Tax avoidance behind pounds 2bn of VAT shortfall

Tax avoidance and better tax planning accounted for most of the shortfall in VAT receipts last year, according to a new report from the National Audit Office. The government's financial watchdog said pounds 2bn out of the pounds 5bn by which the Treasury overpredicted VAT revenues in 1995/96 could be accounted for in this way.

The NAO reported the conclusions of a working party set up by the Treasury and Customs & Excise to solve the riddle after the scale of the missing money became clear. VAT revenues grew by only 3 per cent in the year to last March to pounds 43.1bn, some pounds 5bn less than the Treasury had predicted a year earlier, and nearly pounds 1bn less than its revised estimate in the November 1995 Budget. The report lists a range of contributory factors, but all lag behind avoidance and tax planning.

The fact that legal avoidance of tax by big business threw such a big spanner into the Budget calculations is an embarrassment for the Government, even though the Chancellor of the Exchequer announced new measures in last November's Budget to crack down on this kind of exploitation of tax loopholes.

The Budget estimated that the crackdown on avoidance, smuggling and fraud would deliver savings to Customs and the Inland Revenue of more than pounds 4bn a year.

Changes to the VAT regime explained pounds 750m-pounds 1bn of the pounds 5bn. Successful challenges to the interpretation of VAT law by Customs & Excise ranked next, accounting for more than pounds 400m of the total. Businesses had become more skilful at getting around having to pay, according to the report.

The NAO's report has also provided for the first time an estimate of the amount of tax revenue lost to Customs and Excise due to smuggling. It puts this at pounds 770m in the full year, a figure which is likely to become a benchmark estimate for the financial cost of smuggling.