VAT should be extended to nearly all spending, says IFS

THE EXTENSION of VAT to "nearly all spending" is one of the radical reforms proposed by the Institute of Fiscal Studies (IFS) to simplify the "overly complex and frequently unfair" tax system.

The IFS published the final part of its five-year Mirrlees Review today. It said that the system's complexity was costing the UK tens of billions of pounds a year. The IFS had previously called for the merger of income tax and National Insurance, which was reaffirmed today.

An extension of VAT would reduce complexity and costly distortions to consumption choices, the review says. Paul Johnson, director of the IFS, said that zero rating certain products was an "inefficient means of redistribution, as the rich will buy food too". Alongside this, the report suggests that an equivalent to VAT should be charged on financial services as the current model both favours the sector and creates needless complexity.

Among the other proposals included: the removal of taxation on risk-free savings, such as standard bank and building society accounts: the abolition of stamp duty; the taxation of petrol and diesel being replaced by congestion charging; and more consistent carbon emission taxation.

The institute was clear that this was an aspiration for where the tax system should be in ten or 20 years. Political difficulties mean these reforms cannot be viewed on their own and must be considered as a whole, with a gradual move towards this new system.

"The review shows how national income and employment could be significantly increased through effective tax reform. A government focused on growth cannot afford to ignore some of the fundamental reforms required to the tax system," Johnson said.

"That does not mean small gimmicks and one-off allowances; it means a long-term, considered and systematic approach to tax policy. This is an approach that has been sadly lacking for many years," he added.

A Treasury spokesperson said: "The government has embarked on a programme of ambitious reforms of the tax system to address the instability of recent years. These are based on clear principles to support growth, reward work, reduce complexity and increase fairness. We have already taken over 800,000 of the lowest earners out of tax, reduced corporation tax and established the independent Office of Tax Simplification."