Download Simplicity, clarity and consistency on indirect taxes can

Indirect taxes: Improving the business
environment at no cost to government
Policy briefing No # 7
Indirect taxes – which include VAT, excise duties,
environmental taxes and stamp duties – are
mainly collected rather than borne directly by
businesses. But collecting these taxes on behalf of
the government brings with it compliance burdens
and complexity, which the government should try
“Simplicity, clarity and
consistency on indirect
taxes can improve the
UK business
environment at no cost
to the Exchequer”
and minimise to allow businesses to maximise the
time and money they can spend doing business.
By using the 2016 Business Tax Roadmap to provide
simplicity, clarity and consistency on indirect tax for the
parliament, the government can improve the business
environment by minimising the costs to business associated
with collecting taxes on goods and services. These goals can
be achieved at no fiscal cost to the government – ensuring
stability in these important revenue streams in a period of
deficit reduction.
Simplicity
Through simplifying tax collection, rates and regulation the
government can ease the business compliance burden
associated with indirect taxes.
Clarity
Regular and surprise changes to indirect tax rates are
unhelpful because they add to business uncertainty and to
business cost due to the updates required to systems and
prices.
Consistency
A consistent approach to indirect taxation can allow the
government to meet its environmental policy goals while
minimising economic distortion.
Comprehensive Business Tax Roadmap: Improving the business environment at no cost to government
Designed well, consumption taxes
can make a consistent contribution
to the exchequer, with less
distortion than other taxes
Consumption taxes make a large and
consistent contribution to the exchequer
Most indirect taxes are consumption taxes.
Consumption taxes include VAT, excise duties
and most environmental levies. In 2015/16
consumption taxes are expected to raise £175bn
in tax revenue. This will amount to 28% of all tax
revenue which is more than government spending
on health and education combined (Exhibit 1).
Exhibit 1 Revenue from consumption taxes
compared with government spending 2015/16
180
government spending on public services,
particularly in a recession.
Consumption taxes tend to be less distortive
than alternative means of raising revenue
International tax literature finds that consumption
taxes are less distortive than income tax or
corporation tax, which tend to reduce incentives
to invest, innovate or work.1,2 An OECD tax and
growth study found that a switch away from
corporate and personal income tax towards
property and consumption tax would be expected
to lead to higher long-run GDP per person
(Exhibit 2)3. Furthermore, an increased reliance
on consumption taxes is not necessarily
associated with more inequality4.
Exhibit 2 Estimated effect on long-run GDP
per person per 1% change in tax share
160
Environmental taxes
Other property taxes
140
120
Alcohol and
tobacco duty
Recurrent taxes on
immovable property
£bn
Health
100
Consumption taxes
80
60
VAT & Insurance
Premium Tax
Corporate income taxes
40
Education
20
0
0
Taxes
-2
Current spending
Source: CBI analysis of OBR autumn statement economic and
fiscal outlook – November 2015 and HM Treasury Spending
review and autumn statement 2015
Unlike other sources of tax revenue which tend to
be pro-cyclical (i.e. decline proportionally more in a
recession than the overall economy), consumption
taxes tend to hold steady as a share of GDP over
the economic cycle. Consumption taxes therefore
play a vital role in providing consistent support to
1
Personal Income tax
United Kingdom policies for a sustainable recovery, OECD
(2010).
2
The role of tax policy in times of fiscal consolidation. Economic
papers 502, European Economy. Princen and Mourre (2013)
3 Annex B: Tax and Growth Study, OECD (2010)
-1
0
1
2
3
Source: CBI analysis of Table B.6, Annex B: Tax and Growth
Study, OECD (2010).
Given the reliable role consumption taxes play,
with less economic distortion, this paper focuses
on how to improve the business environment
through a reduction in the business compliance
burden and increase in simplicity, certainty and
consistency in indirect taxation, while maintaining
the Exchequer revenue from these important
revenue streams in a period of deficit reduction.
