The Treasury Committee has held its first evidence session as part of its inquiry into VAT as part of its wider work on Securing the Tax Base. Discussion covered VAT after Brexit, regulation of online marketplaces such as Amazon, the Uber business model, VAT planning by NHS trusts, the scale of the tax gap, Making Tax Digital and VAT, tackling VAT errors, VAT support for small businesses and VAT boundary issues.
The session can be viewed here.
Emma Rawson, Technical Officer, Association of Taxation Technicians (ATT)
Stephen Taylor – Chair, VAT Sub-group, Association of Taxation Technicians
Daniel Lyons, Partner, Tax Policy Group, Deloitte LLP (and CIOT Council member)
Richard Allen, Retailers Against VAT Abuse Schemes (RAVAS)
Liveblog - Tuesday 3 July 2018
NB. The notes below are contemporaneous and not checked against Hansard. We cannot guarantee that no errors have crept in and we advise on checking any passage against Hansard before repeating it.
The session was due to start at 9.15. However the period up to 9.22 was not broadcast on Parliament Live due to a technical fault, so this liveblog starts at 9.22.
Committee chair Nicky Morgan questioned the witnesses on VAT post-Brexit.
Daniel Lyons explained that the introduction of postponed accounting post-Brexit for imports from EU countries would need to be rolled out to other countries too.
Richard Allen said RAVAS was concerned about imports by mail order. Compliance is already poor.
Are there any other potential costs or impacts of being outside the EU, asked Morgan.
There are a number of simplification measures we won't be able to use any more after Brexit, said Lyons. There might be a fix but at the moment that seems unlikely. There is the strong chance of leaving the system where VAT refunds can be claimed back via a portal. If we leave the single market we would lose that, he said.
On business awareness, Emma Rawson said it was difficult for smaller business to plan at the moment. Until there is a clearer picture of what they need to do they won't do anything.
Lyons said there was a clear difference between larger and smaller businesses. Larger businesses are preparing on basis of a hard Brexit.
On the transition period Lyons said most clients have already factored that in; expectation there won't be change until the end of that period.
Morgan asked what responses businesses were thinking of. Stephen Taylor said he was not sure how much planning businesses were able to do without hard facts. While VAT is a major irritation for these businesses it is a small part of running their business. In order to give advice tax practitioners need a lead from government. Rawson added that ATT members would like to say 'these are the steps you need to take'. That can't be done yet. Small businesses might be able to adapt more quickly than larger businesses.
Lyons said some large businesses are having to relocate parts of their work for operational reasons.
Catherine McKinnell took up the questioning and turned to the concerns of financial services companies.
Lyons said that at the moment when these firms supply services in the UK they are exempt from VAT. When they make the same supplies to custoimers in the EU they can't recover input tax but they can to non-EU countries. So when we leave the EU the 'euphoria' was around whether making any supply to the EU would be zero rated. But HMT have downplayed expectations. Hard to see how we differentiate between EU and non-EU countries.
McKinnell queried the word 'euphoria'. If that treatment had applies and supplies by insurances companies and banks had been zero rated that would have been a windfall, said Lyons. But this now looks unlikely.
McKinnell also questioned Lyons about the Terminal Markets Order. Lyons explained that the Commission was accusing the UK of being in breach on the principal VAT Directive. One result was we might have to charge VAT. He hoped we could keep our zero rates. There was some surprise in the sector at the infraction proceedings which the Commission has launched. Infraction proceedings take a long time and may not be complete by end of 2020. He did not think the proceedings were politically motivated.
Stephen Taylor said the Commission's principal was that VAT should be paid in country of consumption. At the moment there is a 'one stop shop'. If that is lost there will have to be multiple VAT registrations.
Charlie Elphicke asked Allen about the effectiveness of government measures against VAT fraud. Allen said online platforms had ways to avoid liability but the new measures seemed tougher. He was still worried that no-one seemed to be being caught. Germany was being tougher on Amazon, Elphicke suggested. Allen agreed.
