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DOCUMENT IS THE PROPERTY OF HER BRITANNIC MAJESTY S GOVERNMENT
l
CP(70) 99
COPY NO
58
30 Ostober 1970
CABINET
VALUE-ADDED T A X
Memorandum by the Chancellor of the Exchequer
1.
Tax reforms.
A s our Election Manifesto made clear, a major
reform of the tax system is a central feature of the Governments
policy.
One of the main aims is to make a substantial reduction in the
burden of personal taxation and a start has been made with the reduction
in the standard rate of income tax which I announced on 27 October.
In
addition, it is desirable to reform the structure of indirect taxation and,
indeed, essential if we are to honour our pledge to abolish the Selective
Employment Tax (SET).
2.
Decision to introduce a Value-Added Tax ( V A T ) .
Manifesto we stated;-.
In our Election
"We will abolish the Selective Employment Tax, as part of a
wider reform of indirect taxation possibly involving the
replacement of purchase tax by a value-added tax. "
There were two elements to this: a clear commitment to abolish SET,
and a wider reform of indirect taxation in which the introduction of a V A T
was mentioned as a possibility.
After much consideration I have
concluded that the introduction of a V A T , with the abolition of SET and
purchase tax, is the most satisfactory way of carrying out the necessary
reform of indirect taxation.
Indeed, I have come to the conclusion that it
is the only way in which we can honour in full our pledge to abolish SET.
VAT has the advantage that it can be applied to both goods and services, in
contrast t o purchase tax which is essentially a tax on goods j V A T is by
nature a comprehensive tax and it does not distort the consumer's pattern
of expenditure; at the same time it can, if necessary, be adapted to
permit reliefs (though these will need to be limited to a small number of
vital areas e. g. food); and V A T is the system of turnover taxation which
Member States of the European Economic Community ( E E C ) are required
to adopt, so that, if our application to join the Common Market succeeds,
we shall in any case have to have a VAT.
A s it applies over a very wide
base V A T has the capacity to raise sufficient revenue to replace
purchase tax and SET and this is the reform which I propose we should
introduce.
1
5 C*RiEEIt
M
11
3.
Of equal importance is the fact that if extra revenue were
required beyond that needed to replace purchase tax and SET, for
example to facilitate a further reduction in direct taxation by making a
significant switch from direct to indirect taxes, the revenue raising
potential of V A T is very great and would enable this to be done.
The
extent of such a switch would, of course, depend on the demand situation
at the time and the extent to which it was decided to reduce the burden of
direct taxation.
This, of course, is not a matter for consideration now.
4.
Green Paper.
I am not enamoured of too many Green Papers,
but I am sure that, in this case, there should be one to facilitate discussion
and the work of preparation.
A copy of the proposed Green Paper is
attached. It explains the main features of V A T , points to some of the
major problems in particular areas and invites consultation on the
detailed operation of the tax.
5.
Revenue from V A T .
The revenue which a V A T would produce
depends on the exact coverage of the tax and on the rate or rates of tax
adopted. No firm figures of likely yield can be given until decisions are
taken on these questions and in particular on what classes of goods,
services or persons would be relieved of V A T .
The draft Green Paper
attached to this note indicates the main areas where special provision
might be made.
I will report orally on the options concerning rates and
yields, and the consequences for the cost of living.
6.
Administrative cost. A V A T scheme on the lines envisaged in
the Green Paper would require a net increase (after abolishing purchase
There is
tax and SET) of some 5,400 to 5,900 in civil service staff.
however a prospect of a major simplification of PAYE resulting in
savings of staff, after the mid-1970's, at least as great as this or
possibly greater.
On reasonable assumptions about rates and yields
the cost of collection might be about 1. 4 per cent of the revenue. This
is somewhat above the average percentage cost of collection of all
Central Government revenue, but no more than that of the Inland Revenue
service.
7.
Work involved in the introduction of VAT.
The introduction of
V A T will be a major operation.
It will apply to all goods and services
(except where reliefs are granted), to raw materials, semi-manufactures,
finished products, to consumer goods and capital goods, to commercial
services and to consumer services, and so on. (The operation of the
V A T is such, however, that the ultimate burden of the tax falls on
consumers' expenditure on goods and s e r v i c e s . ) I do not intend to launch
such a wide-ranging tax without proper consultation with those affected;
the lack of adequate consultation was one of our objections to the intro­
duction of major tax changes by the previous Government.
Consultations
with trade and industry will therefore be held so that the tax can be built
on firm foundations, taking into account the practical problems of
particular sectors of the economy.
In the light of these consultations the
manifold details of the coverage and operation of the tax will be settled
and the necessary legislation drafted.
A major Bill will be required early
in the 1971-72 Session.
When this becomes law it will be necessary before
the tax is introduced to mount a large-scale exercise involving the
registration of all traders affected and their education in the details of the
new law and its requirements,
A large computer installation will have
to be designed and accommodated.
8.
Need for early announcement of V A T decisions.
The whole
process of introducing a V A T is bound to take considerable time - most
Members of the EEC took several years.
It is important, however, that
we should complete the process in the shortest possible time - first to
permit the associated abolition of SET and reduction in direct taxes to be
made as soon as possible, and secondly because a V A T whatever its
ultimate benefits, is bound to give rise to some criticisms from those
affected by its requirements, and it would be desirable to get that phase
over earlier rather than later in the life of this Parliament.
9.
After discussion with the Customs and Excise I have persuaded
them to cut the timetable to the bare minimum.
The time required for
preparation, including the passage of legislation, is two y e a r s , and if my
colleagues agree in principle, it is therefore necessary to launch the
process of introducing the V A T as a matter of urgency.
This requires an
early announcement of the decision in principle to introduce it, so that the
discussions with trade and industry can begin.
My intention is to make
the announcement in the House before the end of the month.
A B
Treasury Chambers, SWl
30 October 1970
3
GREEN
PAPER
VALUE-ADDED TAX
A POSSIBLE SCHEME
CONTENTS
FOREWORD
Paragraph
CHAPTER 1
Introduction
CHAPTER 2
Basic p r i n c i p l e s
added t a x a t i o n
Basic
of
value­
principles
-
2.9
Imports' and Exports.
2.10
Reliefs
2.11
Exemption
Zero
CHAPTER 3
2.1
2.12
-
Rating
2.15
Lower Rates
2.16
2.1k
1
G-eneral scope o f a p o s s i b l e
scheme f o r t h i s country
General
Taxable
3.1
transactions
Goods
3.3
Deliveries
3.4
A p p r o p r i at i o n s
3.5
Services
Taxable
3.6
persons
Registration
-
3.2
- 3.7
3.8
3.9
- 3 . 1 0
Accounts
3.11
Tax p o i n t
3.12
Value
3.13
Accounting
periods
Invoices
Partially
3.14
3.15
exempt t r a d e r s
3 . 1 6 & Appendix
imports
3.17
- Exports
3.18
CHAPTER 3
cont'd.
Payment of
3.19
Repayments
3.20
Annual
3.21
Special
CHAPTER k
tax
statement
restrictions
3.22
I n t e r m e d i a t e goods and
services
3.23
Administration
3.2k
. Special
cases
General
h.1
Nationalised industries
h.2
Government Departments and
Local Authorities
Small t r a d e r s '
Pood;
h. 3
'
k.k
­
U.5
h.6 ­
h.7
farmers and
fishermen
Housing and accommodation
h.8
Finance
h.9
Health
h.10 '
Education
h.11
C h a r i t i e s and r e l i g i o u s
institutions
Second-hand goods,
h.12
antiques, e t c .
h. 13
Books, j o u r n a l s ,
newspapers, e t c .
h.1h
Some t r a n s i t i o n a l
problems
General
5.1
Termination of purchase t a x
5.2
Tax p a i d stocks
5.5
Existing
"
contracts
APPENDIX
P a r t i a l l y exempt
traders
5.4
GREEK PAPER:
VAT
FOREWORD
The Government i s
this Parliament,
committed t o u n d e r t a k e ,
a major reform o f
during the l i f e
of
the t a x a t i o n system t h a t
will
i n c l u d e the a b o l i t i o n o f the s e l e c t i v e employment tax and a
radical
simplification
o f a tax sj^stem which has "been a l l o w e d t o
become t o o complex and d i s c r i m i n a t o r y .
t o t h e achievement o f
replacement
An important
contribution
these o b j e c t i v e s would be secured by the
o f the p r e s e n t
system o f i n d i r e c t t a x a t i o n by a more
b r o a d l y - b a s e d struc ure which, by d i s c r i m i n a t i n g l e s s between
different
types o f
o f consumer
goods and s e r v i c e s , would reduce the
distortion
choice.