4
Countries such as France, Germany and Sweden raise a
higher proportion of taxes through consumption taxes and have
lower inequality than the United States which relies more on
income taxes.
2
Comprehensive Business Tax Roadmap: Improving the business environment at no cost to government
Simplifying the administration of
UK and European VAT can improve
the business environment
Clarity of UK VAT rules will improve business
tax compliance and exchequer revenues
In order to assist businesses of all sizes with their
compliance obligations, HMRC’s published VAT
guidance should be updated and clarified to reflect
real-life business examples, providing more detail
and more closely aligned to commercial practice.
Guidance should also set out the policy objective
and intention of the legislation to assist with
interpretation. HMRC can improve tax compliance
through guidance that is more binding, better signposted, and less fragmented to give businesses
greater clarity of their tax obligations. Where there
are disputes, HMRC should look to take a practical
approach where investigations are proportional to
the size of the dispute in question. This would both
maximise returns to HMRC and reduce business
administrative and legal costs.
Given that businesses – especially SMEs – need
time to invest in new systems to comply with
updates to legislation, the government should
ensure that tax legislation in the VAT space is
implemented at a measured pace. More realistic
timescales would also allow government to realise
potential issues before they escalate.
Harmonisation of VAT rules at European level
can help to supercharge the single market
The European single market is the world’s largest
area without tariffs and customs barriers and with
some common product market regulations. Access
to this market therefore provides opportunities for
UK firms to scale up and take the first step towards
exporting at minimal cost.
Netherlands and the UK – would supercharge the
EU single market for start-ups, small and growing
businesses and entrepreneurs. But some EU
member states currently have zero-VAT
thresholds, making an EU-wide common threshold
unaffordable at this level – particularly in
constrained fiscal times. A lower single threshold is
therefore more realistic in the short term and a
worthwhile pursuit.
“The benefits of the European single
market can be enhanced through a
common VAT threshold below which
sellers of all goods and services, including
digital sales, are exempt.”
As an alternative to fully harmonised rules across
the EU, consideration should be given to whether
suppliers could follow the VAT rules in their
country of establishment regarding issues such as
invoicing, record retention and auditing. These are
the rules that small businesses will be familiar with
and therefore most able to comply with. More
generally, simpler rules will make it easier for all
business to comply, improving the business
environment and allowing business leaders to
focus on investment, innovation and growth.
European Commission analysis finds that even a
purely administrative measure such as the
simplification of EU invoicing rules could save UK
business up to £2.2bn a year.5
A single ‘mini one-stop-shop’ (MOSS) – which
allows for a single VAT payment to cover all crossborder transactions by a firm within the EU – can
significantly improve the business environment for
UK exporters.
The benefits of the European single market can be
enhanced through harmonised VAT rules (not
including rates) under the new destination principle
and a common VAT threshold below which sellers
of all goods and services, including digital sales,
are exempt. An EU-wide VAT threshold – aligned
with the maximum €100,000 permitted by the EU
and existing thresholds in Germany, the
UK business welcomes the introduction of a MOSS
as an important first step. Before extending the
MOSS concept further, there are a number of
enhancements and simplifications required to
resolve shortcomings in the current system and
make it as simple and easy to use as possible.
HMRC needs to provide clearer guidance on what
scale of business needs to register for MOSS.
For example, some traders have been informed
they do not make sufficient regular sales for VAT
CBI analysis of EU paper “REFIT Platform” Stakeholder
suggestions, Taxation and Customs union (2016). £2.2 billion is
the proportional UK saving from the €18 billion a year EU wide
saving that the European Commission estimates from
“Suppressing additional requirements on invoices and enabling
wider use of electronic invoicing”
5
3
Comprehensive Business Tax Roadmap: Improving the business environment at no cost to government
purposes, despite initial guidance suggesting a
strict zero threshold.6
The MOSS should also be supported by an easily
accessible and user-friendly database setting out
comprehensive information on the different VAT
rates and rules across EU member states. An EU
web portal which provides all businesses (both
those exporting from and importing into the UK)
with a single source of information to understand
their UK and non-UK VAT compliance obligations
will further improve the functioning of the single
market.
