The Institute of Indirect Taxation hosted a roundtable discussion for Tax Journal on 15 September at which four leading VAT experts discussed the VAT Green Paper and the future direction of VAT. The participants shared their views on the UK submission, the general move to indirect taxation, the compliance burden and problems facing small businesses who wish to trade within Europe, and how to reduce VAT fraud.
RM The Green Paper on the future of VAT [see lexisurl.com/MuWZU] is obviously one of the most important documents issued by the European Commission for some time.
Certainly, the IIT has had more comments from members on this than anything else I can remember.
IH We do have a very clear indication of the UK’s response, because David Gauke’s letter – which was the official response – had to go before Parliament, and I understand that was the draft that was submitted. I'll summarise it.
The UK continues to attach considerable importance to the principles of subsidiarity and national sovereignty.
The decision as to what VAT rates should apply should remain a decision for Member States while changes to the EU VAT system will require unanimity of decision, and the UK will not support any move away from that principle.
There is continuing support for the destination principle for VAT, and as one would expect, for impact assessments.
What I find most interesting is the challenge for tax administrations to strike a reasonable balance between complexity and administrative burdens on one side, and collection and protection of the revenue on the other.
The UK view is that this needs to be dealt with primarily at a national level, because it involves other taxes as well as VAT.
The submission reports a desire from businesses for more uniformity and consistency of interpretation, and a desire for greater harmonisation of indirect taxation with more comprehensive guidance on national rules available where they have to be applied by traders in other Member States.
In terms of collective action, the UK government shares the EC’s concerns about the size of the VAT gap and finding solutions to MTIC fraud.
It notes that legislation to improve administrative co-operation has already been concluded, but that more should be done.
Lastly, but possibly the biggest difficulty in all this, is that while there is support for the use of technology in VAT collection, the government is very much aware that a lot more work needs to be done to get the security and confidence associated with it.
RM That sounds pretty depressing to me, because basically the UK seems to be saying ‘we like things as they are. Keep off our tax system.’
DS One of the main problems in these discussions is to mix up the big issues with footling points of detail; and secondly, most of us regard taxation as being a practical subject.
But it's very much a dogmatic approach, and the basic proposition it sets out from is that, in what is fundamentally a pragmatic practical area, greater integration can only be achieved at the expense of national independence.
Until one addresses that basic question – does greater integration in areas like VAT involve the sacrifice of national independence, or is it in fact the way to preserve it? – we’re going to remain imprisoned in these political dogmas which prevent sensible answers to practical questions.
JV I agree. One minute we're saying that we want to preserve at national level the right to set the VAT rates and establish some of the legislation, and then we all want greater harmonisation across the EU.
Either you're going to have to accept that if you want harmonisation you're going to lose some national sovereignty, because true harmonisation means we all pull in the same direction, or you don't.
RM It's particularly ridiculous in the context of the Green Paper, because the whole substance of the Green Paper is on international supplies, cross-border supplies.
And you can't have the UK digging its heels in and then get any simplification at all on cross-border supplies.
DS UK governments like VAT. PAYE and VAT are now the two great engines for raising tax.
We're in a totally different world to the 1970s when business was much more national.
Large groups of companies organised themselves along national lines, whereas now they organise themselves along divisions which have no reference to borders.
VAT was raising about 10% of taxes in the 1970s.
It's now above that level, and of course, the great thing about VAT in a recession is that it’s recession-proof because people have to go on buying the basics of life.
JV The trend towards indirect tax has been there for many years, and governments have used it as part of their armoury.
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Supported by the
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Other indirect taxes – various environment taxes such as the aggregates levy and climate change levy – are being used more and more.
They don't generate much in the way of tax, but the indirect tax side is undoubtedly the way forward.
I suspect that in 20 years' time indirect tax will generate substantially more.
RM Getting back to the Green Paper, what is clear is that industry wants a simple system, which we clearly don't have at the moment, and a reduction in the compliance burdens.