The replacement o f
the present purchase tax and the
selective,
employment tax by a b r o a d - b a s e d v a l u e - a d d e d tax was t h e r e f o r e a
c l e a r candidate f o r
programme.
i n c l u s i o n i n t h e Government's t a x
reform
Such a changeover would spread the burden o f
t a x a t i o n i n a more e q u i t a b l e
fashion.
The Government has now d e c i d e d t o do t h i s , and the
d e t a i l e d p r e p a r a t i o n s have been put i n hand.
be r e q u i r e d i n due c o u r s e .
indirect
It
necessary
Legislation
i s c l e a r l y necessary that
nature o f t h e tax should be w i d e l y understood and t h a t
d e t a i l s should be the subject o f p u b l i c d e b a t e ,
will
the
its
so t h a t t h e
final
d e c i s i o n s can be taken a g a i n s t the background o f an informed
public o p i n i o n .
T h i s Green Paper i s p u b l i s h e d t o p r o v i d e a b a s i s
f o r such g e n e r a l p u b l i c
debate.
The-Green Paper i s a l s o i n t e n d e d t o g i v e t r a d e and p r o f e s s i o n a l
a s s o c i a t i o n s and o t h e r i n t e r e s t e d p a r t i e s an o p p o r t u n i t y
to
c o n s i d e r and comment on t h o s e - a s p e c t s o f the v a l u e - a d d e d tax t h a t
w i l l particularly affect
them.
O M F 1 D E M T I A L )
VAT
.
'
.
CHAPTER. 1 - INTRODUCTION
1.1
The e x i s t i n g p a t t e r n of
i n d i r e c t t a x a t i o n in t h i s country
open to the o b j e c t i o n t h a t i t
narrow a range of
d i s t o r t i o n of
is
is
s e l e c t i v e and i s based on t o o
expenditure.
Selective
taxation g i v e s . r i s e
to
trade and of p e r s o n a l consumption p a t t e r n s , and can
lead to the i n e f f i c i e n t
a l l o c a t i o n of r e s o u r c e s .
To remedy
this
shortcoming in our system, we have to extend the c o v e r a g e of
e x i s t i n g t a x e s or to i n t r o d u c e
taxes do n o t r e a d i l y
some new form of
lend themselves to e x t e n s i o n .
and E x c i s e d u t i e s on t o b a c c o , hydrocarbon o i l
are s p e c i f i c
significant
selective
tax.
Existing
The Customs
and a l c o h o l i c
to t h e s e p r o d u c t s and cannot b e e x t e n d e d .
drink
A
p r o p o r t i o n of i n d i r e c t tax revenue i s r a i s e d by the
employment-tax, which the Government i s p l e d g e d
abolish.
The remaining i n d i r e c t
tax of importance i s
to
the
purchase
tax,
i i
1.2
Purchase tax i s a t p r e s e n t l e v i e d a t f o u r
the w h o l e s a l e stage i n the d i s t r i b u t i o n of
goods.
The. tax i s e f f i c i e n t
to i t .
It
falls
specified
and i n d u s t r y and t r a d e a r e
export,
though i t has some hidden
on e x p o r t p r i c e s because tax charged on f o r
i s not r e b a t e d .
wider range of
The p o s s i b i l i t y
goods has some a t t r a c t i o n s .
rates
accustomed
It
example b u s i n e s s
of
extending i t
But in p r a c t i c e
tax could not be a p p l i e d ' t o . s e r v i c e s .
1L :
,
'
.
(
C
O
N
F
I
D
E
N
T
I
A
L
)
is
effect
would riot be easy to extend purchase t a x t o goods g e n e r a l l y ,
of i t s nature, purchase
at
consumer
almost w h o l l y on consumer e x p e n d i t u r e .
not l e v i e d on goods f o r
stationery
different
t o a.
it
and
The
r e t e n t i o n of purchase tax-has l e d to the s e p a r a t e t a x a t i o n
services,
eg SET, and in p r a c t i c e
of
to the e x c l u s i o n from the
tax
base of a s i g n i f i c a n t p r o p o r t i o n of consumer e x p e n d i t u r e on g o o d s .
This has l e d to tax d i s t o r t i o n s and anomalies as between
c a t e g o r i e s of
1.3
different
goods and between goods and s e r v i c e s .
A different
approach i s n e c e s s a r y .
which taxes some forms of
I n s t e a d of a system
consumer spending but not o t h e r s ,
there
is need f o r a form of tax which f a l l s more evenly on a much wider
range of consumer spending in the domestic- economy ( w i t h
r e l i e f s for
c e r t a i n basic i t e m s such as f o o d )
differentiated
without the
highly
t a x s t r u c t u r e a r i s i n g from purchase tax on goods
and SET on s e r v i c e s .
A g e n e r a l employment ( o r p a y r o l l )
r e p l a c e , purchase tax and SET would not be s a t i s f a c t o r y
other c o n s i d e r a t i o n s a p a r t , , i t
charged on i m p o r t s .
disadvantage
specific
tax
to
because,
cannot be r e b a t e d on e x p o r t s nor
I t would then l e a v e us a t a c o m p e t i t i v e
in a l l markets.
J
/ [
I
II
1.4
'
I
' '
There a r e t h r e e forms which a comprehensive consumption
could t a k e .
It
could be a r e t a i l
s e r v i c e s as w e l l as goods.
would be r e q u i r e d ,
s a l e s tax which could
But such a t a x , a t the r a t e s
­
j]
tax
that
would i n t r o d u c e a v e r y c o n s i d e r a b l e burden of
E x p e r i e n c e in o t h e r c o u n t r i e s has-shown that
would p r e s e n t very
­
cover
t a x a t i o n at the stage a t which goods or s e r v i c e s pass t o the
consumer.
i: '
serious d i f f i c u l t i e s
Indeed, i t i s c l e a r that a r e t a i l
of
collection'and
final
this
control.-
s a l e s t a x can be s u c c e s s f u l
only,
i f the rate, i s kept low.
A tax at the r e t a i l s t a g e a t the l e v e l
necessary t o r e p l a c e , purchase tax and SET i s now.widely regarded
as i m p r a c t i c a b l e .
2
\
1.5
Then t h e r e i s
a multirstage "cumulative"
(or
"cascade")
a p p l y i n g a t each s t a g e i n the p r o d u c t i o n and d i s t r i b u t i o n
but w i t h o u t r e l i e f
given for
;
t h e number of
both of
stages,
it
creates internal
t r a d e and i n d u s t r i a l
to c a p i t a l
process
tax paid a t e a r l i e r ' s t a g e s .
tax has well-known d i s a d v a n t a g e s - the amount of
structure,
tax,
Such a
tax depends on
economic
distortions,
i t a c t s as a d i s i n c e n t i v e
investment, and i f i s d i f f i c u l t
to g i v e e f f e c t i v e
relief
to e x p o r t s or to apply a c o u n t e r v a i l i n g charge to i m p o r t s .
These
d i s a d v a n t a g e s have l e d many C o n t i n e n t a l c o u n t r i e s t o r e p l a c e
taxes
of
t h i s kind w i t h value-added
1.6
tax..
Value-added tax a v o i d s the d i s a d v a n t a g e s both of a
tax l i k e purchase tax and of " c u m u l a t i v e "
i n c r e a s i n g number of
taxes.
c o u n t r i e s are a d o p t i n g the
I n Prance and Germany value-added tax i s w e l l
selective
Abroad, an
value-added-tax.
established.
H o l l a n d , Luxembourg, Denmark, Norway and Sweden a l l have
added t a x e s ;
Belgium, I r e l a n d and I t a l y w i l l
value­
i n t r o d u c e the
tax:
shortly.
1.7
The economic arguments about the e f f e c t s
of
t a x a t i o n on the b a l a n c e of payments, e f f i c i e n c y
value-added
and growth have
been the subject o f a good d e a l of p u b l i c debate f o l l o w i n g
p u b l i c a t i o n of e a r l i e r
studies*.
Any examination of
of VAT-on these f i e l d s must be r e l a t e d
intended.to replace.
The passage of
the
the'
effects
to the. t a x e s which i t
time has a l t e r e d
the
R e p o r t of the. Committee on Turnover T a x a t i o n (Cmnd 2300) Richardson R e p o r t 1 96h.