Elphicke asked Allen whether he thought HMRC had a 'secret agenda' not to go too hard on the 'big boys'. Allen said he had heard HMRC had issued instructions not to go hard on Amazon. He said the environment for online retail was much less tough than for High Street retail.
Allen said he was concerned that there was no regulation of private marketplaces such as Amazon and Ebay. The only equivalent he had found was container ports but there is legislation in place to prevent them abusing their position. The same should be done for private online marketplaces. He had a particular concern around price manipulation by these marketplaces.
Elphicke asked if a VAT surcharge for people selling into Britain should be considered. Allen agreed and said Australia and Sweden had such a system in place.
Lyons said that while mail order had been around a long time the globalisation of consumer trade was a recent development. HMRC was doing a lot and there were some signs it was beginning to work. Current changes should be allowed to bed down. Lots of traders were apparently being kicked off platforms.
Rawson said it was important to let changes bed in. This was a good general principle.
Stewart Hosie asked whether the difference was that so many more people could trade online, and under the VAT threshold. Allen said the internet had made mail order more attractive. An expectation has been created that online is cheaper. Allen explained the basis for his argument that 'VAT is optional'. Allen said that search engines gave high rankings to the cheapest products. People don't really understand VAT, he said. They just see the end price.
Hosie noted the EU's plan to remove VAT exemption for small packages by 2021. Why had this taken so long, he wondered, Allen said it had been low on the Commission's agenda and there had been a lack of awareness initially as to the extent of the abuse via the Channel Islands.
Hosie asked Rawson how this would impact on businesses below the VAT threshold. Those below the threshold would not be affected. Taylor explained that such businesses would just continue trading. Key point is for non-EU sellers there is no threshold as no VAT is charged.
Hosie wondered if trading via Channel Islands to avoid VAT would be contrary to professional codes of practice. Lyons and Rawson both thought it would, as would be contrary to intention of Parliament.
Wes Streeting asked about Uber and their model which collects VAT on fees paid by drivers but not on all sales. Taylor said Uber is based in Netherlands. VAT would be expected to be charged in place of consumption but only if the Uber driver is VAT registered. Streeting suggested this was VAT avoidance. Lyons said there had been a number of cases where small cab firms had tried to make this case. Some had been successful and some hadn't. Allen referenced a case where agents selling cosmetics were accused of avoidance because they claimed to be trading separately. Taylor said there was a different principle behond this case.
Uber's recent employment tribunal made it harder for them to argue they shouldn't be paying VAT, said Streeting.
Two different possible interpretations of the facts, said Lyons. Taylor said the principles involved were decided by British courts. If there was a core business at the centre that provided services to drivers that had been decided by the courts. Streeting asked if Uber was paying fair share. He felt it wasn't satisfactory to leave to the courts. Parliament should have oversight. Parliament can change the legislation, said Taylor.
Lyons said a case was being taken forward by a tax barrister regarding input VAT and Uber. HMRC had not sought to make a tax demand of Uber so presumably judged their structure did not leave them liable to VAT on all sales, said Lyons.
Streeting turned to NHS trusts and whether tax rules are being abused through VAT planning. Lyons said this planning was still taking place. Principle is salaried wages not subject to VAT. This 'planning' is if you put staff on your books no VAT liable. Consequences - governed by employment law, obligations, wouldn't be there if still agency employees. Falls outside definition of avoidance.
Streeting asked how much time was spent by advisers looking at public sector tax planning. Very little, said Lyons and Taylor.
Stephen Hammond asked about the scale of the VAT gap. Lyons said VAT avoidance, at estimated £100m, was relatively low. Lyons cited the Ocean Finance case, where a loan broking business had been moved to Jersey, creating a structure which avoided tax.
Under current international treaties, is international tax arbitrage something that can be addressed, asked Hammond. It is largely a matter for the courts, said Lyons. A relatively small number of cases being pushed through the courts by HMRC, he said.