Recommendation 1: simplicity
The UK and EU can improve functioning
of the European single market through
implementing practical steps
that simplify VAT thresholds and rules.
Regular and unexpected changes in
taxes create uncertainty and
impose additional costs on business
It is therefore disappointing that Insurance
Premium Tax, which was also increased at the
same time as VAT in 2011, saw a further rate
increase to 9.5% announced at the summer
budget 2015. This pushes up costs for healthcare
insurance products and employee benefit
schemes. Given the surprise nature of this
increase, businesses dealing in insurance now
seek clarity through the roadmap that a period of
stability will follow so that uncertainty over tax
policy does not distort investment decisions for the
insurance sector further.
In pure economic terms, CBI analysis finds that
rates of excise duty already more than correct for
the negative health externalities associated with
these products.7 Large differentials in excise
duties8 can lead to tax revenues lost to the
exchequer due to the increased incentive to avoid
the duties through illegal smuggling. HMRC’s own
‘ready reckoners’ suggests that some duties are
already close to their tax revenue maximising
levels. Further increases are therefore unlikely to
result in a material contribution towards deficit
reduction9.
Recommendation 2: clarity
The Business Tax Roadmap should be used
as a vehicle to provide clarity and certainty across
the range of taxes facing business, including the
indirect taxes that business collect and sector
specific taxes.
Regular changes to tax rates can disrupt
business plans through creating a sudden change
in demand for goods and services and impose
additional costs as business systems need to be
updated. Combined with heightened uncertainty as
to the future direction of travel for the tax rate
following a change, these factors can have a
detrimental impact on business investment
decisions.
“HMRC wrestles with tax system for digital age”, FT Business
& Economy section, February 11, 2016
7
CBI analysis of the OBR Autumn Statement EFO – November
2015, and academic studies of the cost of smoking finds that
£10.1bn was raised in tobacco taxes in England exceeding the
£9.5bn in estimated health costs for 2014/15.
6
Given the highly targeted nature of
sector-specific taxes and duties, clarity on
the rationale, objectives and impact of any
policy change – as well as the long-term
path for the rate – is essential to
supporting business investment.
Business supports the use of welldesigned environmental taxation
Environmental taxes (targeting energy use) have
the potential to play an important role in unlocking
business investment in measures to increase
energy efficiency, supporting productivity and
8
For example France and the UK both apply 20% VAT to
alcohol, although a 750ml bottle of wine attracts £1.90 of excise
duty in the UK but only 2p in France. A pint of beer attracts
£0.50 in duty in the UK against £0.14 in France. A 100-pack of
cigarettes attracts £19.00 in duty compared with £3.60 in
France.
9
Direct effects of illustrative tax changes, KAI, HMRC (2015)
4
Comprehensive Business Tax Roadmap: Improving the business environment at no cost to government
tackling environmental impacts. But this can only
happen if these taxes are well designed,
proportionate, simple and correctly administered.
The rapid growth of environmental tax measures in
the UK has not been accompanied by a clear
overall strategy, and as a result, the environmental
tax framework does not provide a coherent
landscape in which businesses can invest with
confidence. It should also be borne in mind that the
primary objective of such taxation is to reduce
environmental impact (eg carbon emissions)
– and where the complexity or cumulative burden
of taxation in the UK simply transfers the activity
to a lower tax or more lightly regulated jurisdiction
this primary objective is not achieved.
There is also not enough consideration across
government departments of the impact of
environmental taxes on different sectors of the
economy, with some sectors at risk of having
their international competitiveness undermined by
ill-considered taxes. There are positive examples
where environmental taxes are well-designed,
such as the Landfill Tax. But taxes such as the
Carbon Reduction Commitment have proved
overly complex and failed to drive the right
behaviours. The treasury has recognised this
– with its review of the Business Energy Efficiency
tax and policy landscape.