NEDO R e p o r t on Value Added. Tax 1 969
3 is
the
s i t u a t i o n which the Richardson Committee in p a r t i c u l a r was
examining.
I t was concerned w i t h the arguments f o r
a VAT in
s u b s t i t u t i o n f o r e i t h e r purchase tax o r . p r o f i t s
tax.
f i n d no v a l i d
but t h e r e was then
case f o r
the f i r s t
substitution;
It
could'
no SET, and purchase tax was narrower in coverage than i t i s
and had fewer and lower r a t e s .
It
considered'that
argument was a g a i n s t the s u b s t i t u t i o n of a VAT f o r
The NEDO R e p o r t argued that the case f o r
i n t r o d u c t i o n of a VAT i n - t h e
t h e balance
the p r o f i t s
considering
immediate f u t u r e must r e s t
The present p r o p o s i t i o n i s
in
services
that on the
i n t r o d u c t i o n o f VAT, SET and purchase t a x v/ill be a b o l i s h e d .
can more f u l l y
tax ( f o r
the b a l a n c e of payments,
be r e m i t t e d on e x p o r t s .
i n d i r e c t burden on e x p o r t s .
b u s i n e s s e s where i t
is repaid)
SET on business
(other
than on those
i s w h o l l y u n r e l i e v e d on e x p o r t s
By removing the economic d i s t o r t i o n s
of
t a x a t i o n VAT w i l l ' improve' the e f f i c i e n c y
The c h i e f
possible effect
over-stated.
attributable
selective
on the c o s t of l i v i n g .
i g n o r e s the f a c t
to e x p o r t s .
indirect
of our i n d u s - t r i e s .
o b j e c t i o n l e v e l l e d a g a i n s t VAT has been
It
purchase
equipment) are an
even in cases where s e r v i c e s are s p e c i f i c a l l y r e l a t e d
1.8
The
s i n c e VAT
Some elements o f
example on s t a t i o n e r y and o f f i c e
tax.
primarily
t a x a t i o n and f o r e x t e n d i n g the tax coverage t o goods and
change proposed would b e n e f i t
of
the
on whether i t p r o v i d e d a v i a b l e b a s i s f o r o t h e r adjustments
not a t p r e s e n t i n c l u d e d . -
to-day
its
This-argument i s
that a g a i n s t
increases
t o ' t h e i n t r o d u c t i o n of VAT there have to be
corresponding r e d u c t i o n s f o l l o w i n g
often
set
the a b o l i t i o n of purchase
tax
a n d ' s e l e c t i v e employment t a x .
k
"(CONFIDENTIAL) ­
.
..
1.9
The g e n e r a l
country
is
Paper.
Certain
deals
described
Chapter
taxation,
some
in
of
cases
a possible
the f o l l o w i n g
2 discusses
and C h a p t e r
special
with
outline
the b a s i c
VAT
Chapters
scope
are
in
transitional
problems.
of
principles
3 the g e n e r a l
discussed
scheme f o r
of
this
this
of
value-added
a possible
Chapter h.
Green
scheme.
Chapter
5
CHAPTER £ - BASIC PRINCIPLES OF VALUE ADDED TAXATION
2.1 ' VAT i s a form o f t u r n o v e r or s a l e s t a x ,
and some o t h e r forms o f
L i k e purchase
turnover t a x , VAT i s a tax on
consumer e x p e n d i t u r e i n the domestic economy.
purchase t a x ,
final
But u n l i k e
which i s c o l l e c t e d at a s i n g l e s t a g e i n the
p r o d u c t i o n and d i s t r i b u t i o n c h a i n , VAT. i s c o l l e c t e d i n
liability
instalments:
t o tax a r i s e s at each s t a g e i n the c h a i n , whenever­
t a x a b l e t r a n s a c t i o n s a r e c a r r i e d . o u t by t a x a b l e p e r s o n s .
l i k e purchase t a x , ' a l s o f a l l s on imports o f g o o d s .
VAT,
On e x p o r t s
VAT i s not o n l y not charged d i r e c t l y b u t , u n l i k e purchase
p r o v i d e s machinery f o r r e b a t i n g tax e n t e r i n g i n d i r e c t l y
export
2.2
tax
costs..
;
tax,
into
'
The VAT system d e s c r i b e d i n t h i s Green Paper i s t h a t known
as the " i n v o i c e "
latter
( o r " t a x from t a x " )
system.
The reason f o r
term i s t h a t tax i n v o i c e d t o a t a x a b l e person
from tax i n v o i c e d by him t o a r r i v e a t h i s net t a x
the
is.deducted
liability.
T h i s i s the system p r e s c r i b e d i n the EEC D i r e c t i v e s on v a l u e ­
added t a x .
A l l the c o i i n t r i e s which have i n t r o d u c e d VAT have
adopted t h i s form of the
2.3
Subject
to. any p r o v i s i o n s f o r r e l i e f
the t a x ' a p p l i e s
a.
tax.
in particular
to "taxable transactions",
which i n c l u d e
The d e l i v e r y o f goods or the p r o v i s i o n o f s e r v i c e s
the home market by a " t a x a b l e
6
person";
cases,
in
­
b .
Appropriations
by a " t a x a b l e
c.
to p r i v a t e
and c e r t a i n business uses
person";
' Imports of g o o d s , whether or not by a " t a x a b l e
2.k
The p r e c i s e
person".
scope o f t h e s e e x p r e s s i o n s w i l l need t o be
defined in l e g i s l a t i o n . .
For p r e s e n t purposes t h e y should b e
understood i n a v e r y wide sense...
"Taxable p e r s o n " , f o r
example,
i n c l u d e s companies, i n d i v i d u a l s and p a r t n e r s h i p s engaged i n
b u s i n e s s , and a l s o members o f p r o f e s s i o n s .
and s u b j e c t
As a g e n e r a l
guide,
to any s p e c i a l . V A T I n c l u s i o n s o r e x c l u s i o n s ,
" t a x a b l e p e r s o n s " has much the same meaning as those
persons
c h a r g e a b l e t o c o r p o r a t i o n tax or t o income tax under Cases I and
I I of
Schedule D ( s e e paragraph 3 . ' 8 ) .
The e x p r e s s i o n
"trader"
as used i n t h i s Green Paper has a s i m i l a r wide c o n n o t a t i o n .
The
use of these terms i n t h e VAT scheme d i s c u s s e d i n t h i s Green
Paper i s c o n s i d e r e d f u r t h e r
2.5
Liability
i n Chapter 3 .
t o tax a r i s e s whenever a t a x a b l e t r a n s a c t i o n
paragraph 2 . 3 ) i s performed, and does not depend on the
(see
profit­
a b i l i t y or o t h e r w i s e o f the t r a n s a c t i o n nor on whether t h e
tax
i s r e c o v e r e d from the customer.
2.6
Although i t
on f i n a l
i s p a i d by t r a d e r s , the t a x f a l l s
consumer e x p e n d i t u r e .
p r o v i s i o n s f o r small t r a d e r s i t
Subject t o s p e c i a l
in
principle
(and
simplified)
works i n the f o l l o w i n g way.
a t a x a b l e person ( A ) d e l i v e r s goods o r p r o v i d e s a s e r v i c e
to
another person ( B ) , A i s accountable to the tax a u t h o r i t i e s
the tax on t h a t t r a n s a c t i o n and i f
If
for
B i s a l s o a taxable person, A
gives him an invoice showing that tax as a separate item.
If B
sells to another taxable person (C), B too is accountable for
tax and must give C an invoice showing the tax as a separate
item;
and so on down the line of production and distribution,
until the final stage when a taxable person sells to a final
consumer.
At the end of each VAT accounting period each taxable
person totals (a) all the tax invoiced to him or paid by him at
importation;
and (b) all the tax arising on taxable transactions
which he himself carries out;
and remits to the tax authorities
the amount by which the latter exceeds the former.
If (a) is
more than (b) he may make a claim for credit for the excess
from the tax authorities (see paragraph 3 . 2 0 ) .
Thus a taxable
person has to account for the tax on all the goods he delivers
or services he provides (called outputs) in each accounting
period, but in paying tax to the tax authorities he can take
credit for the tax on goods delivered or services provided to
him (called inputs) whether of a capital or current nature.
The
effect of this "credit mechanism" is that the tax "rolls forward"
at each stage until the point of sale to the consumer.
