OECD Forum on Tax Administration Improving VAT Compliance in the United Kingdom

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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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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

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VAT Gap
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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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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

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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