Host
Philippa Lamb
Guests
- Iain Wright, Chief Policy and Communications Officer, ICAEW
- Max Schofield, Barrister, Devereux Chambers
- Rebecca Porter, CEO, The VAT Team
- John Whiting CBE, former Tax Director, Office of Tax Simplification
- Yige Zu, Associate Professor in Commercial and Corporate Law, Durham University
- Dennis Lui, CEO, Tax Academy of Singapore
- Ed Saltmarsh, Technical Manager, VAT and Customs, ICAEW
Transcript
Philippa Lamb: Hello. Welcome to Accountancy Insights. I’m Philippa Lamb, and this is your monthly roundup of accountancy news. Today, I’m going to be discussing the government’s new industrial strategy with Ian Wright, ICAEW Chief Communications and Policy Officer. What is the plan? How will it work, and crucially, what’s in it for the profession. After that, when is a peach and mangosteen drink not a drink? Our reporter Mark Rowland discovered the answer to that one at ICAEW’s latest VAT conference, where he also interviewed a raft of experts about VAT reform. What do they think needs to change to make it fit for purpose? First, though, Ian Wright has joined me to dig into the new industrial strategy. Good see you again, Ian.
Iain Wright: Good to see you, Philippa, hello.
PL: Now the strategy, it was finally published on June 23 wasn’t it? There is a lot in it. Much of it was heavily trailed. The scope is very wide. So today we are going to concentrate on what it could mean for accountants specifically, I know you were very involved in this as Chair of the Professional and Business Services Council. Do you want to give us a sneak peek behind the curtain about how the strategy evolved into its final form?
IW: It was very intense, Philippa. You’re negotiating at different levels, so you’re negotiating almost internally. So the Professional and Business Services Council has about 10 sectors. It’s accountancy, but it’s also legal services, management, consultancy, architects, business services, and trying to corral all of those people into a single position is hard, but then you’re not just negotiating with government as a sort of block. You’re negotiating with different parts of the Department for Business and Trade, and then DBT is negotiating with different parts of Whitehall. So talking to the Department for Education on skills policy, talking with Home Office about visa requirements, talking to the Foreign Office on what do we do about export. So it’s 3D chess all the way to the wire, fairly intense. And then you had within that as well the Spending Review. So it’s DBT telling us, well, we’ve got this much money. Oh, we haven’t got that much money. Oh, we’re talking to Treasury about this much money. So all of these different things. And then we brought it into land, and I’m really pleased with it.
PL: Yeah. I mean, it sounds incredibly complicated, as you say. And for cynics, it’d be easy to imagine this is just another iteration of everything we’ve heard from previous governments about boosting economic growth. But I know you think this is much more significant than that. It’s a sea change in the way that Whitehall is going to deal with business.
IW: That’s the objective. This is not an industrial policy from the 1970s where it’s about, you know, backing obsolete industries that perhaps needed to change quite drastically, if not die. This is not about, let’s save British Leyland. This is about working to our strengths, where there will be a demand in the future global economy for our particular strengths, and how does business work with government to accelerate and accentuate those strengths? It’s very much sector based, so it’s been looked at in very much an analytical way. You know, what are we good at, and what do we need to be continuing to be good at in the next 10 years. And when I’ve spoken to the Secretary of State, Jonathan Reynolds, about this, Philippa, he really wants the Industrial Strategy to do two things, that is incredibly hard. First is we have to reverse the persistently low levels of investment from business in the economy because future prosperity, future productivity growth, future economic competitiveness relies upon investment now, so we need to have a sea change in how business invests. And the second thing which is equally difficult is, how do you change how the British state decides things and allocates resources? Now that is a real challenge. Do I suggest that the hard-pressed taxpayers of the UK are going to help fund PBS completely? Well, no, of course not. That’s not what this is about. But how do you tilt investment decisions based upon those growth sectors? The Industrial Strategy identifies eight high-growth sectors in which we’ve got a very strong comparative advantage. We’ve got advanced manufacturing, we’ve got creative industries, we’ve got clean tech and, for the first time, we’ve got professional and business services. We’ve never had PBS as a sector identified along these lines before and so what we’re trying to do is work closely with government to make sure investment rises, our strengths are heightened in an era of real change, technological disruption, economic competitiveness around the world, you know, growing protectionism, all of these factors that we’re seeing in the global economy, but we’re really good at professional and business services on a number of levels: accountancy, law, consultancy, architecture. How do we continue to stay at the top of our game?