The
amount of tax collected in this way is thus equal to the amount
that would have been collected had the tax been a single-stage
tax on. sales to final consumers, though to collect in the latter
way would be impracticable for the reasons already set out in
paragraph 1.h.
2.7
The net VAT liability of a taxable person in a given
accounting period might be illustrated by the following example:­
8
C C O N F T D E N T I A L )
C O N F I D E N T I A L )
; a.
Tax on t a x a b l e t r a n s a c t i o n s c a r r i e d out by him
£1000
i n the p e r i o d w i t h i n the UK
Less:­
b.
Tax i n v o i c e d t o h i m , i n the
period
by t a x a b l e persons supplying him
w i t h goods and s e r v i c e s f o r use
i n h i s business ( e g purchase o f
p l a n t and machinery, raw m a t e r i a l s ,
stock f o r r e s a l e ,
transport
s e r v i c e s , power e t c )
and
c.
£900
Tax p a i d by him on t a x a b l e
goods
imported f o r h i s business
£20
£920
Net amount t o b,o paid t o the t a x
authorities
(a.-b.-c.)
2.8
£ 920
-
£
80
Another way o f l o o k i n g a t the c r e d i t arrangements i s
c o n s i d e r the p r o g r e s s o f a p a r t i c u l a r a r t i c l e
and d i s t r i b u t i o n c h a i n .
down t h e
to
production
Tax w i l l be c h a r g e d . o n the raw m a t e r i a l s ,
perhaps when t h e y are i m p o r t e d :
as they a r e worked up i n t o a
semi-manufactured and then a f i n a l . p r o d u c t ,
and s o l d on a t sucessive
s t a g e s , the t a x f a l l s on the v a l u e added at each s t a g e .
2.9
To i l l u s t r a t e t h i s l e t us take the h y p o t h e t i c a l example o f
an a r t i c l e ,
-
c o s t i n g hOs r e t a i l b e f o r e t a x , on which the r a t e
( C O N F I D E N T I A L )
of
VAT i s 1.0 per cent o f the t a x - e x c l u s i v e p r i c e .
The VAT, which the
consumer would pay, would "be h s , g i v i n g a t o t a l r e t a i l p r i c e
hhs.
The hs tax would have been c o l l e c t e d i n a s e r i e s o f
payments.
The number o f payments, i e the number o f
p r o d u c t i o n and d i s t r i b u t i o n c h a i n ,
table
is immaterial.
simplicity,
other taxable
Tax
exclusive
price
s
d
5
0
Producer makes
intermediate
produce and s e l l s
i t t o a manufac­
turer f o r
10
0
Manufacturer makes
f i n a l a r t i c l e and
sells i t to
retailer for
25
Retailer sells
article to
consumer- f o r
hO
Producer o f i n t e r ­
mediate product
imports raw
m a t e r i a l s having
an import v a l u e o f
Total p a i d by f i n a l
consumer
\
Q
stage and.ignoring,
Tax on
transaction
s
d
for
fractional
stages i n the
The
shows how the t a x on t h e . a r t i c l e might b u i l d up,
from the raw m a t e r i a l
of
following
starting
the sake o f
inputs.
Tax r e m i t t e d
t o the t a x
authorities
s
d-
,6
Producer pays 6 d tax at
importation
1
0
Producer i s a c c o u n t a b l e
f o r 1 s t a x but t a k e s
c r e d i t f o r 6d tax paid
a t i m p o r t a t i o n and
i n v o i c e s 1 s tax t o h i s
customer
0
2
6
Manufacturer i s account­
a b l e f o r 2 s 6d tax but
takes c r e d i t f o r 1 s t a x
i n v o i c e d t o him by
producer and i n v o i c e s
2 s 6 d tax ­ t o the
retailer
0
4
o
Q
plus
R e t a i l e r i s accountable
f o r hs tax but t a k e s
c r e d i t f o r 2 s 6 d tax
i n v o i c e d t o him by
manufacturer
k -
0
CONFIDENTIAL
i n s d
2.10
si
I il
A
Imports and e x p o r t s . - As the f o r e g o i n g example "tarings o u t ,
VAT a p p l i e s
to imports o f goods as w e l l a s t o d e l i v e r i e s i n the
home, market.
importer i s
Tax at i m p o r t a t i o n i s p a y a b l e whether or not
a "taxable person".
But i m p o r t e r s who a r e
the
taxable
persons take c r e d i t f o r VAT paid at i m p o r t a t i o n i n the
same way a s ­
they do f o r
of.goods
t a x i n v o i c e d t o them by domestic
and s e r v i c e s .
Conversely,
The u n d e r l y i n g p r i n c i p l e i s
suppliers
e x p o r t s o f goods a r e r e l i e v e d o f
that
export s a l e s are not
chargeable
w i t h VAT, w h i l e e x p o r t e r s who are t a x a b l e persons can take
for,
or have r e p a i d t o them, the tax i n v o i c e d ' t o
i m p o r t a t i o n ) on the' inputs t o those s a l e s .
relief
are d e s c r i b e d more f u l l y b e l o w .
i s that a l l
credit
them ( o r paid a t
The arrangements
The t e r r i t o r i a l
o f the tax t o s e r v i c e s f o l l o w s a s i m i l a r p a t t e r n .
principle
tax.
for
application
The u n d e r l y i n g
s e r v i c e s p r o v i d e d w i t h i n the t a x
territory
would be t a x a b l e .
I
2.11
Reliefs.
- There a r e s e v e r a l ways i n which r e l i e f from VAT
can be g i v e n t o p a r t i c u l a r
particular
classes of
goods or s e r v i c e s ,
or
c l a s s e s o f t r a d e r s , eg exemption, z e r o - r a t i n g ,
the
a p p l i c a t i o n o f a l o w e r r a t e o f tax than t h e standard r a t e , or some
combination o f these methods.
VAT scheme d e s c r i b e d l a t e r
A l l t h e s e procedures f e a t u r e i n the
i n t h i s Green Paper.
borne i n mind t h a t a VAT i s i n p r i n c i p l e
that r e l i e f s
It
should be
a comprehensive tax and
reduce revenue and c o m p l i c a t e a d m i n i s t r a t i o n .
The
more r e l i e f s t h e r e a r e , t h e more o t h e r s have t o pay t o r a i s e a
g i v e n revenue.-
F u r t h e r , the i m p l i c a t i o n s o f r e l i e f s may go beyond
the p a r t i c u l a r t r a d e r s t o whom they a r e d i r e c t e d , and a f f e c t
11 other
traders with whom they deal or with whom they compete.
Any case for relief must therefore be judged against stringent criteria. 2.12
Exemption. - Exemption for a transaction means that no
liability to account for tax to the tax authorities arises when
the transaction is performed.
Equally, the trader undertaking
the exempt transaction is given no credit by the tax authorities
for any tax invoiced to him by his suppliers, or paid at
importation, in respect of the goods and services he uses for
his exempt business.
The operation of the credit mechanism
throughout a chain of transactions is thereby interrupted.
2.13
If a trader providing exempt goods and services wishes to
recoup the tax invoiced to him by his suppliers (or paid at
importation) he is free to do so through the prices he charges to
his customers.
But since he is not accountable to the tax
authorities he is not allowed to show any element of tax as a
separate item on'his sales invoices.
The tax paid at earlier
stages and entering in this way into the price of exempt goods
and services is thus a "hidden tax".
If the exempt goods and
services are acquired by a taxable person the latter is unable
to take any credit for this hidden tax.
no means always an advantage.
Thus, exemption is by
It may, however, provide a simple
way of relieving from tax in appropriate cases the value added
by the provider of a service to final consumers.
12 2.1U
Ah important administrative advantage of exemption is that
a trader whose only business consisted' in carrying out exempt
transactions would not need to he registered by the tax
authorities.
This would be a saving in work both for the trader
and for the authorities.
If, however, part of a trader's outputs
were exempt and part taxable he would need to be registered in
respect of his taxable transactions.
He would be entitled to take
credit for tax falling on the inputs to his taxable outputs, but
not for tax falling on the inputs to his exempt outputs.
If such
a trader were allowed to take credit for tax on all his inputs
he would have an unfair advantage over the wholly exempt trader,
who would not be entitled to any credit for tax.
Establishing
the credit entitlement of partially exempt traders can be a
complicated matter.
This is explained further in the Appendix to
this Green Paper.
2.15
Zero-rating. - Zero-rating a transaction means that it is.
brought within the scope of the tax, but the rate applied to the
output is zero.