Now the EC suggests some review in the way that VAT is collected, but it seems to approach it from the point of view of how can we reduce fraud rather than how can we reduce burdens.
Its suggestions are complex and largely impractical.
IH A good example of that is the database, or the data warehouse idea.
At a time when the EC cannot even create functionality on VAT reclaim software, they're talking about having one global warehouse where all VAT transactions get deposited so that they can be interrogated.
They're not even discussing the electronic identification of each individual transaction which would be a necessary prerequisite.
We've got a mess at the moment, but we’d end up with a mega mess if we go down that route.
RM And all the suggestions seem to assume that no transactions ever take place in cash …
JV It's aimed at the multinational, cross-border business. When the technology is there, that should be achievable.
So far the process for Eighth Directive claims is only a qualified success with a number of issues remaining to be resolved.
But you would like to think in theory, if not in practice, it should be achievable.
There's some merit to suggesting this, because it will be the way we go whether we like it or not.
How much of a success it will be is questionable.
RM It would require daily VAT reporting by businesses.
JV Yes, real time. But that assumes then you're a large business that can afford this.
IH Not all countries have the software problem.
Some countries are really very good, and they do everything required of them on time, and others frankly haven't a clue and they don't know what to do.
I would like to see some form of State mentoring. Germany could go and sit behind one of the other countries and help them.
And there might be one standard system of software that the Commission says is the one to use and everybody implements it.
At the moment each country has to produce its own software, which is ludicrous.
JV Yes, it is. You would have thought everybody would have got together and had one software system.
Then it goes back to harmonisation – countries that don't recognise VAT groups rejecting claims because the name doesn't match the VAT number because it's not a representative member.
RM There are a lot of anomalies in the VAT system. They're coming to light every day.
There's a lot of double taxation and non-taxation because different countries interpret place of supply in different ways.
There needs to be a system to resolve these issues.
If the UK digs its heels in and says we cannot, we will not allow Brussels even the authority to deal with minor things, then the fallback that the EC is saying is ‘why don't you let the EC give binding guidance?’
I wonder what people feel about that, because in a way it gives you the worst of both worlds – it just puts all the power into the EC.
JV There should be a tie-breaker rule as you have in double tax treaties for direct tax which dictates where the taxation will take place.
RM The problem is that to negotiate a double tax treaty takes years.
To say we're going to negotiate 80 double tax treaties on indirect tax with different countries is fine as a concept, but it's a massive long-term job.
‘The simple move you could adopt
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DS The mechanism which Robert's looking for in terms of producing uniformity of application and interpretation, we do have it in the form of the European Court of Justice, or the Court of Justice of the EU as we’re supposed to call it.
It's interesting that the UK courts have given up looking at what UK courts have to say about the VAT.
They almost invariably start with the Directive and with what the ECJ has said, and don't bother with UK decisions which don't start from this perspective.
The simple move you could adopt would be to upgrade the principal VAT Directive from directive to regulation status.
Then they wouldn't need to be implemented in national law; you wouldn't have all this huge overlay of UK legislation on the basic principles of VAT.
We could simply do what the Germans do, which simply translates the principal VAT Directive, and say ‘this is the VAT law’.
So we could do with VATA 1994 at a stroke, and indeed I remember LJ Jacobs was recommending this back in the Century Life case.
You would go for maximum uniformity of the general rules, and maximum decentralisation of the administration of VAT.
That seems to me the model one should be moving towards.
RM It's quite clear that the UK would veto that model.
DS Well, it would do. The question is whether that is sensible or not.
IH The issue about rates is a very interesting one.
We're not actually talking about the technicalities of tax here anymore, we're talking about political issues and political motivation, and the political capacity to make judgment.
We need to question why we are in Europe and what the purpose is.
It's not just short term. There is a medium term; there is a long term.
What are our objectives as a nation? I don’t know whether the UK government’s response to the Green Paper necessarily deals with that.
RM I've got no problem with the UK government taking a robust position, and we have sovereignty over tax on the major conceptual areas.
