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‘An equivalent to VAT should be imposed on financial services’

The Institute for Fiscal Studies has called for VAT to be extended across financial services.

The five-year Mirrlees Review of the tax system, published last week, suggests that current VAT exemptions create complexities in financial services.

It says: “An equivalent to VAT could, and should, be imposed on financial services. VAT should also be extended to nearly all spending. This would reduce complexity and costly distortions to consumption choices.” It claims extending VAT to services such as borrowing money and opening bank accounts would mean banks would not need to charge high interest rates on overdrafts and loans to recover funds, giving customers cheaper services.

The report says: “The money raised could be spent on cutting income taxes and raising benefits in a way that is distributionally neutral and which protects work incentives.”

Paul Johnson: ’Little about the UK tax system looks like it was deliberately designed. It is complex and incoherent and imposes a greater cost on the economy than need be’

The report also proposes that income tax and National Insurance should be merged, as NI no longer “serves any purpose as a separate social insurance contribution linked to benefit receipt”.

IFS director Paul Johnson says: “There is little about the UK tax system that looks like it was deliberately designed. Successive governments have failed to set out a coherent strategy for tax. As a result, the current set of taxes is complex and often incoherent and they impose a much greater cost on the economy than need be.”

Sir James Mirrlees, who chaired the review, says: “The UK system imposes unnecessary costs on the economy. It reduces employment and earnings more than it needs to. It discourages saving and investment and distorts the form they take.”

PMI Independent Financial Advisers director John Stewart says: “I think they are trying to change something that already works and it will be consumers who lose out because they are the ones who have to foot any additional costs. It is difficult enough to convince people to save without adding further charges.”

Mirrlees review – the main points

  • Stamp duty is an “obviously stupid” tax that clogs up the housing market and should be abolished
  • VAT should be applied to nearly all spending, including financial services. The financial services exemption costs £10bn a year
  • The 50p rate of income tax rate costs the Treasury approximately £500m a year. This contrasts with Treasury estimates that it raises £2.7bn
  • Income tax and National Insurance should be merged. Keeping them separate creates confusion and complexity
  • Income tax should not apply to risk-free returns. Standard bank and building society accounts should also be free of income tax. On riskier assets, only returns above the average rate of return should be subject to income tax
  • Inheritance tax is ineffective and avoided by the wealthy. It should be replaced with a system where those receiving the inheritance are taxed instead
  • The Government should prioritise incentives for people around pension age and parents of schoolchildren to stay in work. It could increase employment by 200,000 and earnings by £3bn
  • Fuel duty should be replaced by congestion charges as increasing fuel efficiency and electric cars are set to cut revenue

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