PL: And it was a multi-pronged approach, wasn’t it, because the strategy was launched alongside the Infrastructure Strategy and the Trade Strategy. I mean, we’re not going to get into all that right now, but how do they work together?
IW: I think ministers are really quite proud of what’s happened over the last two weeks or so. In terms of, you know, a year in office, let’s be honest, the administration has been a bit beleaguered at times. But in terms of what’s come out, all this is pointing ministers hope to a decade of national renewal where, you know, the emphasis upon good economic and business policy can help really revive investment and, with that, productivity, growth and rising living standards.
PL: I heard they were calling it Super June.
IW: Yeah, you know, like sometimes on satellite television? Do you have satellite television in 2025, or am I showing my age there? But you know, Super Sunday, when you’ve got two or three football matches, they were talking about Super June in terms of a way in which, you know, these really long-term economic plans designed to turn around that investment and spending decisions for the good of growth in our country, you know, all come together.
PL: And of course, as you say, it is worth saying again, this is the first time professional business services have been specifically, you know, targeted as crucial to the economy in an industrial strategy. Should we get into exactly what’s, what’s on the table here? The sector, it focuses on four key pillars, doesn’t it?
IW: Yeah, it does. I mean, what I’d want to say, Philippa, is we’re coming from a real position of strength. You know, professional and business services is a real source of pride and prosperity in our country. It generates, every single year, £300 billion for the economy. One in seven jobs in the UK are based in professional and business services. You know, this is really, really important.
PL: Be fair to say that’s not widely understood. It’s a big number, isn’t it?
IW: I think we need to shout about it a bit more, you know. And maybe in terms of the sub sectors like accountancy, people recognise that. People recognise what law is, you know. But if you think about, you know, we advise the world, and the whole point of the sector plan is that we will be the world’s trusted adviser to global industry in the next decade. And you know, we are second only to the US in terms of our services exports, you know. So we’re a real powerhouse. But I mentioned earlier on, you, I think we’re at an inflection point. And I think this, when it really comes down to it, is the story of the sector plan. We’ve got this great strength maybe we don’t shout about as much as we should, you know? We’ve got all of these different sub sectors really driving forward prosperity. But that inflection point, to some extent, is about economic competition overseas, but it’s about technology. And the story of the sector plan is, how do we embrace technological innovation and adoption? How do we use AI, which you know, at its best, could take out a lot of the grunt work needed and really enhance value in the sector, so that we can provide value to clients. We can increase margins. We can grow that prosperity for companies, for firms and for the country. Or at its worst, it could make a lot of the service sector obsolete. You know, you could sweep away large parts of it. It could change beyond recognition business models, and that could be to the detriment of UK-based businesses. So we are at an inflection point. And so what the sector plan tries to do is, how do you embrace technological innovation and adoption?
PL: There’s going to be a pilot, isn’t there, in the North about technological adoption for high-growth SMEs?
IW: Well, one of the things I’ve always said, if you look at the characteristics of the sector, this is particularly true of accountancy, it’s micro businesses. People might think of the Big Four firms and think, Oh, well, that’s accountancy. No. The fact is, if you’re an accountant, if you’re a chartered accountant, listen to this Philippa, you’re probably working in a micro business, a firm, or you’re working in business. And so all the way through, the challenge I’ve had is, what relevance is this to you? You know, I don’t want a lovely, glossy launch, you know, with fireworks and a speech by the Secretary of State. If you’re a chartered accountant working in a small firm, how does this impact upon you? And I think when it comes down to it, it’s about there could be help and support available in terms of technological innovation. So as you said, there’s £150 million available. New money to make sure that innovation and adoption, when it comes to the new tech, is provided. We’re launching a technology adoption programme for high-growth potential SME firms within the sector. We’re enhancing Innovate UK’s next generation of professional and financial services programme. And this is an example, Philippa, of what I said earlier, which is, how do you tilt what the British state does in terms of allocating resource? UK R&I, you know, the UK research and innovation, massive, multi-billion pound programme of investment. It’s been, the resource allocation has been tilted towards those eight growth sectors, you know, so you don’t spread the jam thinly. That is at the heart of the Industrial Strategy. You know, you don’t have this sort of scatter gun approach where hopefully, you know, you might get some growth somewhere. It’s concentrate on your strengths, you know, build up that jam in order to make sure that you can do even more. That’s really important.
