OECD Forum on Tax Administration Improving VAT Compliance in the United Kingdom Richard Summersgill 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 (%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

Smuggling Estimate

Projected market share if no action taken

Target

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

• 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

VAT Gap

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

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 03/040.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Compliance Spectrum

Non Compliance

Voluntary Compliance

Triers Compliant Deliberate Chancers Evasion Avoidance Failures

Enforcement/ Disruption / Assurance / Advice / Education/ Marketing

?

Law Enforcement Help for business

Assure or Educate?

RISK

Analysis

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 Extra Staff Extra Revenue

• MTIC

• Avoidance

• Compliance Management

• Audit assurance

• Shadow Economy

• Debt

• Total

• 108 - £1270m

• 45 - £537m

• 158 - £138m

• 907 - £305m

• 122 - £130m

• 150 - £195m

• 1490 - £2575m

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 ApproachFocus 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