Taylor said he was not able to say if £100m was an accurate figure. It was useful information but dependent on how reliable it was. Lyons thought it should continue to be monitored but there was very little appetitie for VAT avoidance.
Simon Clarke took up the questioning. staying on the VAT gap.
Within the £3.5 billion there are a range of errors, from technical errors to arithmetical errors, said Rawson. It is not clear enough how much different aspects are contributing to the total. Clarke wondered about how to reduce errors. Taylor said HMRC should be more willing to engage with small businesses. Large businesses are allocated customer relationship managers, but small businesses, if they want advice or reassurance, have to ring an advice service which will normally just point them to the website. If you want to take it further and want a ruling you have to take advantage of clearance procedures and seek a ruling, he said. Two and a half million VAT registered businesses, most small. Applications for clearances in year to March 2017 just 688 applications received. Year to March 2018 just 544. Of those in half of cases HMRC refused to give a ruling. HMRC take attitude 'we're not there to provide comfort letters'. We as professionals think this system doesn't suit customers needs.
Lyons added that VAT is a self-assessed tax which makes proper guidance especially important.
Clarke turned to Making Tax Digital.
The pilot is still very limited, said Rawson. First returns have been filed but no feedback from HMRC. Hard to say how much impact MTD will have on error figure. Will help on record keeping errors. Nudges and prompts mooted by HMRC.
Clarke said BCC had released figures showing lack of awareness among business of MTD. Rawson said definitely a concern. ATT has done much work to raise awareness among members but still a lot to do in terms of what needs doing practically. Still no info on what software needs to be put in place. Sub-optimal, said Clarke. To my knowledge no direct communication with business by HMRC, said Rawson.
Lyons said he thought MTD wouldn't make a great deal of difference to the tax gap.
Rawson said errors work both ways. Some are in HMRC's favour. Can't assume cutting errors will raise tax take.
Allen said he found a bug in a major piece of software that led to higher tax bills. He couldn't believe HMRC weren't interested. He assumed a major brand of accountancy software would have been checked. Apparently not.
McKinnell linked MTD and Brexit as causes of uncertainty. Chambers of commerce in the north were calling for delaying MTD. Taylor said his clients were asking questions he couldn't answer because the info wasn't available yet.
Alison McGovern wondered if it was fair to say that, even for everyday transactions, hard for businesses to navigate VAT rules solely using legislation. The panel agreed. Guidance is crucial. Rawson mentioned the ATT/CIOT project to improve guidance. Taylor said easier clearance processes would help clarity. Rawson said people would oftehn like face to face meetings with HMRC but find it increasingly difficult to get these.
Lyons referred to HMRC's 'demographic challenge' - hard to find experienced technical officers. Not much movement from industry into HMRC, said Rawson.
Easier for larger businesses to get advice? Yes said the panel.
ADR route can be a way to get the right people in the room, said Lyons. Can make sure HMRC take a dispute seriously.
Lyons said he was not sure to what degree parliamentarians read all the secondary legislation laid. A lot of the problems and challenges come from this. Often negative resolutions. Unusual to VAT that most is in secondary legislation.
Taylor said with VAT often three parties involved (buyer, seller, HMRC), as opposed to just two with direct tax.
McGovern raised the Jaffa Cake example of boundary issues. Why are these issues so complex?
Often because the rules rely on the old purchase tax rules, eg over chocolate milkshake powder, said Lyons. Allen said the pasty tax was an attempt to deal with unfairness against chip shop owners. Taylor said government had largely followed ATT recommendations on pasties.
Elphicke said as a practitioner he represented Subway and had had disputes with HMRC.
McGovern asked what would be top of the list for securing VAT base. Taylor said better help and assistance to reduce errors. Lyons said more and better trained VAT inspectors.
Morgan thanked the witnesses and the session concluded at 10.55.