My concern is that if it wants to take this approach to tidying up the micro areas, then the system is going to get worse because any problems that come to light will never get fixed.
DS I really don't see how having uniform rates of VAT throughout the EU would be any greater infringement of national sovereignty than having rates of customs duty fixed by the World Trade Organisation because we've chosen to belong to it.
JV If you remember back in the early '70s, the thought then was that rates would converge to effectively a single standard rate by pure economic forces and pressures, but it's never really quite happened, has it?
DS No, but it's a bit of fun in a way. It enables cross-border shopping between Northern Ireland and Ireland.
There's a wonderful supermarket at Tilburg, and one entrance is in the Netherlands, and the other entrance is in Germany.
JV There's the story about there being no white goods shops within 20 miles of the Danish/German border because everybody used to just nip across the border.
IH One of the points in the Green paper concerning the collection methods is the idea of a two-payment system, where the purchaser pays the supplier for the supply they have received, but the VAT on the supply is paid into a blocked VAT account of the supplier with the MS revenue authority.
The idea has a substantial upfront cost and it would represent a significant flow of revenue for the banks.
One would hope that if it ever were to come about then the banks would be restricted in what they could do with that money while it's out there.
However, it certainly would make the money more secure for national revenues.
It leads to one possibility – that all tax should be paid directly to the revenue authorities so they've got it immediately.
If this were adopted it is essential that there be a comprehensive refund system.
For it to work a much more advanced and efficient system than we have now is needed so that traders get access to refunded input tax much more quickly than at present.
It's a great shame that this aspect has not been discussed in the VAT Green Paper.
It needs to be, because if we actually move to a system with direct payment to the authorities, we would be halfway to a reversal to a simple purchase tax system.
We know that once some revenue authorities get hold of money, the last thing they want to do is let anybody else have it.
For that reason alone I have distinct commercial reservations about going to a payment into blocked bank account system.
RM I don't think it's really practical in the retail arena where only a few transactions take place through the bank.
RM One suggestion on collection was the one-stop shop which we've been talking about for some time and was actually addressed in the Green Paper.
I don't think they addressed it very well, because their version is that you fill in one 27-column VAT return in accordance with 27 different systems of VAT, which makes it wholly impractical, or wholly worse than 27 separate VAT returns, because at least with separate returns you can employ local knowledge.
A one-stop shop that was complete on the basis of your own VAT system would be a huge simplification, and it wouldn't necessarily cost a lot of money to tax authorities.
IH Or you could have a standardised VAT return.
That was done for the old Eighth Directive claims.
It was in different languages but it was basically the same system and the same return.
They could do that for a VAT return.
RM The risk of course is that the UK has a very simple VAT return. It has only nine boxes, whereas most countries have many more.
JV Some of the Scandinavian countries’ returns run to about three or four pages.
How many of those boxes are actually required? If the UK has got away with a VAT return consisting of nine boxes, why is it that other countries need three pages of boxes?
RM My concern is that history says that where you get harmonisation between governments, you take the lowest common denominator, so you end up with all the boxes of everybody.
DS True, but some individual Member States have actually made a great deal of progress in terms of simplifying the VAT system and integrating it with direct tax systems.
If you look at Italy, there is a system that works pretty efficiently.
For example, you can go to any bank and do your tax return or VAT return, and if you have an overpayment of VAT and underpayment of direct tax, they can be offset.
JV That's interesting. In some Member States, if you're due a repayment you don't actually get it; it's rolled forward.
It's not like the UK where if you're due a repayment you get it, ideally, within a few weeks of putting a return in.
In some Member States your repayment is just credited and rolled forward for so many VAT periods and then you can make a claim, but making the claim can invite a visit from the VAT officer, and you'll have a three-day VAT audit.
So at that level it's crying out for harmonisation.
DS We've got far more repayment traders in the UK than in other Member States because of zero rating, so it's much more of an issue in the UK.
IH One of the big points in the consultation is the continued use of the destination principle.
We know that there's a rough north/south divide on this question which means that there is a political problem with moving to an origin system.