PL: And skills is a big part of that, isn’t it? Apprenticeships.
IW: Well, we didn’t get everything, you know, this was part of the horse trading. So Level Seven apprenticeships is still there, but this is part of being at the table and negotiating both with DBT, who is very, very receptive to business needs here, and the rest of government. You know, the story going forward will be, how do we get even more in terms of skills? So I suppose the four big areas I’d mentioned, as I said, the story, I think, is about how do you get the sector to embrace tech even more, to invest to make it more productive in the future, having AI as that huge tool and not as a weapon that will make you obsolete. But the other areas are exports. As I said, we’re the second biggest exporter of professional and business services anywhere in the world. How do we maintain that position? And how do we encourage smaller firms to export, so a bit of seed money to enable them to go into different markets? A growth campaign programme, you know, all of this, having PBS specialists in embassies in key markets around the world in order to highlight the great strengths of professional and business services, that hasn’t happened before, Foreign Office has never done that before. That’s a big, tangible change within the Industrial Strategy. It’s skills, as you said, because essentially, we are a sector about people, and how do you have the skills to compete in the 2020s and 2030s, and it’s about place. And the great thing about professional business services is it’s not just based in London and the South East. Certainly it’s important. You know, the capital is a great global market, but our real strengths are elsewhere across the UK as well. So the investment within the sector plan is having PBS hubs based upon five key areas other than London, you know, and you’re talking about the likes of the Edinburgh/Glasgow central belt, about Liverpool, Manchester, West Yorkshire and Birmingham, in order to really heighten the great strengths of PBS in those regions that they can help, then help fuel further growth in the sector.
PL: That’s a real shift, it seems to me, from previous strategies, isn’t it? Before we’ve had the North/South divide, we’ve had levelling up, we’ve had northern powerhouse. It’s been much more binary, hasn’t it, this idea of actively distributing growth regionally. Who has led that? Has it been the regional mayors at the forefront of that?
IW: This isn’t somebody in Whitehall deciding in London, you know, the man in Whitehall knows best and just points on a map to somewhere that they haven’t really heard of. This has been bottom up. This is talking to the mayoral strategic authorities, talking to the elected mayors in these powerhouses of great potential across the country and saying, what are the sectors that power your local economy? Where do you want to have the priorities? It’s the mayors who’ve asked for this and, as a result of that, it will be embedded into local and regional decision-making. There will be that partnership, not just with business and government, but with central and regional governments, you know, with the mayors to really power through. And the other thing that I would mention, which is a real characteristic of the professional and business services sector, Philippa, is we’re an enabler. We’re a great sector in our own right. We, you know, as I said, £300 billion of value generated every year, one in seven jobs. But the nature of what we do is we provide advice and support. We stop businesses from failing, from going down the wrong tracks, or we advise on growth strategies. And as a result of our strength, the whole economy grows. So if you’ve got that embedded in regional plans, if you’ve got that as a priority for local mayors, that enabling role will help the whole regional economy in the West Midlands, in Merseyside, in Manchester, in that central belt of Scotland, that will grow as a result as well. This is really exciting stuff.
PL: We’ve seen it work abroad, haven’t we? It’s much more the norm in other countries. I’m thinking about the US, other various European countries. We haven’t really done that here, have we?
