'Ignorance' led to 2bn pounds VAT shortfall

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The Independent Online
ONLY ONE in five traders fully understands how VAT applies to their business, with the result that known under- declarations of the tax amount to about pounds 2bn a year, the House of Commons Public Accounts Committee said yesterday.

More than half of businesses visited by Customs and Excise officers had under-declared VAT, which in 1992-93 brought in pounds 63bn. Discovered under-declarations reached pounds 2bn, equivalent to more than 1p off income tax and 'far too high', the cross-party committee of MPs said.

Customs and Excise, which at the insistence of the committee has been investigating under-declarations, considers that a quarter of under-declarations resulted from genuine error or misunderstanding. Most of the rest came from lack of reasonable care rather than attempts at 'trying it on'.

The committee said the volume of VAT regulations were 'clearly a heavy burden on business'. Customs and Excise plans to consolidate the 156 existing main regulations, which have undergone 209 changes since 1985.

The tax costs Customs and Excise pounds 399m to administer but costs traders four times as much - pounds 1.6bn - to comply with. However, that sum is offset by cash- flow benefits to traders of payment in arrears estimated at pounds 600m.

The department's own estimate is that only 66 per cent of traders have an adequate understanding of the tax, with only one-fifth understanding it fully.

The Cost of Business of Complying with VAT Requirements; 41st Report Session 1993-94; Committee of Public Accounts; HMSO; pounds 7.20.