Businesses are still faced with a significant
cumulative burden when it comes to energy
taxes. Businesses may be paying the Climate
Change Levy, the Carbon Reduction Commitment,
the Carbon Price Support, and for their carbon
emissions through the EU Emissions Trading
System – to name just the most prominent taxes
and levy mechanisms. While partial compensation
is available for some sectors, more can be done to
drive competitiveness and ensure a joined up
approach.
Each tax has its own administration burden and
there must be scope to reduce this by allowing a
combined reporting mechanism for related levies.
For example, under the current energy tax regime
there is currently the obligation for separate
reporting for the climate change levy, carbon price
support, CRC and EU ETS. This could be
simplified by having one return that covers all
areas.
Air Passenger Duty (APD) still acts as a
disincentive to the development of new business
routes with emerging markets and deters business
travel to drive service exports in particular.
Analysis from PwC10 suggests that a reduction
of APD would lead to a significant increase in
investment and exports. During the five-year
OBR forecast, this reform is likely to be better than
fiscally neutral because direct tax losses in APD
would be more than offset by gains in tax revenue
from other taxes such as income tax, National
Insurance, Corporation Tax and VAT as a result
of higher investment and exports. With Scottish
airports set to come significantly more into line
with international competitors from 2018,
the CBI is clear that the solution in the long run
is a competitive flat rate of APD across the UK.
This is the only way of preventing unfair internal
distortions. It is essential that we have a clear
roadmap to match the pledged reductions being
delivered in the devolved nations.
“The hypothecation of Vehicle Excise Duty
is welcomed for providing certainty on
infrastructure investment however more
innovative tax reform would improve
environmental outcomes”
Environmental taxes such as Vehicle Excise Duty
(VED) are one area where the nature of the
environmental damage and wider social impact
(‘negative externality’) from vehicles means that
the simplest system is unlikely to be the most
effective.
At budget 2015 the government announced that
a flat rate £140 VED rate on new cars registered
from 2017 will replace the current graduated VED
rates, with only zero-emission vehicles exempted
from the flat rate. Although this reform sharpens
the incentive to purchase zero-emission vehicles,
the reform fails to reflect that for the foreseeable
future switches from standard to Ultra Low
Emission Vehicles (ULEV) are likely to make a
significantly greater contribution to reducing
emissions than switches to 100% electric. Hybrid
10
The economic impact of Air Passenger Duty: Analytical
Update (2015)
5
Comprehensive Business Tax Roadmap: Improving the business environment at no cost to government
UK revenue from the UK’s two major transactions
taxes – Stamp Duty Reserve Tax (SDRT) and
Stamp Duty Land Tax (SDLT) – has been growing
since the crisis and is due to exceed 1% of GDP
by the end of the parliament (Exhibit 3).
Exhibit 3 Tax revenues from stamp duties
as a proportion of UK GDP
1.2%
1.0%
0.8%
0.6%
Recommendation 3: consistency
0.4%
Over the longer term, government needs
to ensure a more strategic approach to
environmental taxation, which takes into
account business views on how future
taxes should be designed and
implemented. Only by doing this can we
ensure that such taxes fulfil their potential
to unlock private sector investment and
tackle environmental challenges.
0.2%
11
Table 5, The future of motoring taxation, SMMT (2015)
Stamp duty on shares
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2008-09
0.0%
2010-11
An increasingly efficient, environmentally-friendly
fleet of vehicles will have the consequence of
causing petrol duty revenues to decline over time
in real terms. The government should view this
decline positively – reflecting the social and
environmental benefits of a more ‘green’ and
efficient fleet of vehicles – and resist temptation
to increase duty rates or bring back the fuel duty
escalator to protect tax revenue. Business pays
around half of all fuel duty, meaning an increase in
UK fuel duty reduces the competitiveness of UK
businesses and incentivises overseas competitors
to undercut UK businesses by refueling in their
home territory.