If the person carrying out the transaction is a
taxable person he is accountable in the usual way;
but the result
is that his outputs carry no tax because a zero rate is applied
to them, while he is allowed credit for or repayment of tax on.,
his inputs.
Exports of goods will be relieved from tax by means
of this technique.
Transactions other than exports could also
be zero-rated, but the technique is one that could only be
justified in very exceptional circumstances..
Where relief to particular kinds of transaction is contemplated, exemption might 13
be considered, but to go further and remit tax on all the inputs as well by zero-rating would be a very different, matter.
This
would reduce the size of the tax base, so that other transactions b y other traders would have to bear a higher rate of tax to raise the same total revenue.
It would also mean that, scarce resources would have to be deployed by the tax authorities to register and control the traders carrying out the zero-rated transactions with no corresponding benefit to the revenue. 2.16
Lower Rates. - Some relief for particular classes of
transactions can be given by subjecting them to a lower rate of
tax than the standard rate.
This is a practice found in the
VAT systems of all the EEC countries.
In such cases full credit
for tax on inputs is given even when this was at the standard ­
rate so that the effective rate of tax on the transactions is the
lower rate.
tj
ih
CHAPTER 3 - GENERAL SCOPE OP A POSSIBLE SCHEME FOR THIS COUNTRY
3*
1
General.-
details-of
Matters such as the r a t e or r a t e s of tax and
c o v e r a g e can be d e c i d e d o n l y in the l i g h t
circumstances at the time of i n t r o d u c t i o n of
p r e j u d g i n g such i s s u e s in t h i s Green Paper i t
a VAT.
of a l l
Without
is desirable
a t t e n t i o n on c e r t a i n s p e c i a l problems and to i n d i c a t e
s o l u t i o n s to them.
principles
the
to
focus
possible
1'his Chapter g i v e s a g e n e r a l o u t l i n e o f how the
i n Chapter 2 might be a p p l i e d t o a VAT i n t h i s
country.
I t should not be assumed t h a t the d e t a i l e d i s s u e s ' d i s c u s s e d i n
this
and the f o l l o w i n g Chapter w i l l n e c e s s a r i l y be s e t t l e d i n the way
here, d e s c r i b e d .
However, f o r ' the purposes o f
been assumed t h a t w h i l e VAT w i l l
customs and e x c i s e d u t i e s
hydrocarbon o i l s ) w i l l
the Green Paper i t
has
r e p l a c e purchase tax and SET,, o t h e r
( e g those on. t o b a c c o , a l c o h o l i c
d r i n k s and
in g e n e r a l be r e t a i n e d , w i t h any n e c e s s a r y ,
adaptations.
-3.2
Taxable T r a n s a c t i o n s . - -
The scope of the charging
( s e e paragraph 2.3) w i l l need t o be w i d e l y drawn.
provisions
The u n d e r l y i n g
p r i n c i p l e w i l l be a tax a p p l y i n g t o a l l b u s i n e s s t r a n s a c t i o n s
whatever kind ( i n c l u d i n g r e t a i l
trade),
with specific
.rather than a tax a p p l i c a b l e to. a s e l e c t e d l i s t
3*3*
Goods.-
of
exceptions,
transactions.
The e x p r e s s i o n , " g o o d s " w i l l need t o be
carefully
d e f i n e d , p a r t i c u l a r l y i n r e l a t i o n t o land and b u i l d i n g s . '
distinction familiar
of
The
i n d i r e c t t a x a t i o n between e x p e n d i t u r e on
c a p i t a l items.(which i s only r e l i e v e d ,
if
at a l l , by c a p i t a l
allowances)';and expenditure on n o n - c a p i t a l items
(which i s
. a l l o w e d ) would not apply i n the case of VAT, e x c e p t
15 generally
in some s p e c i a l
cases,
3.4
eg p a r t i a l l y exempt t r a d e r s
Deliveries.-
( s e e paragraph
In a d d i t i o n t o s a l e s , d e l i v e r i e s
would c o v e r o t h e r t r a n s a c t i o n s
involving transfer
f o r example, h i r i n g and h i r e purchase.
r e l a t i o n t o goods
3.16).
of
o f goods
ownership and,
Certain transactions
( e g p r o c e s s w o r k ) might he t r e a t e d e i t h e r
in
as
d e l i v e r i e s or as the p r o v i s i o n o f s e r v i c e s . .
3.5
. Appropriations.-
T h i s ' term r e f e r s
­
in general to
transfers
"by a t a x a b l e p e r s o n of items from h i s business t o non-business u s e ,
eg t o the use o f h i s f a m i l y or employees, or t o h i m s e l f
in his
private
transactions
capacity;
or to c e r t a i n b u s i n e s s u s e s . '
These
might be brought w i t h i n the scope of the t a x e i t h e r b y t r e a t i n g
as d e l i v e r i e s
or,
or s e r v i c e s and so s u b j e c t
tax
charge
in some c a s e s , by d i s a l l o w i n g c r e d i t f o r tax on t h e inputs
them ( s e e paragraphs 3 . 2 2
3*6
to a s p e c i f i c
Services.-
them
to
and 3 . 2 3 ) .
In p r i n c i p l e ,
the p r o v i s i o n of a s e r v i c e
should
be understood as any b u s i n e s s . t r a n s a c t i o n not amounting t o a d e l i v e r y
of
goods or a p p r o p r i a t i o n i n the above s e n s e .
such as h o t e l s and r e s t a u r a n t s ,
office
services
entertainment and h a i r d r e s s i n g would
be c o v e r e d , as would s e r v i c e s used by b u s i n e s s
consultancy,
Consumer
cleaning services)
(for
and s e r v i c e s ,
example management
such as those
of l a w y e r s and a c c o u n t a n t s , used by b o t h p r i v a t e persons, and b u s i n e s s .
3.7
The e x p r e s s i o n " s e r v i c e s " might w e l l
r e p a i r s and., maintenance;
transactions
trademarks and i n d u s t r i a l
know-how,;,
;
surveyors; ' advertising,
include,
inter
involving patents,
the s e r v i c e s ' of
alia,
designs,
architects
t r a n s p o r t and s t o r a g e s e r v i c e s ;
16 and
employmen
agency s e r v i c e s ;
the s e r v i c e s of consultants, engineers
planning o f f i c e s ;
b u s i n e s s agents
the s e r v i c e s
and
of f o r w a r d i n g a g e n t s , "brokers,
etc.
I
3*8
Taxable p e r s o n s . -
Except f o r
i m p o r t a t i o n s of
goods,
t r a n s a c t i o n s would i n g e n e r a l be t a x a b l e . o n l y when undertaken by
" t a x a b l e p e r s o n s " ( s e e paragraph 2 . U ) .
T h i s e x p r e s s i o n should be
understood as a p p l y i n g not o n l y t o companies, but a l s o t o
p a r t n e r s h i p s and o t h e r b o d i e s engaged i n t r a d i n g ^ o r
activities
in a wide s e n s e .
employees a c t i n g in that
3*9
Registration.-
delivering'chargeable
individuals,
professional
The e x p r e s s i o n does n o t , however,
capacity.
For t h e purposes o f c o n t r o l a l l
persons
goods or p r o v i d i n g c h a r g e a b l e s e r v i c e s
have t o be r e g i s t e r e d w i t h the Tax a u t h o r i t i e s whether t h e y
pay t a x or' n o t , and t o enable t h i s t o be done t h e y w i l l be
t o g i v e the a u t h o r i t i e s
activities.
limit
c e r t a i n p a r t i c u l a r s of t h e i r
will
actually
required
business
Thus small t r a d e r s , whether or not below the exemption
( s e e paragraph h*k)
w i l l be r e q u i r e d t o r e g i s t e r , but
d e a l i n g w h o l l y i n exempt goods w i l l
3.10
include
persons
not.
The p r o c e s s -of r e g i s t r a t i o n w i l l take s e v e r a l months and
w i l l , need t o be completed b e f o r e the date on which the t a x becomes
operative.
In a d d i t i o n ,
t r a d e r s w i l l need time t o
themselves w i t h the d e t a i l s o f
\
the tax p r o c e d u r e .
­
17
'
;
familiarise
IN
5
tf
MM
3.11
Accounts.-
Persons accountable f o r t a x w i l l have
maintain the accounts n e c e s s a r y t o e s t a b l i s h t h e i r VAT
to
liability,
t h e i r e n t i t l e m e n t t o i s s u e i n v o i c e s showing t a x and t h e i r
entitlement
3.12
to c r e d i t for
Tax, p o i n t . -
t a x on I n p u t s .
