Billions are being lost due to tax avoidance – yet a weak HMRC is trying to pretend everything’s fine
Every year, HMRC publish their estimate of the tax gap – the amount of tax they claim is lost though avoidance, evasion, omission and error.At £35bn, the government’s official estimate of tax losses is now the highest it has ever been in cash terms since figures were first published in 2008. That is £673m a week if you wanted to paint it on the side of a big red bus - almost 3 times the police budget which stands at £12.3bn. Worryingly these estimates have been increasing sharply in recent years. The tax gap has increased by 17 per cent since 2016 when the figure was £30bn. If you think that sounds bad, the reality is much worse. If you dive into the detail of HMRC’s research, you quickly see that the tax gap is not a measure of tax avoidance that anyone would recognise. For example, the way in which HMRC calculates the tax gap specifically excludes profit shifting by multinational companies, the kind of tax avoidance strategies used by Google, Starbucks, Facebook and others.
Also not included are any schemes that take advantage of legal loopholes. This includes cases where HMRC have judged something to be a tax avoidance scheme in the past, but have then lost the case through the courts. Part of HMRC’s job is to advise the government on policy change designed to stop abusive tax avoidance structures, but the potential gains from any legislative changes are not included in the tax gap figure. By leaving out large and important areas of tax avoidance, the government is able to claim that at just 5.6 per cent of the total tax bill, the UK has one of the lowest tax gaps in the world. The claim is laughable. HMRC themselves say that they are the only tax authority in the world which regularly publishes an estimate of tax losses for a comprehensive range of taxes. It is easy to be a world leader in a world of one.
Many countries publish tax gaps looking at the tax gap on specific taxes such as VAT. As the tax gap varies considerably between different types of taxes, it is not possible to compare the UK’s broad tax gap figure with these estimates. However, when the figures are compared on a like for like basis (i.e. comparing the UK VAT gap with other VAT gaps) the UK does not perform particularly well.According to the European Commission, the UK has the 11th highest VAT gap out of the 28 member countries, expressed as the percentage loss of total potential VAT revenues.Where countries do publish more comprehensive estimates, they often use very different methodological approaches which are known to produce higher estimates of tax losses than the approach deployed by HMRC.
All of this points to a government which is failing to take tax avoidance seriously, and the result is a lack of investment in tackling the problem.
The figures speak for themselves. Since HMRC was founded in 2006 out of a merger between HM Customs and the Inland Revenue, the department has been progressively de-funded. Over that period the department has lost over 40,000 staff from a total of 104,000.
Few people care about having fewer tax inspectors in the same way that they care about cuts to other public services, so governments of all colours don’t mind being seen cut to HMRC as an easy way of saving money. But cutting back on tax collection is a false economy, and recent research by Dr Arun Advani of the University Warwick demonstrates that the case for investing more in HMRC is unanswerable.
In a paper published by the Social Market Foundation, Dr Advani demonstrates that the average targeted audit of a tax payer costs on average £2,500, but brings in between £10,000-£15,000 in previously unpaid tax. Despite the very large benefit for the government, the number of audits have been falling, even though HMRC now has more data than ever and so a better chance of finding people who have not been paying their fair share.
So isn’t it time for the government to stop hiding behind HMRC’s flawed figures, and face up to the challenge of tax avoidance? A good start would be to stop leaving it up to HMRC to mark their own homework, and invest more effort in going after tax avoiders.
My client is a small retailer specialising in bespoke leather goods, and all sales to date have been within the UK. In order to expand her customer base, she is launching a website and planning to sell through Amazon. Are there any VAT consequences she needs to consider?
In order to establish the VAT treatment of her sales, she will need to consider where her goods are dispatched to the customer from (the place of supply), their final destination and, in the EU, whether the sale is to a VAT registered business customer.
The place of supply of goods is where the goods are located at the time of supply, and where this is the UK, the following apply:
Sales to UK customers are subject to standard rate VAT;
Sales to customers in non-EU destinations are zero-rated as exports provided the goods are removed, and proof of export is obtained, within 3 months. The sale is reported in box 6 of the VAT return. VAT Notice 703: “Goods exported from the UK” provides detailed guidance on export procedures and requirements.
Sales to EU business customers that are VAT registered in another member state are zero-rated as EU dispatches. The customer accounts for the VAT as an acquisition in the destination member state. Sales are reported in box 6 and 8 of the VAT return and declared on the EC sales list.
