Alastair’s Place

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"Value Added Tax" (Aka Sales Tax)

HM Revenue & Customs statistics are apparently expected to show that VAT fraud in the U.K. has reached record levels according to the BBC today.

It’s hardly surprising that when you introduce any form of system that relies on the government paying back tax that has been claimed, you’re going to get a significant amount of fraud. We’ve seen it with Gordon Brown’s silly “tax credit” system, and we continue to see it with VAT.

What I don’t get is why people think we actually need VAT. Sure, it brings in a lot of tax revenue for the government, but:

  • It places a burden on business to account for and charge VAT correctly (this is very complicated; the rulebook is well over 300 pages long, and it isn't even a complete list of all the rules that apply).
  • It artificially increases the prices of many goods, which can only be an inflationary pressure on the economy.
  • It is never adjusted. People sometimes claim that it gives the government an additional knob to twist, but it's been 17.5% here in the U.K. for as long as I can remember.
  • It disproportionately taxes the poor. Everyone has to pay VAT, no matter how much they earn.
  • It distorts the E.U.'s single market, because the rules and rates differ from member state to member state (and there are 25 different member states, all of which have complicated VAT rules like ours; what's more, they are all free to change them at various points during the year, and the penalties for non-compliance, as well as the time limits for compliance, vary from regime to regime… one or two countries even require you to employ some of their citizens in order to comply with their VAT regime!). The result is that the so-called “single market” is a joke; a hotchpotch of complicated rules administered on different terms by different states. You can even see that it isn't really a single market, since you still have to fill out CN22 forms (under a different name, but it's basically the same form) when sending goods between E.U. countries.
  • It creates difficulties for companies e.g. selling services or downloadable goods over the Internet. The E.U. insists that pretty much anything sold to its citizens should include VAT, but not everyone outside of the E.U., unsurprisingly, feels like paying tax to the European Union. Most of the large U.S. operations do, and a number of the smaller ones, but a lot simply don't care, whereas those of us within the E.U. have to do it otherwise we'll be prosecuted.
  • It creates additional opportunities for people to defraud companies (e.g. by quoting someone else's VAT number—the E.U. doesn't provide a sensible way for companies to verify that VAT numbers correspond to the identities of the people using them… you can do it, but you have to phone your local VAT administration, sit in a queue for hours on end and then read all the details out to an operator in order for them to tell you one way or another). In case you're wondering, if you quote someone else's VAT number, you may be breaking the law, but do HMRC care? No. They will pursue the company you defrauded for the VAT that you should have paid!
  • It creates additional opportunities for people to defraud the government.

There is no credible evidence that VAT is necessary or desirable. Many countries don’t have it, and their economies function perfectly well without it. We should forever curse the French, and in particular the late Maurice Lauré, for coming up with the idea.

What we should do is scrap VAT and raise the extra revenue through income taxes (in the U.K., that means Income Tax and Corporation Tax). They’re much fairer, since they’re calculated as a proportion of income, and (the daft tax-credit system aside) they offer fewer opportunities to defraud, as well as being simpler to account for.

OK, the U.K. government claims that VAT is good because it’s easy to collect (apparently), but what they really mean is that it’s easier for them.

(Note: I’m aware that VAT is collected differently from a traditional sales tax, before anyone points that out. Both types of sales tax, however, are a bad thing.)