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Home Blog The dead loss of VAT

The dead loss of VAT

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With the UK soon to be out of the EU, the country now has a golden opportunity to get rid of a regressive and troublesome tax. It would be difficult to conceive of any tax more damaging than VAT, because it applies precisely at the point where supply meets demand. VAT is exactly, precisely, wrong. Whatever is taxed results in less of the thing taxed. Taxes on gambling, tobacco and alcohol lead to a less betting, smoking and drinking; that is their aim and purpose. A tax on the addition of value will lead to the addition of less value. Since labour adds value, a tax on added value is the perfect tool to create unemployment by reducing demand. It is the exact opposite of what Keynesian theory would recommend, which is the artifical stimulation of demand due to a chronic shortage of demand in the economy.

There cannot be a more irrational and harmful tax than one on the sale of goods and services - VAT in the UK, GST in Australia, and similar ones recently introduced in India and Saudi Arabia. They is no reason behind the widespread adoption of this tax; it is just a meme, like wearing one's baseball cap back-to-front. A rapid phase-out delivers an immediate boost to the economy, since it removes a severe obstacle to the exchange of goods and services.

What about the "lost revenue"? It is nowhere near the headline figure. A substantial proportion of this apparent revenue (about £110 billion) is swallowed up in costs and losses. Every hard working trader and enterprise can immediately do something useful with the time wasted in helping government collect this tax. Government gets rid not only of the substantial cost of administration, but also, in the longer term, of the costs of paying people such as pensioners, benefit recipients and public sector employees, large amounts of taxpayers' money which is then paid back in VAT.

Its abolition also raises the revenue base on which other taxes are levied: profits, incomes and rents all go up, due to the widespread increase in productive power now that the burden has been lifted.

There is no need for scientific precision. We have tried to put together some ball-park figures for what would happen if VAT were scrapped. The figures were originally prepared by Henry Law in 2017. Revised estimates prepared by Mark Wadsworth in June 2020 are given in brackets.  These are based on a higher total VAT receipt to the Exchequer since 2017.



Even the authorities admit that for every ten pounds of VAT revenue received, one pound is lost due to

  • Payments in cash
  • Fraudulent claims for refund of inputs
  • Carousel fraud

The VAT gap was estimated at £12.7 billion in 2014-15. This equates to 10.3 per cent of the estimated net VAT total theoretical liability (in other words, the net VAT total that should, in theory, be paid). It is of course not a loss to be deducted from the figure of the actual headline revenue raised. href="



An official figure of 4.7% of the yield has been given for the two together. However, the main burden of VAT administration falls on business, since it is required to act as an unpaid tax collector. The cost to government is probably around 1%. (2%) The papers linked to discuss the issue and conclude that the burden falls disproportionately on small and medium-sized enterprises but that the cost is difficult to disaggregate from financial management costs that would be incurred in any event.

This Swedish study, based on a survey in 2006 (text in English) draws attention to the interest costs of VAT due to the adverse effects it has on business cash flows.


Deadweight losses are due to economic activity which does not take place but would have done in the absence of the tax. Any figure must be conjectural. What counts here is supply/demand price elasticity, which varies across sectors, for example, on people's willingness to forego a restaurant meal and eat at home instead, or to employ a tradesman rather than do the job themselves, or leave the work undone. A deadweight loss of 1% of GDP is £15 billion. A part of this results in a loss of tax revenue, and in addition, contributes to welfare costs.

The reduction of VAT from 25% to 12% in the Swedish restaurant sector led to an 3500 additional full-time jobs.

This newer report estimates that 11,300 additional jobs were created by this cut in VAT.

The IFS Green Budget of 2009  worked on the assumption that a 1% cut in VAT would lead to a 0.5% increase in demand for goods and services. (Chapter 10). The methodology is questionable: however, on this basis, at a conservative estimate, abolition of VAT at 20% would lead to a growth in GDP of around 5% (5%), ie worth £75 billion, of which tax revenue would be about £25 billion. 



This is the part of the cost of VAT to the government itself. It comprises, for example, payments to pensioners and recipients of welfare benefits - child benefit, incapacity benefit, unemployment benefit, etc. The total of these benefits is £195 billion. It would be difficult to estimate what proportion of spending is on VAT-charged items, since rents and food are not subject to VAT: however, even if the figure is as low as 25% of spending is subject to VAT, that is 5% (0%) of the total of welfare and pensions, ie £10 billion (nil).

In addition there is the component of VAT which is paid by public sector employees out of post-tax income. There are 5 million workers in the public sector, average earnings £25,000 per year. This gives a total wage bill of £125 billion. Assuming 5% (0%) of the spending of this group is comprised of VAT, that is another £6 billion. Thus, total churning losses are £16 billion (nil).


VAT results in the abstraction of revenue from other taxable sources eg incomes, profits, rental values (UBR valuations). A 10% (33%) loss of the total of income tax, national insurance, corporation tax and the UBR [£330 billion] is £33 (£43) billion. This is over and above the loss in tax revenue due to deadweight losses (section C3, below).


£25 billion (£21 billion) see ¶ B1 above


Total spending on pensions and tax credits 2015/6 is given as £213 billion. Of this amount, about £60 billion is accounted for by welfare and housing benefits for the unemployed and low-paid. Assuming that this is 10% higher (than it would be with an economy that was no longer diminished by the deadweight loss from VAT, a cost of £6 billion (£15 billion) can be attributed.


These are given in ¶ B1 above.


  • Compliance and administration £1 billion (£2 billion)
  • Churning £16 billion (nil)
  • Downstream (abstraction from other taxes) @ 10% £33 billion (£43 billion)
  • Deadweight (consequential tax losses) @ £25 billion (£21 billion)
  • Consequential additional welfare costs @ £6 billion. (£15 billion)

This indicates a total loss of £81billion (£81 billion) ie over 70% of the revenue to the exchequer ( 62% of £130 billion) is swallowed up in costs and losses. This is barely credible but it indicates the need for an in-depth study, since the figures used are conservative estimates.



This is a work in progress. The original article on this subject generated an extraordinary amount of hostility. Strangely, this hostility has not attempted to examine the actual figures and assumptions quoted. So far as I am aware, there has been no double counting, which is an easy trap to fall into. The weakest of the assumptions concerns deadweight losses and consquential losses in tax revenues, which have been revised downwards. However, an additional loss has been inserted: the consequential welfare costs to government arising from the deadweight loss.

The topic requires a depth of analysis for which the Campaign lacks the resources. However, given the proportion of VAT that seems to be swallowed up in costs and losses, and given also the opportunity that now exists to scrap this tax, it cannot be reasonbly argued that it does not need to be examined seriously.


IMF report

HMRC statistics


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