IW: I can bore for England about industrial strategy, Philippa, and maybe the listeners have thought that I’ve done that already. But there’s something in the green paper that was produced at the very start of the process towards the first few months of the new Labour government, which said, and I think the analysis is really good, there are four key reasons why we’ve had poor productivity over the last 20 years or so. It’s worth just spelling those out because we’ve tried to address that in the sector plan with some of these measures. One is persistently low levels of investment. So we need to make sure we have a step change in investment. The second is, we’ve got too much of a, sort of, really, what’s the right word? There’s an imbalance towards London and the South East. We’ve got this distorted regional economic map where we’ve got too much in London and that crowds out, you know, the great work elsewhere. That’s the second point. The third point is, we don’t adopt new technology and new techniques on things like management. This is not just true of the sector. This is true of the economy as a whole, you know. So the great stuff, you know, technology adoption, management techniques that maybe can help drive productivity – we’re very reluctant to do that. There’s a risk aversion. And the fourth, and I think really interesting thing, is we don’t have market dynamism, and what that means is we don’t have that churn of businesses and often it’s very, very painful, but you’ve got a life cycle of businesses as part of this creative destruction of capitalism, which is businesses are born, they hopefully grow, but ultimately they will at some point die. And that means that capital is reallocated to more productive parts of the economy and we need to encourage that market churn a bit more. Now, that’s really difficult. It’s incredibly difficult to do politically. I can’t imagine any MP standing up in the House of Commons and say, ‘Can I just say there’s a there’s a big firm that’s closed in my constituency and I welcome that because it means the allocation of capital is going to go to more productive parts of the economy.’ Of course, it’s not going to happen, but we need to get better at thinking we’ve learned from our failures, rather than just thinking: do you know we’ll try this once and if it doesn’t work, well, I had a go, didn’t I, you know. You’ve got to get more into that entrepreneurial mindset of maybe the US, which is, you don’t have business failure, you just learn your lessons from failure.
PL: And China too.
IW: Well, to some extent. I mean, China has a sort of state capitalist model that maybe is different,
PL: Indeed.
IW: But that idea of I’ve failed, this business that I’ve set up, has failed, but the learning that I got from that means that my next attempt will have much more of a chance of succeeding. Getting into that mindset. I suppose what I’m trying to say is, Philippa, you need less policy churn. You need a stable policy environment on things like tax rates, on what the government will do to give business the confidence to invest in the future. And you need more market churn so that you’ve got that dynamic, entrepreneurial, almost that animal spirit. And you don’t want people to lose their jobs, of course not, but you want people to have the skills to be able to adapt and for the state, through a skills policy, to be able to enable training, retraining, reallocating of skills into the economy, so that people stay relevant all the way through their careers.
PL: I mean, as you say that, that is a big, it’s a big cultural shift for business, isn’t it? You know, a completely different way, really, of looking at progression and growth in this country, and only business can make that happen. I mean, so it is, it is about confidence, isn’t it? So what are we going to see from government in terms of this strategy and next steps to start to build that confidence?
IW: I think there are a number of things. One is this was published a matter of days ago, but this is the start of the process. We’ve had a great launch. I think government is pleased with it. I think that it has been received well by the sector, but the hard work starts now. You know, we’ve got 10 years in order to make sure, you know, these big challenges of low levels of investment, of how do we remain competitive in this great sector of ours? You know, how do we do that? So you’re making sure that the sector is involved, working in collaboration with government to set that stable policy framework to make sure that some of these measures are implemented and implemented successfully, things like the PBS hubs around the country, to make sure those regional economies are thriving and have good business advisers. You know, these are the challenge, as I said, you know, I think we can say it’s been a good sector plan, well received. Let’s start work on delivery now.
PL: So there’s a real opportunity here for, for members to get involved.
IW: I’d really stress that, Philippa, and as I said, all the way through what I’ve had and what I’ve said all the way along to officials in Whitehall is it’s got to be relevant. I said it to the Secretary of State as we signed off the sector plan in our meeting just a couple of weeks ago, which is, it’s got to be relevant. He’s an MP in the Greater Manchester area. I said, how can this be relevant to a firm of accountants in Greater Manchester, rather than just having this glossy document on a shelf that has no relevance to them whatsoever? How do they make sure that things like skills, on tech adoption, on maybe thinking about export markets for their services, how is that brought into life? So making sure that the reach from the Professional and Business Services Council, you know, is extended all the way through so listeners, listening today, you know, can feel that they can contact me as Co-Chair of the PBSC, so that their concerns, you know, their think, thinking about, doesn’t feel very relevant to me. Or how do I go about doing this? How do I get part of this make smarter pilot programme? You know, in order to get tech adoption, I want this to feel very, very real and very, very relevant to chartered accountants and their firms all up and down the country.
PL: Okay, so shall we put a link in the show notes then Ian?
