Labour leadership hopeful Jeremy Corbyn and his supporters must reconcile blunt application of VAT and its effectiveness in raising revenue, writes CEO of VAT consultancy Accordance Nicholas Hallam
IF EVER there was an example of the type of corporate perfidy Jeremy Corbyn hopes to vanquish as leader of the Labour Party, the VAT ‘scam’ apparently being operated by airport retailers must be it.
Taking advantage of the public’s belief that boarding passes need to be shown in airport shops to assist with security measures, retailers have been noting which passengers are flying out of the EU (and who are not required to pay VAT on various goods), and claiming VAT relief on the products being sold to those travellers. Without passing on the saving to the customer.
As one unidentified holiday-maker succinctly put it to The Guardian: “These shops have been very naughty.”
Unsurprisingly, the retailers themselves have been less keen to consider the story as a straightforward moral issue. It has been suggested by them that to actually refund the relief on a case-by-case basis would be unworkable, and that the savings are in any case dispersed among the whole of their customer bases through generally lower prices. One retail pricing consultant has contested that the only likely effect of legislating against the practice would be an overall price hike.
I can’t see Jeremy Corbyn buying any of those arguments. VAT is a tax on consumers, merely collected by businesses. Companies may resent having to bear the costs of collection, but that doesn’t give them the moral right to treat VAT as margin when no-one is looking. Apart from anything else, it creates a competitive distortion that works against retailers who are adhering to the spirit of the rules. (Harrods, for instance, are apparently entirely blameless in this matter).
Having said that, Corbyn’s position on VAT is a bit of a mystery. The ‘Taxation’ and ‘Tax Justice’ sections of his recently published economic manifesto, The Economy in 2020, make no explicit reference to VAT, though they make the familiar left-wing argument for the superiority of income over consumption taxes.
Our tax system has shifted over the last generation from taxing income and wealth to taxing consumption; and from taxing corporations to taxing individuals.
These changes have helped to make our society more unequal and our tax system
more regressive.
So I make this pledge: Labour must make the tax system more progressive, ensuring that those with the most pay the most, not just in monetary terms, but proportionally too.
The core problem with VAT – taxing consumption – for the left is that it treats rich and poor alike; it is a tax on discrete bits of stuff or services; it does not take into account how much you had in the first place. And, consistent with that view, Corbyn has a long history of voting against increases to VAT.
So, why isn’t Corbyn leading the charge for a major (and no doubt hugely popular) reduction in VAT? Well, if and when he becomes Labour leader, perhaps he will. But there are at least a couple of big reasons for him to be wary.
Firstly, Corbyn’s plans for The Economy in 2020, appear to be based on the assumption that there is currently £120bn of uncollected tax in the UK annually – and that a Corbyn regime would be able to recover those amounts in full:
A detailed analysis last year produced by Richard Murphy suggests that the government is missing out on nearly £120bn in tax revenues, per year. That’s enough to double the NHS budget; enough to give every man, woman and child in this country £2,000. The £120bn figure is made up from:
• about £20bn in tax debt, uncollected by HMRC which continues to suffer budget and staffing cuts (only partially reversed in the last Budget)
• another £20bn in tax avoidance
• and a further £80bn in tax evasion.
This is, to put it mildly, a pretty controversial position. Economists, including Ed Milliband’s own tax specialist Jolyon Maugham, having been queuing up to rubbish Corbyn’s claim. Even Richard Murphy, the brains behind ‘Corbynomics’, has now said that Corbyn never meant to suggest the whole £120bn was recoverable; a more modest £20bn is the target.
If it’s that easy to lose £100bn, a prudent potential Prime Minister might want to play safe with revenue that is definitely in the bag. During the 2013/14 tax year, HMRC coincidentally collected a touch over £100bn in UK VAT – and is forecast to collect nearer £110bn this year.
Richard Murphy and Jeremy Corbyn may well despise VAT for being ‘regressive’, but they are afflicted by the paradox faced by left-leaning governments in Europe and around the world: because VAT is so efficient compared to income and corporation tax from a collection perspective, it is an excellent way of raising revenue for government-run progressive projects.
Tax and spend governments need tax to spend. It will be interesting to see how Corbyn manages the contradictions.
Nicholas Hallam is CEO of VAT consultancy Accordance