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

1. OECD Forum on Tax AdministrationImproving VAT Compliance in the United Kingdom Richard Summersgill United Kingdom

2. 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

3. 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

5. 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

6. 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.

7. 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.

8. ‘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

9. 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

10. VAT Gap

11. 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

12. 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%

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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