UK Treasury Committee VAT Gap and Brexit VAT inquiry

Tue 27th Mar 2018

The House of Common’s Treasury Committee today announced an inquiry into the UK VAT Gap and the VAT implications of Brexit. There will be separate Treasury Sub-Committee enquiries into tax avoidance/evasion, and the conduct of HMRC in tax enquiries.

VAT contributes almost one-third of UK tax revenues, so the lack of progress on the VAT Gap and the risks around Brexit have triggered this latest public review.

VAT Gap remains stubbornly high

The VAT Gap calculates the annual deficit of VAT collected compared to the amounts forecast. The difference is attributed to a mix of fraud, errors, poor administration and companies going into liquidation.

HRMC has made limited progress in reducing the VAT Gap: it was estimated at £12.6bn for 2015-16 compared to £12.4bn for 2014-15. The VAT Gap is three times larger than the Corporation Tax (‘CT’) Gap, which was £3.3bn in 2015-16. This is largely because the CT Gap has been significantly reduced in the last ten years by extensive anti-avoidance measures.

Chinese VAT fraud; the Gig Economy

Issues that will be reviewed will include an estimated £1.5bn in VAT fraud committed by Chinese online retailers. Also, the effect of the Gig economy growth. The erosion of the traditional tax base as more individuals start providing taxable services that are not captured by HMRC’s traditional tax reporting mechanism. This includes home-renters and car sharing which fall below the high VAT threshold of £85,000. The Committee will investigate how some countries, including Norway, are now looking at forcing P2P marketplaces, such as Airbnb and HomeAway, into surrendering hosts’ taxable renting to the tax authorities. Additionally, the role of car-sharing platforms, such as Uber, which have enabled a major rise in non-VAT charging taxi service providers to enter the marketplace.

VAT implications of Brexit

The UK’s date for leaving the EU VAT regime has been potentially set for 31 December 2020, following a 21-month Brexit transition period. The VAT implications for UK businesses include:

  • Importers will face a UK 20% import VAT bill and cash flow recovery administration on all their goods coming into the UK.
  • The imposition of up to £720 million in extra annual VAT compliance costs on up to 27,000 small businesses following the loss of EU distance selling VAT registration thresholds.
  • Irrecoverable customs tariffs of 4% on average for importers of goods into the UK from the EU.
  • UK sellers of digital services (streaming media, apps and e-books) losing their right to the EU MOSS single VAT registration and filing facility. This will hit US businesses which have used the UK as their EU-gateway for their EU digital sales.

The Committee will also review the simplification of the UK VAT regime to help businesses, and making and processing better VAT policy.

The Treasury Sub-Committe will separate conduct an inquiries into tax avoidance and evasion, and the conduct of HMRC tax enquiries and conduct.

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