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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