VAT Incentive Scheme, United Kingdom
The main objective of the VAT Incentive Scheme is to encourage businesses that are not registered for VAT to come forward and register by offering them a one-off incentive, within a certain time-limited period – namely, that they would not incur an overdue notification penalty. The initiative targeted these unregistered businesses throughout the UK and ended in September 2003.
In the United Kingdom (UK), traders are legally required to register with Her Majesty’s Revenue and Customs (HMRC) to pay value-added tax (VAT) if their turnover of taxable goods and services exceeds £64,000 (about €85,787 as at 5 February 2008) a year. However, some traders fail to register for VAT when they should do either because they:
- do not realise that they must do so;
- do not want to put in the administrative effort involved in accounting for and paying over VAT, or they have taken steps to deliberately fragment their businesses into separate units to show that turnover on each is below the VAT registration threshold;
- intend to evade the payment of VAT.
All of these traders who evade their payment of this indirect tax are therefore operating in the undeclared economy.
In the UK, the VAT registration threshold of £64,000 per annum is higher than in most other countries. For instance, it differs strongly from the situation in the Netherlands, where only self-employed people, who pay almost as much VAT as the charge, are exempt from VAT. In Denmark, all companies with an annual turnover of over DKK 50,000 (around €6,708) need to be registered. Because the threshold is higher in the UK, the revenue lost to the Exchequer due to undeclared work in the realm of VAT is perhaps lower than in other countries. Indeed, some one million businesses in the UK do not have to register for VAT because their turnover is below the threshold. As a result, the transferability of this measure might be limited.
Nevertheless, the VAT gap in the UK remains large and has been estimated at 15.9% in 2002–2003, 12.4% in 2003–2004 and 11.7% in 2004–2005 (HMRC, 2006).
In order to tackle this problem of unregistered businesses – that is, legitimate businesses trading above the VAT threshold that deliberately do not register for VAT – in April 2003, the HMRC introduced the VAT Incentive Scheme. The initiative targeted these unregistered businesses throughout the UK and ended in September 2003.
The main objective of the VAT Incentive Scheme is to encourage businesses that are not registered for VAT to come forward and register by offering them a one-off incentive, within a certain time-limited period – namely, that they would not incur an overdue notification penalty.
Announced in the 2003 budget by the Chancellor of the Exchequer, the VAT Incentive Scheme ran from 10 April to 30 September 2003 and provided a one-off, time-limited incentive for businesses that should have previously registered for VAT but had not done so. Under this voluntary disclosure scheme, these businesses would not incur penalties for late registration as long as they did all of the following:
- came forward voluntarily;
- assisted the HMRC in establishing the amount of VAT due;
- paid any arrears in full and furnished all VAT returns and payments on time for 12 months after registration.
Evaluation and outcome
Achievement of objectives
This VAT Incentive Scheme resulted in many businesses coming forward with overdue applications to register for VAT.
Obstacles and problems
Because this was a one-off scheme, concerns were expressed that businesses in the future that had not registered for VAT when they should have done so would continue to operate on an undeclared basis and have no similar incentive to come forward.
Offering an opportunity and incentive for businesses to come forward and put their affairs in order does entice many businesses to do so, enabling them to clear up previous misdemeanours.
Between April and September 2003, some 3,800 overdue applications for VAT registration were received; by the end of December 2003, almost 3,900 applications for late registration had been processed.
The costs of this scheme have not been published. However, Her Majesty’s Customs and Excise (HMCE) Shadow Economy Teams that were responsible for this VAT Incentive Scheme in 2003–2004 deployed an additional 65 staff in 13 teams across the UK. This provides some indication of the additional work generated by the scheme.
Between April and September 2003, VAT arrears amounting to £20 million (about €26.8 million) were identified by this scheme (HMCE, 2003). By December 2003, the applications for late registration had generated arrears in the region of £26 million (around €34.9 million).
This one-off voluntary disclosure scheme for VAT registration is transferable across all EU Member States. It could also be applied to a range of taxes, including direct taxes and other spheres where evasion occurs, such as offshore banking.
The VAT Incentive Scheme is one of the only contemporary instances where a voluntary disclosure scheme has been applied in the UK – a Member State usually strongly opposed to ‘amnesty-type’ measures when tackling undeclared work. During 2007, voluntary disclosure was nevertheless introduced to encourage the declaration of offshore banking. Until now, however, resistance has remained steadfast in the UK to the use of such voluntary disclosure schemes for tackling the evasion of direct taxes.
Main organisation responsible: Her Majesty’s Customs and Excise (HMCE), which has since merged with Inland Revenue to form Her Majesty’s Revenue and Customs (HMRC).
Her Majesty’s Customs and Excise, Annual report and accounts 2002–2003, London, HM Customs and Excise, 2003.
Her Majesty’s Customs and Excise, Tackling VAT fraud, London, The Stationary Office, 2004.
Her Majesty’s Revenue and Customs, HM Revenue and Customs Annual Report 2005–2006, London, HMRC, 2006.
Colin C. Williams