This has always been the Holy Grail and would, if implemented, deal with many of the problems of accounting and fraud.
In practical terms, though, we are moving more and more to the use of destination as the basis of taxation.
JV The January 2010 and January 2011 changes are all pushing towards destination, by and large.
But it has been suggested that we should have a split approach where B2B is destination and B2C is origin.
It seems to make a reasonable amount of sense to me. But is that more complexity?
DS No, that's by and large the system we've gone over to now, which is a great improvement.
The big switch to a destination system was with the single European market back in 1992.
Having said that, the origin system has a lot to say for it.
It’s a clear way of eliminating MTIC fraud, but it’s difficult to reconcile with the idea of a single market.
JV We spent many years moving towards B2B, which is effectively a destination system for everything; are we now going to say no, let’s all aim for an origin system?
DS No. Having moved to B2B for destination system, we've got to stick with that.
And as you say, a simple principle; B2B destination, B2C origin – that's great.
JV That seems to work, and there must be some further simplification that can be had around that.
We've still got some pretty complex rules on the B2B around entertainment, admission to events and the ‘use and enjoyment’ rules.
Land is still a bit of an issue. And there are incredibly complex rules on leasing, whether it's more or less than 30 or 90 days etc, which are crying out for further simplification
‘I would suggest that HMRC set up a specific team whose sole objective is to
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RM It does seem to me that there's a huge issue for small businesses who cannot hope to cope with 27 different VAT systems, and therefore the VAT system creates a disincentive to trade internationally, or certainly within Europe.
At the moment, we've got a mess because the Directive allows companies to introduce small business systems within closely defined limits.
Is there any chance we could get a cross-EU small business system, which is what a small business would really need?
IH That is one of the most important tasks that the EC and the Member States have, and it's one in which they are failing abysmally.
The politicians talk about the need to work with the SME sector because they are the engines that will get us out of recession; they are the businesses that actually employ the vast majority of people within the EU, yet they are also the unfortunate traders who have to spend a very large proportion of their time and administrative resource in dealing with very complex situations, a lot of which have nothing to do with them but with which they have to comply.
The EC has not said it is going to deal with this as a main priority to create within Europe a system that is simple and certain which allows for small/medium-sized businesses to operate within a European single market.
The sooner that is done the better. At the moment we have systems that have been structured on a Member State basis.
We've got the cash system here, the annual accounting system and the flat rate system.
But the minute that you say, 'how does that work if those businesses want to go into Europe?' is the minute that they've got very big problems.
That has got to be addressed, it’s a major issue.
JV In the UK we've got the £73,000 registration limit, which doesn't exist by and large in most other Member States.
You just have to be in business to be registered in other Member States.
A cross-border de minimis limit would take X thousand very small businesses out of the VAT net, and would be a step in the right direction.
DS You have this terrible difficulty though, when businesses just get to the registration level.
If you're repairing cars or doing small building work in the UK, as soon as you go above the registration threshold you've got two choices.
Either you start charging VAT, in which case you lose all your customers, or you try and stay in business just below the registration threshold.
IH There is that cliff edge, and there's another that is actually more insidious.
It’s the simple fact that if you take on somebody to work with you, the mere fact that they're working for you is going to increase your turnover.
So you don't take on staff, or you try and find, as hairdressers do, this very bizarre way around it where you have a chair as a business centre.
Business should never be a dog wagged by the tax tail, but unfortunately, that is what is happening.
Businesses are being structured with operational methods at the lower end designed to accommodate the peculiarities of tax.
And that means that traders haven't got the freedom to grow in real terms, which is what small businesses need.
I would suggest that HMRC sets up a specific team whose sole objective is to reduce the VAT and other tax compliance burdens for small business.
The motivation behind collection procedures is about countering fraud and securing the collection.
I'm not understating the responsibility of exchequers to collect revenue but they must bear in mind that VAT is a tax collected by the trader.
HMRC should work with the trader to ensure that in doing so, the trader is not hobbled so that he can't thrive and grow.