L i a b i l i t y t o tax w i l l
a r i s e when the
t r a n s a c t i o n takes p l a c e , eg when the goods a r e imported or
d e l i v e r e d or the s e r v i c e i s p r o v i d e d ;
but i n c e r t a i n
cases,
eg s e r v i c e s p r o v i d e d o v e r a -period of time., o r the d e l i v e r y
of
a major i n s t a l l a t i o n w i t h payments on account, s p e c i a l r u l e s
will
be needed t o determine the t i m e s a t which the t a x becomes due.and
at which c r e d i t s may be t a k e n .
3.13
Value.-
The v a l u e f o r t a x would i n g e n e r a l be the
price,
inclusive
of. other d u t i e s and t a x e s , but e x c l u s i v e
invoice
of VAT;
.however, where the p r i c e c o n s i s t e d w h o l l y or p a r t l y of a
c o n s i d e r a t i o n o t h e r than money, or where t h e r e was no
a n o t i o n a l v a l u e would need t o be a s s e s s e d .
a l s o be needed i f
length.
consideration,
A n o t i o n a l v a l u e might
the buyer and s e l l e r were not d e a l i n g at
P r o v i s i o n would a l s o be needed f o r adjustment,
arm's
eg i f
goods
were not up t o sample and a l o w e r p r i c e was n e g o t i a t e d .
3.14
Accounting p e r i o d s . -
based on p r e s c r i b e d
months.
The assessment
of the t a x - w i l l be
accounting p e r i o d s , which might be o f
three
To g i v e an even f l o w of t a x r e t u r n s and r e m i t t a n c e s ,
arrangements might be made under which r e t u r n s w e r e . s t a g g e r e d ,
w i t h about one t h i r d o f the t r a d e r s making them each month.
18
Traders
would be a c c o u n t a b l e i n r e s p e c t of
taxable transactions
b y them in each a c c o u n t i n g p e r i o d .
liability
( o r net c r e d i t )
importation
In any p e r i o d a t r a d e r ' s
would be equal to tax at
r a t e on h i s t a x a b l e t r a n s a c t i o n s
in the p e r i o d minus tax p a i d at
in the p e r i o d .
transactions e f f e c t e d by a trader
t h i s would n o t m a t t e r :
. r e s p e c t of
of
tax w i l l
credit for
of VAT on t h e t r a n s a c t i o n ,
sales'apart,
rates,
If
c a t e g o r y t o be i d e n t i f i e d .
by the t r a d e r who i s s u e d i t .
tax w i l l
support the claim f o r
needed
or i n c l u d e d exempt i t e m s ,
the t r a n s a c t i o n s
In t h e i r own i n t e r e s t s
provided
details
i n each
retained
traders
provide
they are i n a p o s i t i o n
c r e d i t of t a x i n t h e i r
to
own tax r e t u r n s .
t a x w i l l n o t , of c o u r s e , be e n t i t l e d t o
P a r t i a l l y exempt t r a d e r s . as w e l l
showing the amount
A copy o f the i n v o i c e would be
d e l i v e r i n v o i c e s showing the t a x
transactions
accountable
need to ensure that t h e i r s u p p l i e r s
Traders not accountable f o r
3.16-
each t r a d e r
the goods and s e r v i c e s
them w i t h i n v o i c e s i n t h i s way, so t h a t
in
ones.
in a d d i t i o n t o the p a r t i c u l a r s
would be shown on the i n v o i c e t o enable
accountable f o r
assessing
tax on purchases would
customers an i n v o i c e
f o r the purposes o f h i s b u s i n e s s .
were t a x a b l e at d i f f e r e n t
directly
those i t e m s , and would be a l l o w e d
Most r e t a i l
g i v e each of h i s
taxable
For the purpose of
c a p i t a l i n p u t s as w e l l as c u r r e n t
Invoices-.-
3*15
for
to the r e - s a l e
Thus the
suppliers
i n a p e r i o d would not be
r e l a t e d t o h i s inputs i n t h a t p e r i o d .
not be t i e d
net
the a p p r o p r i a t e
and minus t a x i n v o i c e d t o him by a c c o u n t a b l e
o f t a x a b l e goods and s e r v i c e s
liability
undertaken
separately..
- A "trader u n d e r t a k i n g
taxable as exempt ones w i l l be e n t i t l e d t o claim
-1Q
- ,
credit for
t a x - o n the i n p u t s t o h i s t a x a b l e t r a n s a c t i o n s but not on the
i n p u t s t o h i s exempt t r a n s a c t i o n s .
of
In some cases p a r t i c u l a r
input might be r e l a t e d t o p a r t i c u l a r
types of outputs
types
(eg
stock
f o r r e s a l e ) but f o r the r e s t r u l e s w i l l be needed t o determine
the
p r o p o r t i o n of t a x on inputs in r e s p e c t of which c r e d i t may be c l a i m e d
( s e e the Appendix t o t h i s Green P a p e r ) .
3.17
Imports.-
The procedure f o r
c h a r g i n g VAT at
importation
w i l l need t o i n c l u d e the p r o v i s i o n of e v i d e n c e of pa3^ment of VAT
t o s\ipport subsequent claims f o r
those c l a i m s .
c r e d i t by t r a d e r s e n t i t l e d t o make
A n c i l l a r y q u e s t i o n s which a r i s e i n c l u d e the
f o r VAT purposes of goods t e m p o r a r i l y i m p o r t e d , or taken
treatment
into
warehouse oh i m p o r t a t i o n .
3*1$
Exports.-
- E x p o r t s b y t a x a b l e persons w i l l b e r e l i e v e d
tax by z e r o - r a t i n g ,
3.19
as d e s c r i b e d in paragraph 2 . 1 5 .
Payment o f t a x . -
Each t r a d e r accountable f o r
r e q u i r e d t o pay VAT t o the tax a u t h o r i t i e s
made at the end of
from
t a x w i l l be
on the b a s i s of
each accounting p e r i o d .
In addition to
d e t a i l s the r e t u r n would show the amount of VAT on the
t a x a b l e t r a n s a c t i o n s and the amount of c r e d i t
a return
other
trader's
claimed i n r e s p e c t
tax on i n p u t s .
3*20
Repayments.-
Por some t r a d e r s the. t a x on t h e i r
purchases
-
of goods and s e r v i c e s w i l l
exceed the t a x on the
t r a n s a c t i o n s c a r r i e d out by them.
Traders with a l a r g e
business w i l l r e g u l a r l y be i n t h i s p o s i t i o n .
-
-
- 20
taxable
export
Others may f i n d '
of
themselves in t h i s
s i t u a t i o n from time t o t i m e .
"be n e c e s s a r y to have r u l e s g o v e r n i n g c r e d i t
e x c e s s of
3.21
for
It w i l l
of
course
or repayment of
the
tax on inputs over tax on o u t p u t s .
Annual s t a t e m e n t . -
T r a d e r s accountable f o r
r e q u i r e d t o complete an annual d e c l a r a t i o n
i n c l u d i n g a summary of
s a l e s and purchases during t h e p r e c e d i n g y e a r .
the b a s i s f o r
any n e c e s s a r y adjustment
tax might be
T h i s would p r o v i d e
of t a x a l r e a d y p a i d .
Other
t r a d e r s i n c l u d i n g t h o s e p a y i n g under a s i m p l i f i e d arrangement
paragraphs h.2 and h.3) might a l s o be r e q u i r e d t o p r o v i d e
(see
annual
statements.
3*22' S p e c i a l r e s t r i c t i o n s . credit for
In a few cases t h e r i g h t t o
claim
tax on i n p u t s might be r e s t r i c t e d as an a l t e r n a t i v e
t a x i n g the t r a n s a c t i o n as an a p p r o p r i a t i o n
( s e e paragraph 3.5).
Examples a r e : ­
a.
goods and s e r v i c e s which have both a b u s i n e s s and a
p r i v a t e use eg business c a r s ;
electricity,
shops.
business
gas-and t e l e p h o n e s i n f l a t s
entertainment;
combined w i t h
'ihe reason f o r t h e r e s t r i c t i o n would be t o
safeguard the i n t e r e s t s of other taxpayers,
revenue,
in cases- where b u s i n e s s and p r i v a t e use
. not be s a t i s f a c t o r i l y
b .
and o f
the
could
distinguished.
goods and s e r v i c e s a c q u i r e d f o r ,
or produced b y , a
trader^'s b u s i n e s s which are t r a n s f e r r e d t o p r i v a t e
21 use.
to
3.23
Intermediate
goods and s e r v i c e s . -
In some c o u n t r i e s
a VAT tax i s chargeable on c e r t a i n d e l i v e r i e s , "by the t r a d e r
himself f o r
the purpose of h i s b u s i n e s s .
