The Great VAT Robbery

The piece reproduced below was published today in The Journal's in my view with series where the Editor is a regular contributor.

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By Peter Troy

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Back in April 1967, the European Commission issued a directive to launch a tax system unlike any seen before, which it described as "achieving the highest degree of simplicity". So amazingly complex did Value Added Tax (VAT) turn out to be that it has subsequently had to issue 35 more directives, which in practice has made the Tax even more complicated as most small and medium size businesses know to their cost.

Governments like VAT because that it turns the business community into tax collectors. To collect VAT from their customers, with all the accompanying paperwork, costs businesses four times more money than it costs the government to receive it; this ongoing cost of course particularly impacts on smaller businesses. Part of the price of forcing firms to collect the government's taxes in this way is that VAT has become a huge crime opportunity.

VAT fraud now costs the UK Treasury £4.75bn in 2005-06 and is estimated to be worth €250bn (£170bn) annually across the EU as a whole, according to a House of Lords report published last month.

The figures involved are of such staggering dimentions that they defy comprehension. Those of us, who are old enough, however, will remember the Great Train Robbery - committed 44 years ago. A huge £2.3 million was stolen - £40 million in today's money – and the publicity was huge, the crime is now a part of our national folklore.By comparison, UK is currently losses to VAT fraud in 2005-6 the equivalent of 120 great train robberies a year, or one every three days. At a European level, that number soars to a colossal 11 per day.

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For sure, more recently, the UK government has got to grips with some of the more obvious scams – involving computer chips and mobile telephones – through increased enforcement and tightening procedures.

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However the House of Lords argues that these measures are in the long term unsustainable.

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Simply carrying out the checks involves about 1,500 staff, at a cost of £95m a year, with some supply chains under scrutiny involving up to 600 companies. Better VAT enforcement carries the danger of withholding money from legitimate, smaller, importers and traders, possibly pushing some to the brink of going out of business.Furthermore, the House of Lords report warn that the system change will simply shift the fraud from goods like mobile phones to others instead - such as cosmetics, precious metals, and computer software. Thus the fraud "will continue to migrate and mutate.''

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The only way we can get to grips with this fraud, therefore, is to change the VAT system, ideally to a return to a simple Purchase Tax and that – as even the Lord's Committee who identified the huge fraud cost acknowledges – is not going to happen. The reason is that VAT is a European Union (EU) tax, it requires unanimity of all 27 member states to change, and the majority are very much against any fundamental changes.

In the meantime small Businesses and indeed their representatives will continue to despair at the complexity and draconian enforcement of VAT regulations and collection methods brought about because of the depredations of organised criminals.

The UK's largest member based Business organisation the Federation of Small Businesses (FSB) will continue to support its 205,000 members who come under VAT investigation whilst at the same time demanding simplification of the EU tax, but there is there is absolutely nothing that can be about it, short of leaving the EU. Which is probably one of the reasons why FSB representative members voted (by over two thirds) to do just that back in 2001.