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VAT nudge collects more tax

An HMRC experiment, which incorporated a nudge message into the VAT return process, has apparently resulted in £330m of additional VAT paid by traders.   

6th Sep 2019
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This is an experiment by HMRC to test whether digital prompts would encourage traders to review their VAT returns before submission, and hence reduce the errors in the return. The first stage of the trial ran for a year from September 2018, and the next stage is beginning now.

HMRC selected a random group of VAT-registered traders for the trial. We don’t know how many were selected but it must have been a sizeable number. The traders weren’t told that they were taking part in this experiment.

Half of the group saw a checkbox when they (or their agent) submitted their VAT return through the HMRC online portal, which asked the trader to agree with this statement: “I can confirm that I have checked that the calculations used to produce these figures are honest and accurate.” It was not possible to continue with filing the VAT return until this box was ticked.

The remaining traders in the selected group acted as a control population and did not see any additional messages while submitting their VAT return.

Agents’ concern

In early September 2018, members of AccountingWEB noticed that some of their clients’ online VAT returns had this new checkbox, but other VAT returns did not. The wording of the confirmation statement caused some confusion and amusement. What exactly could HMRC mean by “honest” in this context?

Other tax agents were more concerned that by completing the confirmation statement their firm, or even the individual staff member who submitted the VAT return, could be held responsible for the client’s figures.

Heather Langtree of HMRC responded to these concerns raised on the Agents’ Forum, saying the upfront honest declaration carried no weight in law, and that completion of upfront honesty declaration box would not be taken into account for compliance purposes during the trial. Langtree also confirmed: “No account is taken of the upfront honesty declaration if a return is found to contain errors, whether submitted by an agent or an unrepresented customer.”

Payments increased

The upfront honesty box declaration deemed to be a success by HMRC, as it resulted in an additional £235m of VAT being declared as payable by the traders on the first occasion they were asked to confirm the calculations were correct, compared to the control group.

However, the effectiveness of the honesty box prompt diminished over time. The second time the traders saw the statement an additional £95m of VAT was declared. By the third and fourth times traders saw the honesty prompt message there was no tax effect at all.

Next stage

HMRC will now introduce the honesty box declaration for the remaining group of traders that comprised the control for the first year of the trial and didn’t see the message.

However, at present, the honesty prompt can only be included on the old HMRC portal (government gateway) for submitting VAT returns. Thus, traders who have moved over to MTD for VAT filing won’t see it.

This means the experiment will not be truly reflected with the control group as it will be a far smaller population, made up of traders who are voluntarily registered for VAT and hence do not have to file via MTD.

MTD future

HMRC is exploring how it can introduce the honesty prompt, and similar pre-submission nudge messages, into the VAT filing under MTD. However, such flexible nudge messages would have to be delivered via commercial software, and this may need a change in the regulations to require the software providers to do this. 

Replies (7)

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Stepurhan
By stepurhan
11th Sep 2019 08:54

If we don't know the size of the sample, the results are already hard to gauge. Sample size is a key factor in any study.

We also don't know how it was "randomised", so no way of knowing if that affected the results. This also raises the question of how they know an additional amount was reported. That would only be comparable if the two groups were of similar make-up. (i.e. both groups would be expected to report the same amount otherwise). If the two groups were truly random, how did they adjust for differences between them?

But the thing that really confuses me about this is that they are reporting after running for a single year. Seasonal variances anyone?

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By ireallyshouldknowthisbut
11th Sep 2019 09:37

There have been at least 2 different messages shown, and they seemed to appear occasionally at first, and then quite widely.

As above, I question very hard how they have determined any genuine tax rise as a result of this prompt.

Their "normal" way of measuring error is already deeply flawed. It turns out all they do is following a VAT inspection extrapolate away, ignoring (a) the fact many errors would have been picked up at year end and (b) errors in HMRC's favour. Its from such deeply flawed data the mythical "tax gap" is created.

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By cmiskin
11th Sep 2019 15:18

My understanding is that the sample size was half of the VAT population and that the additional declaration will now be presented to the other half of the population. As Rebecca points out, many of these traders will have moved to MTD in the meantime and so won't be presented with the declaration until such time as they are extended to commercial software.

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By rockallj
12th Sep 2019 10:14

Sampling flawed, methodology flawed, taxpayers moving from GG to MTD means results skewed. So the results prove nothing whatsoever and there is no proper control group or comparison so proves nothing.

If this is hmrc’s method used to calculate the tax gap, no wonder it’s greatly exaggerated.

How about simplifying the VAT system, rates, RC, DRC and all VAT on building/construction works? Et voila, therein lies your problem! Ok some of it is fraud, but the greater amount is complexity, surely?

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By Rgab1947
12th Sep 2019 11:46

Still worry about the "honesty" statement. Too tempting for HMRC not to use it when oppertunity arises.

Then can one trust the HMRC of today?

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By Guilford Accounting
12th Sep 2019 11:50

The claim of increased tax raised is nonsense and not statistically valid. How can the Government allow this? The ONS must be furious that other departments are allowed to devalue the veracity of Government statistics.

I have seen these messages on numerous client VAT returns but all the checking is done prior to accessing the form. This is what we do as agents and why our clients employ us- check the figures are correct. A silly tick box is no substitute for years of professional training and experience.

An under-resourced HMRC should concentrate on answering the phone not futile PR exercises.

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By Echo761
12th Sep 2019 12:24

Perhaps a similar "honesty" box should be included before Boris says anything. "Are you sure Boris... really really". But yes this is just more psychological babble from HMRC. How do they know the increase in VAT was due to nudging... or Brexit stockpiling... or more sales of ice cream over a hot summer.

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