First HSBC, now the ENTIRE PUBLIC SECTOR dodges tax The public sector is committing millions of pounds of tax fraud by incorrectly claiming money back on IT services which are not VAT recoverable. Under VAT rules, government bodies can claim back 20 per cent of the price of IT services that are managed by a large provider, as well as bespoke custom-made software. Money spent on …
1. Since this is government departments getting their VAT wrong, isn't this essentially an internal transfer between HMRC and some other dept, there's no 'real' money involved (either plus or minus).
2. The article claims: "Money spent on off-the-shelf software, hardware and interim IT staff is not eligible for recovery." That's news to me - I've been recovering VAT on hardware and software, and charging it on my consultancy services (admittedly not as interim staff) for more than a decade - should I dob myself in? (Perhaps this means that it's only the case for government depts?)
That's crazy - why should VAT on ANYTHING not be recoverable?
I thought the system was meant to be simple. VAT is paid by the final link in the chain (usually the end customer). A business charges VAT to its customers, who (if they are VAT registered) claim it back, and then charge VAT on THEIR services/goods to their customers.
So how can some things not be VAT-recoverable? Doesn't that mean that HMRC gets the VAT twice? First from the original supplier (who has charged VAT) and then from the buyer, who can't pass it on to their end-user customer. Cloud services are surely a business expense?
Crazy! No wonder there are so many accountants making a fortune out of tax loopholes. For heaven's sake - please can we have a nice simple tax system that can be written on a couple of sides of A4.
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VAT is normally only recoverable by an organization which is in business (there are exceptions, of course).
Government departments are not normally in business (there are exceptions, of course).
Therefore government departments cannot normally recover VAT on their purchases (there are exceptions, of course).
All VAT rules have exceptions (except those that don't). All exceptions have exemptions from them (even the ones that don't). It's all very recursive :-)
As a tax advisor, I say 20% on everything and damn the torpedoes. Then I wouldn't have to do any VAT work and could do something more exciting, like capital allowance claims :-)
@ Pellinor
"As a tax advisor, I say 20% on everything and damn the torpedoes. Then I wouldn't have to do any VAT work and could do something more exciting, like capital allowance claims :-)"
Surely if it is 20% on everything there is a massive increase in tax take. Surely if it is applied to everything then the tax should drop sharply even to collect the same amount of revenue?
re: "I say 20% on everything and damn the torpedoes"
Some unsolicited advice from the sunset side of the pond: every so often someone reintroduces the idea of replacing the epic tomes of U.S. tax law with a "flat tax", usually ten percent of income. This certainly sounds good, if only to save folks having to spend so damn much time on tax forms (plus a seemingly unlimited number of schedules, some of which may be applicable but it's not always clear).
However, this idea hits low-income people hardest -- ten percent of poverty-level income could mean the difference between having shelter and homelessness, food or utilities, medical care or ... you get the idea, PLUS there are a handful of credits available to poor, poor with kids, elderly poor, et cetera, and if one starts carving out exceptions ("everyone pays ten percent except those in only these conditions") we all know what happens to the "only these conditions" list and then we're back where we started with forms to prove qualifications and so on. At the other end of the income scale, is ten percent of gargantubucks fair? Perhaps that would ensure more tax actually gets paid than under our current system of credits, exceptions, and whatever else the accountants are paid to gin up, but where exactly the line gets drawn would keep our Congress tied up ... dealing with ... lobbyists for a while. Maybe things are different over there?
Also, a flat tax eliminates the ability for various administrations to encourage/ discourage various behaviours by issuing tax credits (or rescinding them). I am not saying this is good or bad, only pointing it out.
@ skeptical i
"every so often someone reintroduces the idea of replacing the epic tomes of U.S. tax law with a "flat tax", usually ten percent of income"
I can see the appeal. Originally their should have been a cap on income tax of 10% but advocates of the tax claimed a cap unnecessary because it would never get that high. And of course the higher it goes the more damaging it is to the whole economy. The flat tax is easier to administer and should provide the growth and more importantly the ability to get employment to reduce the burden on the poor.
The poor is a term that must always exist because they are the lower end of the scale regardless of the actual values on the scale. But as long as the poor is able to get what they need and the system doesnt punish them for making money (like the benefits systems are known to) they at least have the chance to be prosperous even if they are still technically labelled poor. Poor is a measurement of having less than others, which is acceptable if they have what they need. Poor in various countries is not eating/drinking/living.
>That's crazy - why should VAT on ANYTHING not be recoverable?
Universities can't claim VAT.
Didn't matter when all they bought was ink. But if you have a multi million quid contract to build a detector for CERN or a bit of the ISS and you have to pay VAT on all the components but you can't claim it back or charge VAT on the resulting product - you end up a bit screwed.
"If your business deals primarily in zero rated or VAT exempt goods, then you can't claim back the VAT on goods you purchase"
If the discussion has moved on to general business, this is incorrect.
For several years I ran a minibus business - and for trips in vehicles over seats there was no VAT.
But I still claimed back VAT paid for fuel etc and was always getting refunds from HMRC every quarter :-))
point 1.