International research shows that regular levies on
asset values tend to be less economically
distortive than taxes on transactions12. This is
because annual levies on asset values tend to
apply to a very broad tax base of assets and can
therefore be set at a low enough rate to raise a
significant amount of tax revenue without having a
material effect on UK asset values or investment.
In contrast, a transaction tax is paid only by a small
minority of asset holders buying an asset in a
given year and therefore has to be levied at a
much higher rate to raise the same revenue.
2009-10
Underinvestment in our road network represents
a cost to both the economy and the environment
through the congestion it creates. Business
therefore welcomes the decision to hypothecate
VED to fund a stream of upgrades to our road
network. Over the longer term, improvements in
technology make more innovative solutions such
as UK-wide road pricing systems more viable and
worthy of consideration.
In the long run, the government
should reduce and ideally phase out
transactions taxes such as Stamp
Duty on shares and property
% of GDP
vehicles can often be part of the consumer journey
to gaining confidence in an electric-only vehicle. A
more innovative tax reform that extended the tax
base to include vehicles with CO2 emissions of
50g/km or above could both maintain the current
real value of the VED tax base until 202511 and
create an incentive to develop more efficient hybrid
vehicles.
Stamp duty land tax
Source: CBI analysis of OBR autumn statement economic and
fiscal outlook – November 2015
OECD (2010), Annex B: The OECD Tax and Growth Study”,
in Tax Policy Reform and Economic Growth.
12
6
Comprehensive Business Tax Roadmap: Improving the business environment at no cost to government
There is already evidence that high rates of
transaction tax on high value properties are
deterring transactions. The tax both deters a
transaction that yields mutual beneficial outcomes
for the buyer and seller alike and takes away the
opportunity for intermediaries and in the case of
property, the construction sector, to add economic
value if the property was to be bought and then
renovated to the preference of the new owner.
OECD analysis shown in Exhibit 2 (stamp duties
are ‘other property taxes’) suggests that in the long
run phasing out stamp duties and replacing them
with an efficient recurrent tax on immovable
property could increase UK GDP per person by
around 2.5-3% through supporting a more
economically efficient allocation of resources.
equity by 7.5% to 9% and by 10% to 13% for tech
companies13.
Measures to remove Stamp Duty on AIM stocks
and include AIM shares in ISAs have already
proven to be transformative in cutting the
complexity of public markets and unlocking
productivity growth. £5.3bn14 worth of ISA
investments moved into high growth companies
quoted on AIM following the abolition of Stamp
Duty in 2014.
Long-term recommendation:
tax reform
As its fiscal position reaches balance
the government should look to move
away from transaction taxes which deter
economic activity.
Stamp Duty Reserve Tax is a transaction tax that
builds costly complexity and inefficiencies into
public markets, holding back capital markets
driving productivity growth. Paid at 0.5% on
purchases of UK company shares, it accounts for
65% of the total transaction purchase cost. It is a
direct cost to investors, while increasing the cost
of capital for companies and reducing returns
for savers.
Research suggests that abolishing Stamp Duty on
UK equity markets would remove the complexity in
investing savings into the real economy. It is
estimated the abolition of Stamp Duty would
remove a tax burden of between £7,259-£18,565
from the average UK family’s savings, increase
investment by up to £7.5bn and reduce the cost of
For further information or a copy in large text
format, please contact:
© Copyright CBI 2016
The content may not be copied, distributed,
reported or dealt with in whole or in part
without prior consent of the CBI.
Dilip Shah – principal economist, CBI
T: 020 7395 8213
E: [email protected]
www.cbi.org.uk
13
@cbitweets
Building a sustainable recovery. Rebalancing the economy
from debt to equity: A revenue neutral case for the abolition of
UK Stamp Duty on Shares. KPMG & London Stock Exchange
(2010)
linkedin.com/company/cbi
14
Table 9.6, Individual Savings Accounts (ISA) Statistics,
HMRC. August 2015
7