Suppliers may also be required to complete separate Intrastat declarations. These detail the movement (dispatches) of the goods from their home state to the state of their customer. They are only required once the value of the dispatches goes over a certain threshold currently £250,000.
For sales to private individuals and unregistered businesses, your client would treat this as a domestic supply in the UK until she exceeds the distance-selling threshold in the other member state. She will need to monitor the sales to each member state throughout the year. Member states set their own thresholds, which are between €35000 and €100,000 measured over a calendar year.
Once the distance-selling threshold is reached, a business is required to register as a non-resident trader in that country and charge local VAT. Once VAT registered in a new country, there will be local compliance rules to follow, which will include ensuring invoices are issued according to local requirements and submitting regular VAT returns.
Once registered for distance-selling, the movements from the UK are treated as supplies of her own goods at cost. These are shown in boxes 6 and 8 of the UK VAT return. They should not be entered on an EC sales list but are included on an Intrastat declaration if one is required. She will account for the acquisition in the destination member state and charge local VAT on the sale, declaring it on her VAT return there. You can read more about this in VAT Notice 725 “The single market” (section 6).
Where your client sells goods to consumers via Pan European Fulfilment by Amazon (‘FBA’), if she is not already registered in the country where she holds goods she will need to register with effect from her first supply from that stock. This is because, as mentioned previously, the place of supply of goods is where the goods are located at the time of supply, and most, if not all, member states have a nil threshold for sales by businesses not established in the country. In this situation, the place of supply of the goods will be the member state where the warehouse holding the consignment stocks is located. Sales to customers in that same country will be subject to local VAT. If your client starts selling goods from the foreign warehouse to customers in other EU countries, she will need to follow local rules for reporting dispatches and distance-sales. We strongly recommend that businesses making supplies in other member states take VAT advice locally to ensure that they are able to comply fully with local requirements.
Distance selling thresholds and links to other member states’ VAT rules can be found on the EU Commission website:
My client is a VAT registered building contractor – they work on various construction projects, including new build housing developments and new build commercial developments. They will sometimes work as the main contractor and other times as a sub-contractor. They have asked me about changes scheduled for October 2019, when they will no longer have to charge VAT on their standard-rated services – is this correct?
The intention to introduce a domestic reverse charge for construction services was announced in 2017. The change will shift the responsibility for accounting for the VAT on ‘specified services’ from the supplier on to the recipient of the supply. The change will be implemented into law via SI 2019/892, amending VATA1994 Section 55A. The reason for its introduction is to tackle Missing Trader intra-Community (MTIC) fraud.
The key features of the changes are:
Only standard rated and reduced-rated supplies are affected by the changes.
The reverse charge will only be applicable on ‘specified services’ that fall under the reporting requirements of the Construction Industry Scheme (CIS).
The reverse charge only affects ‘specified supplies’ made between VAT registered businesses.
If your invoice consists of some CIS and some non-CIS supplies, your whole supply will be subject to the reverse charge.
You will account for VAT in the normal way if you are making the supply to an ‘end user’.
Sub-contractors are likely to become VAT repayment traders.
Your client is correct in that under certain circumstances they will not charge VAT on standard-rated or reduced-rated services.
This will be the case where they’re making supplies as a sub-contractor to a VAT registered main contractor. As the main contractor will be making onward supplies of building and construction services to the developer, your client is not supplying an end user, and therefore the domestic reverse charge will apply.
Work on new build dwellings which is zero-rated will be unaffected, whether your client is a sub or main contractor.
When your client acts as the main contractor on a standard-rated or reduced-rated project, and they are supplying consumers or final customers of building and construction services, these supplies are not subject to the reverse charge, and your client must charge and account for VAT in the normal way.
If your client is on the flat rate scheme, they should not include reverse charge supplies in their Flat Rate turnover. If a significant number of their supplies are subject to the reverse charge you may need to review whether it is still beneficial for them to remain on the scheme, as they will still be subject to the input tax restrictions of the scheme.
Should they receive any reverse charge supplies whilst on the flat rate scheme, again these should be dealt with outside the scheme, meaning the client will account for the VAT to HMRC, but will be able to credit themselves with the input tax (as long as they are fully taxable).
HMRC have said they will apply a soft touch approach towards errors for the first 6 months whilst traders get used to the changes and they have now published further detailed guidance on 7 June 2019 – VAT: domestic reverse charge for building and construction services.