Whilst with respect to VAT this would appear to be an internal transfer, the net effect is that a department has increased it's spendable budget!
So for example my department negotiates a budget of £100M, by reclaiming VAT on all my purchases I can potentially increase my effective budget to circa £120M. This slight of hand only becomes visible when the government thinks it should have £20M left in the pot to spend on a pet project or buying votes and discovers the pot to be empty...
Where does the money end up?
If the Dept of Odds & Sods spends £1200 on a service, and claims £200 back from the Treasury - where exactly does that £200 go to?
Into the DOS's budget, obviously. But it can't be spent from there, at least not on-book, because then accountants would ask where it came from, and you can't answer that without revealing the fraud.
The obvious conclusion is that it's being "spent" off-book, i.e. under the counter, i.e. five-finger discounted into some accountant's home swimming pool or new Bentley. It's not "just an internal transfer", it's the trace evidence of something much more sinister.
The money is all accounted for; as the article makes clear it is just HMRC not agreeing with the decisions the Accountants in the individual departments made about VAT liabilities.
Fraud? not really, just an accounting error that will result in a VAT payment adjustment, unless HMRC have found evidence of a clear intention to make false VAT declarations...
Obviously, depending upon the state of a Department's account, we may see them either making cuts or asking the Treasury for additional budget - largely equal to the amount of VAT they are having to now pay.
And that makes it ok???
The point is that there's a fundamental attitude which seems to be that it's ok for them to do this and get away with it, whilst we would end up in court and possibly prison (or, at least, face huge fines) for doing something like this.
Now, forgive me for perhaps being a bit over simplistic, but...
People and companies pay tax to the estate to fund state activities carried out by government departments and their employees. To some degree, this makes sense. Why does a government department pay tax at all as it will only end up back in their coffers, less the cost of administering the tax calculation at both the department and HMRC? A lossy system if there ever was one.
Similarly, why are government staff subject to income tax on government salaries? Surely an equivalent value to net should be paid and so you eliminate the need to calculate tax and all the staffing needed to handle it.
Of course, keeping departments and staff subject to tax ensures more union members on one side and management on the other, so it's highly unlikely that such an inefficient system will change. Keep the gravy train rolling....
"Similarly, why are government staff subject to income tax on government salaries? Surely an equivalent value to net should be paid and so you eliminate the need to calculate tax and all the staffing needed to handle it."
Doesn't work for employee's tax, as not everyone has the same tax code - will vary based on other earnings, child benefit, owing tax, pension contributions, Gift Aid etc. Very difficult to work out what the net value would be.
The only part which does apply is the employer's NI - why does the public sector have to pay employer's NI? I remember seeing a headline that the increase in employer's NI was putting a strain on School and NHS budgets. Seems crackers to me - complaining about increased public expenditure due to an increase in public taxation...
You'll find that the cost to administer tax differently for government from other businesses actually makes the whole thing even more complex. Better to have one set of rules for everyone, then complete any internal transfers at a later date (Assuming they can get that bit right).
"Tax doesn't need to be taxing" :)
It's called eating your own dogfood. If a private company complains that the employment legislation is too onerous, or that another increase to employers' national insurance will mean layoffs, then the government can just stick their fingers in their ears and ignore it. But when the same message comes from your own side, from schools and hospitals and the civil service, then it's harder to ignore.
"However, this contradicts moves by central government to encourage the public sector to buy cheap, off-the-shelf cloud services by providing a tax disincentive for those that do."
Sounds about right. The left hand doesnt have a clue about the right. Sounds like a continuation of public fiefdoms battling each other for money and power.
It needs to be reformed - the system is too complex to be policed and deliver what the majority of the electorate expect from a tax system.
I realise that the clean up will be messy (take the various issues around biscuits/cakes/pasties etc as an example of how hard it will be from a manurfacturer/retailer perspective).
My thoughts are a flat corporation tax at current levels (give or take a few percent but remove exemptions), a flat VAT rate of 20% (with a lower rate on things considered as essentials), leave income tax/NI at current rates (although I would hope they could be lowered) and increase the tax free threshold in preference to providing benefits increases (i.e. avoid taking money off people just to give it back to them) and leave the sin taxes as is. For property, devolve to local bodies and allow them to set the bands/rates to allow management at a community level rather than national level.
General idea is to keep a similar system but push more of the revenue generation to VAT as it is harder to avoid/easier to track in a consumption-based economy. Making a low-rate/no-rate on essentials (i.e. childrens clothes, basic food ingredients, fresh produce, electricity, heating) allows the regressive nature to be balanced.
I don't believe this is the perfect answer, but tries to keep a similar structure (to avoid massive changes in how tax is collected/administered) while addressing some of the faults that prevent the current system being considered "fair".
For once I feel almost qualified to comment. I've worked in the NHS for some years now and until relatively recently the VAT rules were simple. If it was a managed service, you could claim the VAT back. Now, this bunch of incompetetents pretending to be a government have changed things so that what was previously a managed service isn't, unless it is because they say it is. Sometimes.
