04 June 2013

VAT — The Moral Dimension of Tax Collection

Graham Elliott
Consultant | UK

We have become increasingly familiar with the call upon taxpayers to pay an amount of tax which fulfils their moral obligations in addition to an arguably different legal obligation, and thus to ensure that the overall amount of tax payable is commensurate with what is assumed, by somebody or other, to be the financial scale of the business operation.  This concept is clearly not aimed at evasion, since evasion is not merely immoral but also plainly illegal.  It is aimed at avoidance which could be legal but may arguably not be moral, or merely the adopting of certain legal interpretations, which increasingly has been suggested as somehow potentially immoral if it leads to ‘too little tax' being paid through a given scale of business operation. So, if there is a moral obligation upon taxpayers (a controversial thought in itself) should there be a moral obligation on the tax collectors to only collect an appropriate amount of tax, or to allow all fair and reasonable allowances for tax, as should morally apply to each individual taxpayer? My mind was turned to this by the unfortunate case of Paul Hunt (TC02676), who came before the First tier Tax Tribunal seeking to claim a small sum of VAT under the DIY House Builders Scheme. He had a fundamental problem, which was that the business which had charged him the VAT, some years back, should not have charged it, since its supply was zero rated. HMRC had, rightly, at least as far as the law goes, refused to refund the VAT to the DIY house builder. There is no suggestion in the facts of the case that the supplier had failed to pay the wrongly charged VAT over to HMRC as output tax. It was also obvious that the supplier was now too late to rectify that error with HMRC, thus giving a windfall to HMRC. In such circumstances the moral answer would have been to say that, as the overcharged VAT had been paid to HMRC, they should follow suit and allow the overcharged VAT to be reclaimed under the DIY House Builders Scheme. To fail to do this would be to give HMRC an unintended bonus which Parliament had not wished it to have. It would, put in simple terms, give it more tax revenues than it ought to have got if all of the rules had been followed successfully by the various taxpayers. But such points are not relevant for a Tax Tribunal which must construe the law without any moral considerations. There is nothing novel in the legal point. It was a hopeless case. The VAT, being wrongly charged, was not VAT at all and could not be claimed. The Tribunal acknowledged that ‘it bears harshly on [Mr Hunt] … we can however do nothing to alleviate this burden'. And so HMRC has collected this ‘VAT', and is sitting on revenues it ought not to have received. There are a few things that can be said about the moral position arising from this. The most obvious likely reaction from the general public to such a story would be that HMRC picks on small people, but lets the big fish go. But, looking beyond that debate, it would be surprising if most of the general public would not acknowledge that what is sauce for the goose must also be sauce for the gander. If there is a moral dimension to paying tax (including potentially paying more tax than the law allows) then there should at least be a moral dimension on HMRC to only collect the amount of tax which the law intended to be collected, irrespective of the strict legal position. In this particular case, they could have decided to reimburse the money, quietly, to Mr Hunt on the basis that there had been an understandable error, having perhaps checked the position on the output tax. They decided not to, either because they could not be bothered to check the full position, or because they wished to ‘make a point'. Once it had escalated to the Tribunal there was no hope for Mr Hunt, and possibly no way out of the situation for HMRC itself. This got me thinking about the famous ‘tax gap'. This is the difference between the amount of tax revenues actually paid into the Treasury and the amount which economists estimate should be paid. The gap is always negative, which is to say that the amounts paid in aggregate are less than the amounts that theoretically ought to be paid. It is tempting to think that this is purely a measure of the amount of either evasion or avoidance (however one might define avoidance), and nothing more. But it rather depends how one calculates the tax gap as to whether that is all that there is to it. On a simple basis of calculation, where one does not seek to estimate the amount of avoidance and evasion as such, but rather to estimate the amount of tax revenue one would expect, and subtract what one has received from that, it seems obvious that the figure that emerges is a balance between tax overpaid and tax ostensibly underpaid. That is to say, that the tax gap is likely to understate the amount of tax that has not been properly paid by certain taxpayers, possibly by a considerable figure, since the amount of tax overpaid by other taxpayers is netted off the figure. Looking at how the VAT tax gap is calculated, according to HMRC's guidance on that point given in its document entitled ‘Methodological Annex for Measuring Tax Gaps 2012', we see that this is precisely how the VAT tax gap is measured. However, I note that at paragraph C.15 it states that ‘because the calculation of non-recoverable input tax is complex, the level of uncertainty around input tax adjustments is larger than for the other elements'. Given that Mr Hunt was attempting to do precisely that — claim input tax — one wonders quite what has gone into that particular part of the calculation. Whatever may be the details around that point, it is clear that people like Mr Hunt are helping HMRC keep their statistics favourable. It would be far more worthwhile if we could see, in addition to the net tax gap, how much of that final balancing figure relates to tax overpaid, and how much to tax ‘underpaid'. If that were possible, then I would venture to suggest, we might be surprised at just how high the former figure is. And of course, the higher that figure is, the greater is the figure for tax which has been either evaded or, according to certain persons' definitions, wrongly avoided.

Graham Elliott Consultant | London

Category: Blog