(Ref ”Economic Recovery”) – Radical VAT reform providing a massive boost to the economy

This proposal will produce: – Dramatic increases in employment levels particularly in SMEs. – A corresponding improvement of performance and competition particularly in service sectors. – Dramatic simplification of the tax system with corresponding reduction of collection time and costs. – Corresponding transparency and reduction of both accidental and deliberate calculation errors. – Overall increase in tax revenues from both VAT and income tax. The VAT system is basically well conceived, but, as it exists today, it has many minor flaws and one very major flaw, the VAT threshold. Granted there are other aspects of our VAT system that have troubled a lot of people for a long time; The ludicrously complex list of different rates, exemptions and exceptions is a complete nonsense and long overdue for simplification; The excessive standard rate, now standing at 20% has serious implications way beyond the cost of living and desperately needs to be reduced. However, what should be of greater concern is the issue of the threshold – the level below which a trader need not concern himself with VAT at all – currently £85,000. Even at the most basic level this is absurd. This misguided attempt to assist small businesses actually helps to consign entire industries to the dark ages. These three major issues, the over complexity, the excessive standard rate and the threshold are inextricable and must be addressed together in order to form what would be the perfect solution; namely the complete removal of the threshold, the reduction of the standard rate of VAT to 10% and the universal application of this new standard rate to every product or service offered by every trading company. The obvious appeal of the rate reduction and simplification is actually less important than the not so obvious benefits achieved by the threshold removal. The universal application of the new rate (to include previously “sacred” exemptions such as basic foodstuffs and children’s clothing) may raise a few eyebrows even at a lower 10% tariff. It would, however, be a vital third element of the whole equation. The threshold was conceived as a well-intentioned concession to smaller businesses, allowing them to avoid the additional work and financial burden involved in VAT registration. The prevailing rate of VAT at the time was 10% and the threshold just £5,000 and for any growing business with a turnover approaching that figure it was not such a big issue to suddenly have to start adding VAT to every invoice. For the average tradesman today approaching the £85,000 turnover threshold and potentially having to increase all prices by 20% the prospect raises a massive question: How will they continue to win business against the competition still operating under the threshold? The realistic options are a) – to invest, take on staff and move up to specialise in commercial work for companies that can reclaim input tax or (more likely), b) – to ease off, be more selective and generally lose interest and ambition for development of the business. Perhaps a third option, c) – to steadily increase the number of “cash” jobs and thereby defraud the tax system of both VAT and income tax. And here lies the nub of the issue; whether as a result of b) or c), the losses to the system are invisible – who is going to raise the alarm and alert us to these losses? – certainly not our disillusioned tradesman, who has, probably against his better judgement, been forced into either relative idleness or tax evasion or both. How can anyone defend a tax system that so clearly encourages businesses to turn their backs on honest endeavour. The fact that few opt to take the steps involved in continued expansion is borne out by the massive bunching of companies operating with a turnover just below the threshold. In contrast, a system where a simple, transparent and reasonable level of taxation is applied from the word go there would be no barriers. On the contrary there would be every reason to expand and be content to contribute a fair share to the exchequer rather than to defraud it. The result would be an “Dramatic increase in employment levels particularly in SMEs” and a “Corresponding improvement of performance and competition particularly in service sectors. As regards implementation, the zero threshold (currently enjoyed by Bulgaria and Spain) presents no problem. The 10% rate would previously have been forbidden by the EU so the timing of Brexit is extremely fortuitous! Smaller businesses not previously accountable to the vat man should not find a universal rate of 10% too intimidating and any thoughts of evasion would be deterred by the transparency of the figures; the VAT payable would always equate to 10% of turnover less 10% of the cost of sales and be very difficult to avoid. Hence the assertion that these proposals would result in “Corresponding transparency and reduction of both accidental and deliberate calculation errors”. The claimed “Overall increase in tax revenues from both VAT and income tax” might be more difficult to demonstrate conclusively. The £130 billion of VAT generated from current sources would effectively be halved to £65 billion at a 10% standard rate However, 3.5 million enterprises with a total turnover approaching £350 billion would be sucked into the VAT system and contribute approx £15 billion (say £25bn less £10bn input tax). Add to this the VAT on the estimated 40% of sales currently exempt or zero rated, equating to approx £40bn at the 10% rate. 65+20+ 40 = £125 billion – almost matching the current £130 billion raised. Add to this the removal of black market activity previously aimed at keeping businesses below the threshold and a generally improved level of compliance due to improved transparency and simplicity and it should be easy to envisage an overall increase in revenues – not to mention the boost to small businesses and the incentive for them to grow and all the longer term benefits that would bring.

 

 

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