IW: I’ll probably live to regret this, but I think it’s really important that chartered accountants, our members, feel this is something that’s really relevant to me, to my business and the environment and the market in which I work. So, yeah, I want firms, I want members to get in touch and say, you know, how do I get this tech adoption? How do I think about export? Because only by doing that, by getting firms and members involved, will we see success in the sector plan.
PL: Now, you’re going to be back with us, aren’t you, later this month, because we’re going to be analysing the first year of the Starmer administration, what worked, what definitely hasn’t, what needs to happen in year two. I wonder if you’d care to mark the prime minister’s first year out of 10 right now.
IW: Oh, I think I’ll keep my powder dry for that, Philippa, and maybe talk with others about it.
PL: Yeah. Well, events do move fast at the moment, so that’s probably a wise decision. Thanks very much.
IW: Thanks Philippa,
PL: On to VAT now and that thorny question about when a fruit drink is not a fruit drink. Here’s Mark Rowland’s VAT conference report.
Mark Rowland: Does a peach and mangosteen drink count as food when it comes to VAT? It depends. A recent court ruling against Bottled Science for its product, Skinade, found that despite the fact that it’s a fruit-flavoured drink, it does not classify as food for VAT purposes. The decision is currently under appeal. This is one of many examples of the ridiculous complexity within the current UK VAT system. ICAEW’s VAT conference convened a number of experts in VAT to discuss reform. I am at the conference to find out exactly what needs to change to make the system work for the modern age. Max Schofield, a barrister with Devereux Chambers, delivered the opening keynote on VAT on food.
Max Schofield: Do we need judges to put themselves on to the Clapham Omnibus to decide what is or is not food? Would it all be easier to align with regulations for food rating or for food standards.
MR: He represented Bottled Science during its tribunal case.
MS: What’s so interesting about these cases aren’t they’re the first hurdle in that schedule eight, group one, that starting point, which is, what is food? That should be the simple question. People often complain about the sort of complexities with under that food umbrella, but we’re here dealing with a fundamental point, what even is a food? And it’s sort of a philosophical question that’s entered into VAT litigation. And the interesting thing about the Bottled Science case is it starts to look at, well, what about the purpose and the use of the product. Is a collagen drink that’s good for your skin, therefore not a food because it has a specific purpose, and that’s unclear to me whether that’s a correct test in law. If I only eat lettuce for, you know, weeks on end to lose weight, does that affect its quality as being a food in the same way that I have coffee to perk me up in the mornings and a protein shake to try and help me look bigger after the gym, those things shouldn’t affect the very nature of the food itself. So it raises a question about use and purpose, which I’m not sure is inherent within the definition of the word food. And that raises further questions as to well, how should we define food? And there’s litigation going on at the moment which says maybe we don’t need the man on the Clapham Omnibus anymore. Maybe we need a more simple system, which is food regulation and food labelling and we’ll try and basically piggyback off those regimes.
MR: You mentioned the complexity around VAT and biscuits in your speech. Can you give a couple of examples of that? And how did the system end up so complicated?
MS: Yes, the best example is fantastic. It’s a hangover from the purchase tax originally, and the VAT provision is that zero rating applies to biscuits, except those that are covered partially or wholly in chocolate. So we end up in the position whereby a biscuit is plain is zero rated. If you put a bit of caramel over it, that’s fine, that’s still zero rated. But if you put a bit of chocolate over it, it becomes standard rated. But if you put another layer of biscuit over the top, think about a Bourbon, then suddenly that goes back to being zero rated again, because it’s not no longer partially or wholly covered. So then we add a little bit of chocolate on top of the Bourbon. It becomes covered again. But what about if there are holes in the top layer of that Bourbon? You can see the chocolate coating in the middle. Well, that becomes partially covered again. So the question is, really, what is partially covered? And one of the problems I’ve been looking at is, well, let’s look at chocolate chip cookies. Now it’s accepted that chocolate chips baked within the cookie aren’t covering the biscuit, but what about if you have enough that peek through on top. At what point do the chocolate chips on top of the cookie become a partial covering? Now for HMRC’s position, they say for gingerbread men that two eyes, two chocolate eyes, are zero rated the second you add a nose, mouth, buttons on a shirt, gloves, shoes it becomes standard rated again. Now I think that just two eyes is very low level of partial covering, but it raises further questions on what should be a very simple provision.
MR: So how did that system get as complicated as it is?
