Tax Gaps 2019-20

Lord Leigh of Hurley Excerpts

Thursday 7th April 2022 Grand Committee

[Lord Leigh of Hurley (Con)]

My Lords, I congratulate the noble Lord, Lord Sikka, on securing this important debate.

The HMRC report in question here today states that:

“We use a range of internal and external data and different analytical techniques to produce annual estimates, which we revise as more accurate data becomes available. These are our best estimates based on the information available, but there are many sources of uncertainty and potential error. For this reason, it is best to focus on the trend in the results rather than the absolute numbers when interpreting findings.”


As the noble Lord, Lord Sikka, pointed out, it certainly is not a complete and full way of measuring things. Generally, the VAT tax gap, which is where I am going to focus my remarks, is measured using the top-down approach: that is to say finding the tax base—in other words, the theoretical amount of tax that should be paid—and comparing that to the amount actually paid. The alternative bottom-up approach uses HMRC operational knowledge to identify areas of loss and then the two are combined to find some sort of common ground or estimate. Even HMRC does not seem to have confidence in its own figures. They are frequently revised and, as I say, it urges us to look at the trends rather than the absolute amounts.

My interest in the tax gap stems from learning about the work undertaken by vatfraud.org and RAVAS—Retailers Against VAT Abuse Schemes—led by the very able and admirable Richard Allen. This organisation pointed out many years ago the VAT loophole that existed as retailers, believe it or not, transported goods to the Channel Islands and then back to the UK, simply to avoid VAT under the low-value consignment relief scheme. HMRC was in complete denial about the problem and did not take adequate steps to alert Ministers to the issue. What was the shortfall to HMRC? HMRC estimated £85 million, but realistically it would have been much nearer to £300 million, and of course many businesses in the UK went bust at the time.

Subsequently, RAVAS looked at the much bigger issue of VAT abuse by online offshore retailers. In 2015, Mr Allen was approached by businesses which found themselves having to compete with Chinese traders who were not charging VAT but were sending goods from UK warehouses. The sums of money involved were eye-watering: it was estimated that at least £1 billion in VAT was being evaded every year on sites such as Amazon and eBay.

A dossier was given to the then Chancellor, George Osborne, with the assistance of my noble friend Lord Lucas and myself. Over the next five years, HMRC again gave every possible reason not to take effective action, claiming that the sums of money we said were being lost had been exaggerated. Eventually, an exposé by “Panorama”, numerous debates in Parliament and the involvement of the National Audit Office resulted in measures that now bring in £1.4 billion per year of VAT that was otherwise being lost. This figure was confirmed by Jim Harra, no less, to the Public Accounts Committee in November 2021. In February this year, at question 39, he admitted that the new measures were

“bringing in much more of the previous lost VAT yield that we had anticipated”

and that

“we had a level of registrations far in excess of what we had forecast.”

I was a witness to and a participant in all this. So, my point is twofold: first, a top-down approach would not have revealed this loss of tax; and, secondly, we must learn to listen to whistleblowers like Mr Allen for these types of abuses. Can the Minister tell the House what processes are in place to look at all possible tax loopholes and investigate whistleblowers’ reports? I am sure there are many more opportunities to close the tax and VAT gap, but we must listen to the people on the ground who are good enough to let us know of the problems. By the way, it is to HMRC’s eternal shame that Mr Allen was never recognised or thanked for his role in closing the loopholes. In fact, he ended up having to pay HMRC for the cost of his freedom of information requests. I hope the Minister picks this up and reflects on what happened.

Interestingly, Mr Allen has identified another area where there is undoubtedly a huge tax gap. This is a new form of abuse involving sellers who operate outside the jurisdiction of the new rules. They are not registered for VAT and have no need to be as they are based mainly in China and, as such, impossible to pursue. They sell their products directly to UK customers. Their websites target UK customers and are filled with reviews—probably fake—from UK customers, and the goods are sent by post so there is no VAT collection. Yes, HMRC does undertake some checks on the border, but it is impossible to look at every item, and attempts to ascertain value by, for example, weighing clothes are somewhat primitive.

Let us be clear: at the moment, if a seller is in China or any other country and posts a package to the UK with no VAT added, as they have not registered for VAT as they should have done, HMRC is in reality powerless to collect the VAT due. The simple solution could be a VAT passport on all goods, via a QR code, which closes down a VAT gap that has yet to be quantified or recognised. So it is a digital solution: a QR code is essentially a VAT passport. A foreign seller will then have to prepay any VAT due and a bar code scan can easily inform HMRC of the exact details of the consignment.

As every seller has a unique QR code, it will be easy to identify them and of course the recipient. As tax becomes digital it is up to us to embrace opportunities such as these. It is just one idea to reduce the real VAT tax gap which TaxWatch advises me is €23 billion in the UK. Embarrassingly, that places us second out of European countries in terms of absolute VAT loss and seventh in the table of VAT loss as a percentage of total available revenues. Perhaps the Minister tell the House if HMG are looking at bringing in a VAT passport. If they are not, do they have plans for an alternative method of capturing this VAT owed? The status quo is clearly short-changing the UK taxpayer. We can do better.