‘A cross-border de minimis limit [for VAT registration] would take X thousand very small businesses out of the VAT net, and would be a step in the right direction’John Voyez |
JV Your medium-sized businesses are almost pushed down the route of non-compliance, because if you're a medium-sized business faced with a piece of complex VAT legislation, there is a choice between employing a professional adviser at no doubt a very reasonable fee, or saying ‘well, this is so complex I'm not going to spend time on it’.
They would rather be compliant, but if it's going to cost them to employ a professional adviser to tell them how to be compliant and deal with all the complexities, they're more likely to say: ‘Well, I think this is the right approach, I'll go down this line and just hope it's right.
And if it's not, then I'll worry about it when somebody comes along and tells me it's not’.
This, in blunt terms, is the decision that many medium-sized businesses are being forced to make.
Look at the anti-avoidance legislation you have now around the option to tax.
That's become so convoluted over the last 15 years because it has changed and changed and changed again.
When you advise a small charity that's decided to sub-let to somebody else, for instance, you might have to tell them they're caught by some obscure piece of anti-avoidance legislation – it's a nightmare.
It's just crying out for simplification at that sort of level.
RM One of the main thrusts of the Green Paper is how to stop VAT fraud.
David mentioned earlier that the main driver of VAT fraud is the destination system.
If States are wedded to the destination system, you're either going to have to have an extremely complex collection system, or you're going to have to accept VAT fraud, it seems to me.
I can't see there's any other sensible alternative.
IH I agree. I have a slight problem when talking about VAT fraud, because the VAT fraud is always spoken about in the same context as the VAT gap.
And the VAT gap seems to be a bit like a concertina; it can get bigger or smaller depending on where you put your hands.
How do they work this VAT gap out? And what has been done to deal with it so far?
There are huge forms, statistical and compliance notification – how much of that is actually used?
JV I get the impression that other Member States do use the EC sales lists more than we do in the UK in terms of checking.
RM In UK terms we define the VAT gap as the difference between the before the year estimate and the actual outturn, and assume that any difference must be due to fraud rather than to poor estimation.
‘There's a big issue for small businesses who cannot hope to cope with 27
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IH Exactly, the complexities it is meting out on certain trades are quite frightening.
Certainly, there was abuse with mobile phones and chips, and lots of other things as well.
A capacity to defraud is generated by the fact that at some stage you have a supply with no VAT attached, and these fraudsters are very clever at identifying and exploiting that.
I'm well aware that the more complex you make the system, the better it is for the fraudsters because they've got a lot more places to hide.
Every piece of anti-avoidance legislation is an opportunity. That's how they see it.
RM MTIC fraud happens very, very quickly; from start to finish it's less than 28 hours.
So any system other than real time information system, will not stop it.
Where does this leave us?
RM It seems to me that, from what everybody's been saying, we're not going to get anywhere without some degree of harmonisation at a political level, which the UK has turned its face against.
So it may be that the whole thing turns into a damp squib.
IH There is now a realisation within the EC that the single market in respect of the supply of services is significantly obstructed by regulations in Member States and that many of those regulations are coming from various professional bodies within those Member States.
The Commission has issued a consultation which at the moment has only gone to revenue authorities within the Member States.
This is specifically looking at how one service industry is treated in each different state.
And it's a service industry that's relevant to us because it's tax advisers.
In some Member States such as Germany or France, tax advisers are regulated.
In others, such as the Netherlands, they're not at all.
And in countries such as the UK, you don't have actual regulation, but you have the majority of tax advisers belonging to professional bodies who do their own regulation.
What the Commission is interested to know is how they can reduce the degree of existing regulation, and how, having done so, they can ensure consumer security in a European single market for the supply of services.
This raises the possibility of EU consumer legislation being introduced in relation to the supply of services.
A large part of future European development will depend on the development of cross-border supplies of services.
One of the things that will be subsumed into this Green Paper response will be something in relation to services.
RM Thank you everyone.
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