MS: Well, it’s difficult. We have effectively adopted a lot of the legislation under the previous purchase tax. Now, you have to go and trawl through the old copies of Hansard parliamentary debates to look at what was, what were the issues in the 1940s. A lot of these things have hang ups with World War Two. I’m not sure about all of these, but anecdotally, you hear about things like cakes being zero rated because there was this tradition the WI in World War Two would come together with their ration books, put their single eggs together and sugar, and bake a cake for the village. And that was something that was an essential for the villages, rather than maybe a very expensive chocolate biscuit from France, there would be a luxury. We also hear there’s examples of products like cocoa, which is chocolate. You know, Nesquik is the example that went to the tribunal – that’s zero rated, but the strawberry and banana versions are standard rated. And again, the idea is that was supposed to be something to do with the ration books and what were given to soldiers fighting in the trenches. So it’s difficult. We’re not sure exactly where all of it comes from, but it stems from this purchase tax provision. And obviously what was important in the 1940s, and then the amendments to the purchase tax act in the 60s, what were important politically then are not important as politically important now. But also products change, products and new formulations of foods, drinks, all these new supplements we’re seeing, we wouldn’t have even thought they could exist in the forties. So the legislation just hasn’t caught up.
MR: Yeah, I mean, you talked about that in your speech, as well the law around food VAT because of coming into conflict with the way that consumers think about food and nutritional science. Do you think that might force some reform through?
MS: In my view, the fundamental problem is that there is no legislative purpose that backs up these provisions. And if there was some purpose in the 1940s we’re not really sure what it was now and whether it’s still applicable. There’s some discussions about luxuries and essential items back then that clearly doesn’t apply and doesn’t feature in the VAT act. So the question is, what can we do to have a specific purpose? And that purpose might be health, it might be the environment. It might mean luxuries. It might mean economic policy where we tax goods that are inelastic, but we need to have a defined purpose that can withstand the test of time, to help guide our interpretation of the VAT act.
MR: Obviously, VAT in general, is quite politically contentious. People don’t like to touch it too much. Look at the pasty tax. So what do you think could sort of encourage governments to look at this in a serious way?
MS: I think it’s going to be incredibly difficult. Either we reduce, we get rid zero rating entirely, which would be very difficult politically, as we’ve seen in the pasty tax, tampon tax, and now the private school education VAT on removal of the exemption. I think that’s very difficult. The other option is to apply the zero rate to everything, in terms of food, and get rid of the distinctions, but that would mean a huge loss of revenue. So what would change the public view? Well, I think two possible things. Firstly would be better education as to the amount of money involved and the cost to businesses and to HMRC in policing these very fine and quite frankly absurd distinctions. Another issue will be to look at this more systemically. And this is something that I know Rita de la Feria has talked about in her discussions on progressive VAT and that’s the propagation of excise taxes, these very targeted taxes to deal with negative externalities. We call it in economic theory, these Pigouvian taxes. If we can have a way of showing people how ridiculous the VAT system is and still give politicians an option to target things that are the political hot potato of the time, that can adapt, that can change and that can face scrutiny for the modern age, I think that might just tip it.
MR: While there is a fairly solid case reform, it lacks political will. Rebecca Porter, CEO of the VAT team, spoke to me about the barriers to progress when it comes to VAT
Rebecca Porter: I think one of the biggest issues is that we’ve got so much history behind the tax. So we started off with purchase tax, and a lot of the reliefs were taken into the VAT act in 1973, a lot of those sort of reliefs that people were wedded to are even sort of wartime tax relief. So, so we’ve got a really, really long history, and I think part of the issue is people have forgotten why things are relieved, and so they’re very wedded to the reliefs, but without knowing necessarily what they’re achieving. So I think one of the things that we’ve, one of the issues that we’ve got to overcome, is to have that educational piece for taxpayers as well, to understand why things are relieved and what it does and whether it even achieves its purpose. Someone said it earlier on today, in one of the, in one of the speeches, that actually there’s no sort of regular review in terms of sort of tax policy and the exemptions, are they really achieving what they should achieve? Because, if we’re looking at zero rating, for example, lightning, the tax burden for certain sort of, perhaps poorer families or, you know, and hence the zero rating for food, is it actually achieving that or not? Because, you know, there’s an argument to say, well, retail pricing doesn’t work on whether or not something is is VATable. And so if that’s the case, then perhaps the relief isn’t achieving what it’s, what it’s meant to so I think the perhaps the starting point is we have to decide what the policy should be, what, what is that actually trying to achieve? And maybe simplify that because at the moment, it does a lot of things. It’s trying to, it’s, it’s a consumption tax, but it’s also got exemptions to relieve that tax in places which to do with social policy, perhaps, and other policies that haven’t been about for a long, long time. So I think that’s, that’s a major issue.