It strikes me (and several other colleagues) this government is so hell-bent on privatising large swathes of the public sector they're trying to make life as complicated and expensive as possible for us so that when it goes wrong they can point at us and say "Look! Public sector incompetence! Give it to the private sector and all will be rosy!" They conveniently forget about disasters like Circle Health and the various local care homes who can't care for our elderly properly, but never mind. And don't get me started on capital charges and the half-truths that have been told about NHS funding...
Apologies for posting AC but I think some in my organisation would take a dim view of my stance here.
Quote
It strikes me ... about NHS funding...
Unquote
Governments merely set the aims, aspirations and policies.
How those are made real is usually the work of civil servants.
If it is very complicated it is usually civil servants doing the obfuscation really (I don't think John Prescott wrote the social housing amendments while he was deputy PM but some develishly craft individuals did?)
Government = policy
Making policy manifest = many but if a budget is involved almost always it means the work of UK civil servantry
Seeing the headline, I wondered how on Earth the government not paying sales tax to the government could cost the government, or even the taxpayer, any money. But reading the article cleared this up - individual government departments, claiming tax refunds not allowed by the rules, were enabling themselves to spend more of your tax dollars than they were really given in their budgets.
I wonder how you could have made a non-confusing headline for this type of story. Civil servants use tax fraud to inflate their budgets?
I can imagine an Army of pointy headed civil servants rushing around trying to figure out who owes who what in this wooden dollar merry-go round.
Such a waste of tax payers money, or is this another way to massage the unemployment figures? Keep a load of people off the street and out of the job centres by sending them on the most enormous treasure hunt for VAT revenues that don't exist between Govt departments......
We focus on the army of tax accountants and lawyers that feed off this mess whilst no one in Govt or the Civil Service has the balls to take an axe to the 12000 pages of tax regulations.
too sorry for words
I recall rather a long time ago there was a scheme to ensure mothers got a child benefit that previously went to the father. The argument was that some fathers didn't use the cash for the benefit of the child. The outcome was that effectively £20 was taken from the father, thrashed around in the system and emerged as £10 benefit passed to the mother, the system consumed half the money.
A former colleague became involved as a government consultant looking at streamlining a financial system. He explained that if any change was proposed to simplify the system the civil servants would always come up with some obscure situation which meant there'd be a few people who would be financially disadvantaged by the change. They'd push for an exception. If the wording of that were not carefully drafted it would become a loophole for "legal" tax avoidance. Result loads of resource going into drafting the exceptions and then an ongoing workflow to administer the affairs of those applying for the exception. And the press loves to run stories about those who will lose as a result of any change - and a suspicion that there are those in public office only too happy to help the press identify such stories. The end result was that any proposed simplification leads to additional complexity.
Recently there was an instance quoted in the press of some new legislation relating to wives. A civil servant declared it unworkable because it assumes a single wife "it disadvantages wives of immigrants who married multiple wives in a legislature where that was valid, before coming here".
In UK approaching half the employed population is in the public sector. Broadly speaking that means that everyone in the private sector has to generate sufficient revenue to pay a bureaucrat to invent more and more useless red-tape.
Wherever you look at their "enforcement" activities they seem to be directed at soft targets. It's easier to attack a "benefits scrounger" than tackle Starbucks, Amazon, Vodaphone etc who'll be armed to the teeth with lawyers and "friends in high places". (Doesn't mean we shouldn't tackle benefits scroungers but the way to do that is by creating a more robust benefits system, less open to fraud, prevent fraud at source). It's easier for a social worker to spend hundreds of man-hours trying to find fault with prospective adoptive parents than to spend a tenth of the effort to ensure on access to the at-risk child of a very aggressive and abusive mother - result: the continuing stream of cases like "child B", "Child C" and the rotherham and so many others.
"In UK approaching half the employed population is in the public sector. Broadly speaking that means that everyone in the private sector has to generate sufficient revenue to pay a bureaucrat to invent more and more useless red-tape."
But look at what happens when a gov threatens to reduce the public sector. The same tripe of front lines being cut and entitled (entitlement) pay rises demanded and strikes being called just on the mere mention of taming the beast. The problem being the fighting fiefdoms wrestling for control and power at the private persons expense.
In the end either the beast will be tamed or the country will go broke leaving the people with a huge bill and nobody accountable for it. I despair that some people actively support continuing down the road we are going assuming a magic money tree or happy to accept the selling of our future generations.
"In the end either the beast will be tamed or the country will go broke leaving the people with a huge bill and nobody accountable for it. I despair that some people actively support continuing down the road we are going assuming a magic money tree or happy to accept the selling of our future generations."
Case in point - Greece. Low taxation, high public spending on a large public sector. Ends up living on Euro subsidies and loans until the bubble bursts. And then they still can't take living within their means and try and demand yet more handouts.
Of course, people working in the public sector see it as a vocation. They are not in it for "the money" but for service to the public. The is true even for the most senior civil servant of manadrin rank.
But just try to entice them to take a 20% wage cut, reduction in job related perks and ... well you know the point I am trying to make?
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