.I or example, i f
,v
with
to
a trader
purchased exempt goods or s e r v i c e s and used them t o c a r r y out
t r a n s a c t i o n s t h e r e c o u l d be a
taxable
hidden t a x on h i s purchase which he
might wish to a v o i d by making the exempt goods or p r o v i d i n g
exempt s e r v i c e s w i t h i n h i s own b u s i n e s s .
Conversely,
the
a trader
w i t h exempt outputs might wish t o a v o i d paying t a x t o h i s
suppliers
of t a x a b l e goods and s e r v i c e s . b y making the t a x a b l e goods or
p r o v i d i n g the t a x a b l e s e r v i c e s w i t h i n h i s own b u s i n e s s .
were the p o s s i b i l i t y of
distortion
such a c t i v i t i e s
of trade or revenue l o s s i t
r e s u l t i n g in
If
there
serious
might be n e c e s s a r y t o have a
s p e c i a l p r o v i s i o n i n t h e VAT system.
3.2k
Administration.-
VAT w i l l be a d m i n i s t e r e d by HM Customs
and Excise to whom any q u e s t i o n s or comments on t h e
aspects o f
the tax should be
addressed.
22 administrative
CHAPTER h - SPECIAL CASES ­
h.1
General.
special
As has heen e x p l a i n e d ,
the scope f o r
treatment under VAT i s l i m i t e d .
However,
giving
special
treat­
ment would be r e q u i r e d in some cases and t h i s Chapter d e s c r i b e s
p r i n c i p a l i t e m s wlhich might be concerned.
be that any b u s i n e s s a c t i v i t y
of
t h i s Green Paper i s
The presumption would
in an area not covered by
Chapter would be w i t h i n the scope' of
the t a x .
to. i n v i t e a t t e n t i o n
One of
Nationalised Industries.
industries
In principle
t a x i n the f u e l ,
consideration,
to s p e c i a l rules,
trading
activities
The p r e c i s e c o v e r a g e o f
t r a n s p o r t and communication s e c t o r s
where a p p r o p r i a t e ,
the purposes
nationalised
should be t r e a t e d i n r e g a r d to t h e i r
in the same way as commercial f i r m s .
this
to the q u e s t i o n whether
t h e r e a r e any o t h e r areas which ought t o be. s u b j e c t
h.2
corresponding p r i v a t e a c t i v i t i e s )
the
(including,
will
require
and i t may'be found a p p r o p r i a t e t o have a reduced
rate
applying
h.3
Government Departments and L o c a l A u t h o r i t i e s .
to some of
these
activities.
a p p r o p r i a t e p r i n c i p l e would be t o s u b j e c t
c o r r e s p o n d i n g w i t h those a p p l i c a b l e t o
An
the outputs of
b o d i e s where they compete w i t h the p r i v a t e s e c t o r
their
to
these
arrangements
competitors.
To
t h a t end, Government Departments would be l i a b l e
to the t a x ,
goods and s e r v i c e s p r o v i d e d by l o c a l a u t h o r i t i e s
t o the p u b l i c
c o m p e t i t i o n w i t h the p r i v a t e
s e c t o r , w o u l d a l s o be
authorities.
23
and
liable.
Arrangements could be made to r e l i e v e from t a x o t h e r
of l o c a l
the
activities
in
Small
"small"
below
traders.
On a d m i n i s t r a t i v e , g r o u n d s
t r a d e r s would.lie
a specified
t h e number
of
account
the
limit
(a)
a n n u a l . amount.
obligation
for
In
(b)
fixed
other
at
possible
possible
tax
countries
a relatively
ing p r o v i s i o n
for
low
those
traders
with small
outside
the VAT s y s t e m
a separate
would g e t
very
small
n o t be
h.6
their
no c r e d i t s ) .
required
for
VAT..
Food;
basic
is
transition
other
just
with
and
Following
VAT o r
is
taxed,
products.
this
claim
credit
to
that
to
their
tax
show t a x
precedent,
alternative
would
tax.
though a t a r e d u c e d r a t e f o r
If
our a p p l i c a t i o n
of
course,
negotiated,
have
as t a x a t i o n
is
to
a.VAT
at
least
to
join
the
within
such
period
come
into l i n e
harmonised.
as
customers
I n EEC c o u n t r i e s w i t h
as may.be
2U remain
course have
a specified, figure
we s h a l l ,
so f a r
to
so
successful,
Members i n
alternative
of
the purchase
turnover below
an
A
to
not be a b l e
invoices
taper­
w h i c h would a p p l y
they would n o t b e a b l e
sales
some
exemption.
to provide
they would
t h e y would
the
between
generally
accompanied by
outside
f a r m e r s and f i s h e r m e n .
agricultural
Community
and i s
on t u r n o v e r )
t o pay e i t h e r
in operation food
of
accountable
turnover;
i t e m on t h e i r
tax'
(c) competition
c o u n t r y would b e
inputs,
traders
t a x p a y e r s and t h e
and
traders
(ie
into
loss
level
reduce
The
take
exemption i s
was
those
VAT a c c o u n t s .
to
for
turnover
VAT and r e l i e v e
w i t h a VAT the
method i n - t h i s
tax'on
substantially
to both
revenue
(an annual c h a r g e based
for
This' could
to keep f u l l
cost
e x e m p t t r a d e r s and t r a d e r s
h.5
taxable
such an e x e m p t i o n w o u l d n e e d
administrative
authorities,
when t h e i r
traders accountable f o r
e x e m p t e d from
turnover
desirable
an e x e m p t i o n
In
the
with
meantime
we a r e f r e e
to food
and f o o d
farmers
would
would
to consider
products.
still
involve
have
lead
to e x t r a
to
substantially
from
food
the
same
such a s
farm
relieve
those a t
element
in
time
to
machinery
4.7
effect
if
they
within
4.8
special
scope
stuffs,
that
in
purchase
to
this
would
-
tax,
exempt
i n p u t s of
apart
and
them and
the
at
farmers,
fertilisers,
of
all
controlling
products
agricultural
so. f a r
products,
of
insecticides,
services
the f i s h i n g
of
would h a v e
t h e y w o u l d be
transactions,
trader"
and
industry
Other
both
the n a t u r e
would b e n e e d e d
to
some f o r m m i g h t ' b e
2.5 only
the
scope
to account f o r
unless
housing;
of
they apply.
to be r e l a t e d
outside
countries
kinds f o r
in
produced
they
tax
came ­
exemption.
various
in which
housing
as farmers
c o u r s e he r e q u i r e d
a "small
countries,
f r o m . VAT i n
with
inputs
then
returns
which
and f o o d
lime,
specialist
in
course,
specialised
and a c c o m m o d a t i o n .
arrangements f o r
Relief
of
circumstances
and t h e s e
main
any t a x a b l e
arrangements
in different
and t h e
food
They would
Housing
but
the' VAT s y s t e m ;
costs
­ would b e
relief
zero-rated.
or
undertook
the
t a x ' most f o o d
feeding
w o u l d be
food
tax.
A better
Main s p e c i a l i s e d
similarly
the
giving
zero-rated,
within
present chargeable
and t o o l s ,
c q u l d he
of
them.
zero-rate
farm b u i l d i n g s .
non-taxable
ways o f
administrative
catering .services
some a n i m a l
The
They m i g h t b e
to "be b r o u g h t
and making r e p a y m e n t s
from
other
them i n k e e p i n g r e c o r d s and m a k i n g r e g u l a r
and w o u l d a l s o
perhaps
also
our
w i t h a VAT make
these
the r e l i e f s
Similarly
provided
provided
special
i n a VAT i n t h i s
own
differ
country
circumstances.
in respect
of
sales
and r e n t s
of
h o u s e s and o t h e r
and m a i n t e n a n c e
for
example
of
in h o t e l s
Finance.
flows
of
to a special
in
including
similar
services,
this
U.10
Health.
doctors
from
education.
t o purchase
be
VAT i n
field.
would p r o b a b l y
the
the
the
A
somewhat
tax,
and t h e s e
and
Consideration
be
those
*
of
26
CONr DENTIA
sector
futures).
