 2.5bn - 3.0 bn Failure to Register for 0.4bn - 0.5bn VAT General nonCompliance 2.5bn - 4.0 bn VAT Gap 14.0

18.0% 16.0% 12.0 14.0% 10.0 12.0% 8.0 10.0% 8.0% 6.0 6.0% 4.0 4.0% 2.0 2.0%

0.0 0.0% 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99

99/00 00/01 01/02 02/03 03/04 Compliance Spectrum Non Compliance Voluntary Compliance ? Deliberate

Chancers Evasion Avoidance Enforcement/ Disruption / Triers Failures Assurance / Advice / Compliant

Education/ Marketing Assure or Educate? Law Enforcement RISK Analysis Help for business 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% Additional Investment MTIC Avoidance Compliance

Extra Staff 108 45 158 Extra Revenue - 1270m - 537m - 138m -

305m - 130m - 195m - 2575m Management Audit assurance Shadow Economy Debt Total

907 122 150 1490 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

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