Transcript OECD Forum on Tax Administration 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
Extra Staff
• MTIC
• Avoidance
• Compliance
• 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