Thus '
relieve
Health
Service
in regard
at present
to
subject
The p r i n c i p 1 e
s h o u l d be s u b j e c t
operating
t o ways o f
specialised
hospitals,
from
to.VAT.
other bodies
(eg
of
Somewhat
needed h e r e .
are
charities
certain
a number
in this
problem a r i s e s
institutions.
of
sometimes
banks.
the N a t i o n a l
supplies
c o u l d be. g i v e n
of
of
of
a VAT
c o u l d be made t o
might be l i a b l e
example- c h u r c h b u i l d i n g s ,
*
by
similar
trading a c t i v i t i e s
taxing
t o be exempt
and i n c o m m o d i t i e s
re1igious.
same way a s
are
transactions
f r o m VAT w i l l
tax.
taxing flows
reasons
have
services
to other
and d r u g s p r o v i d e d
t a x purchases by c h a r i t i e s
for
administrative
' But many e d u c a t i o n a l
Charities
that
services
c o u l d b e e x e m p t e d and a r r a n g e m e n t s
Education.
h'12
these
sector
securities
for
of
the
Other c o u n t r i e s w i t h
For
Some r e l i e f
tax' s e r v i c e s
method
repair
accommodation
would "be " w i t h i n
tax.--
and
though
short-term
an a p p r o p r i a t e
though
considerations apply
in
camps,
money.
life-assurance
such a s d e a l i n g s
of
i s not appropriate
representing
exempt f i n a n c i a l
VAT,
and h o l i d a y
g o o d s and s e r v i c e s
transactions
and. l e t t i n g
A VAT w h i c h i s
money and p a p e r
subject
buildings
domestic accommodation,
in
relieving
capital
and s c h o o l s ,
and
the
would
to
same
from
assets,
to
the
ii l. question
of
exempting
certain
their
fund-raising
or o t h e r
U.13
S e c o n d - h a n d good s ,
trade
way a s
sales
new g o o d s .
public
to d e a l e r s
public.
so
It
that,
seller
is
for
whether
to
selling
ie
the
price.
I n most VAT
are
it
Antiques,
like
to.
countries
taxable
t a x would be
special
in
or
rules
liable
to. members o f
same
the
art,
cars,
private
t o V A T ' o n l y , on
-works o f
the
on
to. s e c o n d - h a n d
between b i s ,buying p r i c e
original
the
charged
a used c a r f r o m a
would be
difference
related
s a l e s by members o f
dealers
a trader buying
and t h e n r e s e l l i n g
gross margin,
etc...
taxable,
other
charities
activities.
Thus a l t h o u g h
common to. a p p l y
example,
of
second-hand goods
would n o t b e
s a l e s by d e a l e r s ,
Inputs
non-trading
antiques,
s a l e s by' way o f
of
of
other
his
and
are
his
usually
exempted...
h. 1U
Books",
appropriate
magazines,
Advertising
of
to g i v e
music
for
on i n p u t s )
scores,
etc
etc,
could,
selling
while
own o u t p u t s .
their
to take
etc.
If
i t . were
to books, newspapers,
this
remain
advertising
sales
considered
journals,
c o u l d be done by
however,
t a x on t h o s e
w o u l d be e n t i t l e d
their
newspapers,
relief
services
newspapers,
accountable
tax
journals,
exemption.
taxable.
services
would
(with appropriate
customers,
credit.for
if
this
Publishers
then be
credit
accountable f o r
tax a g a i n s t
the
for
tax,
tax
on
CHAPTER 5 - SOME TRANSITIONAL
5.1
General.
both f o r
the
Solutions
of
The
introduction
trading
will
have
which r e q u i r e
PROBLEMS
of
VAT w i l l
community and f o r
t o he f o u n d
further
-the
i n v o l v e a major
tax
t o a number o f
consideration
change
authorities.
novel
problems,
and c o n s u l t a t i o n
with
many
those
affected.
5.2
Termination
revenue,
VAT i s
purchase
purchase
tax w i l l
in
the usual
Tax p a i d
w o u l d be
any r e l i e f
what method
5.h
or r e d u c t i o n
or
the
charge,
stock
purchase
until
purchase
tax
tax
Under
of
that date.
of
If
the q u e s t i o n m i g h t
existing
customs o r
may b e p a s s e d on i n
terms o f
A similar
introduction
VAT
the
arise
VAT l i a b i l i t y ,
and i f
so
''
or a b o l i t i o n
the
essential
to be c h a r g e a b l e
after
s h o u l d be g i v e n a g a i n s t
in a rate
notwithstanding
to raise
on t h e
w i t h VAT when s o l d
contracts.
imposition
the g o o d s .
in
to adopt.
Existing
only
be p a y a b l e by r e g i s t e r e d
Goods
g o o d s ' had a l r e a d y b o r n e
whether
If
way.
stocks.
chargeable
tax.
need t o continue
i n t r o d u c e d , and w i l l
traders
5*3
of
of
the
the
provision
legislation,
excise
a new d u t y
price
of
original
will
duty
any
or p u r c h a s e
or purchase
28
C O N F I D E N T I A L
tax,
tax
the goods
supplied,
contract
in r e s p e c t
no d o u b t be r e q u i r e d
legislation.
increase
of
i n VAT
APPENDIX PARTIALLY EXEMPT TRADERS 1.
As noted in paragraph 3.16 a trader providing taxable as well
as exempt goods or services would be entitled to claim credit for tax
on his inputs only in so far as' they related to taxable outputs.
In some cases particular- types of inputs could be related to
particular types of outputs;
but where this was not practicable an
alternative, adopted in other countries, might be to allow credit
for tax on inputs in the ratio of taxable to total outputs ("Pro­
rata rule").
Taxable outputs would include exports and other zero­
rated sales, and taxable-appropriations.
The ratio would provide
the percentage of the total tax on the trader's inputs for which he
could claim credit.
In some cases, however, this alternative­
might not be practicable and it might then be necessary to
calculate the ratio by reference to the proportion of taxable to
total innuts.
2.
A period of 12 months might be an appropriate base period for these calculations.
For any given year the necessary .data could not be ascertained until that year was completed and a provisional assessment of the percentage would therefore have to be made. When the full year had elapsed a reassessment could be made on the basis of the trader's outturn for that year, and any adjustment made
by way of credit or repayment to the trader or additional payment by the .trader. 29
1A I 3'
Capital
inputs.
If
credit for
taken i n the same way as c r e d i t f o r
be necessary
capital
to p r o v i d e f o r
tax on c a p i t a l i n p u t s could b e
tax on o t h e r i n p u t s ,
adjustment of
the amount of
i n p u t s f o r which c r e d i t was i n i t i a l l y
t r a d e r ' s r a t i o of
considerably
taxable
EEC c o u n t r i e s ,
the^possibility
- y e a r s f o l l o w i n g a c q u i s i t i o n
of each of
those f i v e
of
of
tax on
fluctuate
the c a p i t a l , a s s e t .
of adjustment "runs f o r
the c a p i t a l a s s e t ,
y e a r s one f i f t h
of
would
c l a i m e d , because a
t o t o t a l outputs might
during the l i f e t i m e
it
In
the
and a t
the amount
the
five
the end
initially
claimed as c r e d i t can be i n c r e a s e d or reduced a c c o r d i n g to the.
-
a c t u a l pro r a t a p e r c e n t a g e c a l c u l a t e d f o r
. arrangement f o r
c o m p l e x i t y of
capital
that year.
i t e m s would add c o n s i d e r a b l y
Such an
to
the pro r a t a arrangements, both as r e g a r d s
c a l c u l a t i o n s , and as r e g a r d s
the
the
the need to d i s t i n g u i s h between
c a p i t a l and n o n - c a p i t a l i n p u t s .
However, w i t h o u t . s u c h an a r r a n g e ­
ment i t would be open to a t r a d e r with b o t h taxable, and exempt
outputs to purchase h i s c a p i t a l . a s s e t s i n a year
undertook only t a x a b l e t r a n s a c t i o n s ,
whole of
the tax o n . t h o s e a s s e t s .
and t o claim c r e d i t f o r
T h i s kind of
be c o r r e c t e d only by an adjustment of
r e s p e c t of
in which he .
distortion
the c r e d i t e n t i t l e m e n t
tax on the a s s e t over a p e r i o d of y e a r s f o l l o w i n g
acquis i t i o n .
.
'
30 the
could
in
its
I