MR: So what does the VAT system need in order to work? John Whiting OBE, former Tax Director of the Office for Tax Simplification, believes that delivering certainty is the key.
John Whiting: VAT reform was something that came up very frequently at the OTS in all of our reports, not just the VAT ones, but small business, international competitiveness – it kept coming through. And probably the biggest thing was a simple word – certainty – that if you can give business certainty about the treatment of something, that would make life so much easier. It would simplify it because they’d know what they were doing. And, of course, there’s various ways you can give certainty, that would take quite a bit of discussion. But if we can just take that as a, as the word, the C word, that would help.
MR: What does that look like in a practical sense, in a sort of a kind of prospective modern VAT system?
JW: A modern VAT system would be geared to being kept up to date. And that’s, we need a mechanism where, if there’s a technology change, if there’s a new food product that comes up, it’s very easy. It’s built into the system. How you get a clear ruling as to what the VAT status is. But more than that, there’s also behind it, the system commits itself to keeping up to date. The system’s not just waiting for you or I to ask for a ruling, it’s looking at it what is happening, and will keep itself up to date. So yes, there would be rulings, perhaps from HMRC, but it’s a systemic thing that tries to make sure the system is keeping up.
MR: For Durham University’s Yige Zu, there are two obvious priorities for VAT post Brexit.
Yige Zu: After Brexit, we are kind of caught in a policy vacuum because we have left the EU and EU integration is no longer an objective of UK VAT law, but we don’t have our own domestic policy behind these exemptions, so it would be really challenging for judges to identify a clear purpose behind the exemptions when they interpret the scope and definition of exemptions. And in terms of sharing economy, currently in the UK, we rely on the common law rules of agent and principal to determine who is the supplier. In the case of, for example, the ride-sharing services and, over the past few years, sharing economy operators fought a series of complex legal battles, primarily over employment status and licensing regulations. Well, these cases are not directly relevant to VAT, but they have knock-on consequences on the VAT liability. So this complex legal situation brings us to a critical question, why do we rely on private law outcomes to determine VAT liability when the objectives of VAT are fundamentally different?
MR: We could also perhaps learn from other nations. Dennis Lui, CEO of Singapore’s Tax Academy, explains how Singapore designed its goods and services tax by learning from taxes such as UK VAT.
Dennis Lui: Well, we learned that the VAT was a good tax to adopt because the tax had the value chain, and it is a tax on our final consumer, and we wanted to reform our tax system to make it fairer, to reduce the reliance on income taxes. So we adopted a lot of our legislation, especially from the UK, also from New Zealand, and we implemented the GST successfully in 1994 at a low rate of 3%.
MR: For ICAEW’s Ed Saltmarsh, the biggest issue is education.
Ed Saltmarsh: The problem with tax reform in general is that too many people don’t really understand it, and that includes people in government. So we need to educate ministers, other MPs, but also the general public. So much tax debate is so uninformed, and it just means that pressure groups can actually move the conversation in the way that they want to. So I think we start with education, and then we need to consider long-term thinking. Tax reform isn’t easy. It’s not going to happen overnight. Any tax reform that does happen overnight, it’s probably not being well thought out, probably not targeting the right things, probably going to have unintended consequences. So actually, we need to be looking at where do we want to get to in five,10 years, and how do we get there, rather than what can we do now.
PL: Many thanks to Mark. That’s it for today. And as I mentioned earlier, Iain Wright will be back with us later in July to mark one year since the General Election, fellow members of our regular politics and economics Dream Team, Frances Haque, Santander’s UK Chief Economist, and David Williamson, Chief Political Commentator for the Daily Express and the Sunday Express. They’ll be with us, too, to chart the highs, the lows and the future as they see it, of Keir Starmer’s Labour government. It’s going to be good. Thanks for listening.
