VAT should extend to financial services, says IFS

The Institute for Fiscal Studies (IFS) has proposed extending VAT to nearly all spending – including financial services – following its wide-ranging review into the UK’s tax system.

It said the UK applies a zero rate of VAT to far more goods and services that most other countries and believes a change could reduce complexity and, as a result of the extra money raised, lead to a reduction in income tax.

It pointed out it believes it would be "hard to apply" VAT to financial services in the same way it is applied to other goods and services, but it said a tax "broadly equivalent" to VAT should be applied.

The review also suggests inheritance tax (IHT) should be completely changed because it is ‘ineffective', and allows the wealthy to avoid paying it by exploiting loopholes. It recommended it should be switched to a system where the person who receives the inheritance is taxed, rather than a tax on the dead person's estate.

The five-year Mirrlees Review sought to identify the characteristics of a good tax system for the 21st century and to assess the extent to which the UK system conforms to those ideals.

It was carried out by a group of experts under the chairmanship of Nobel laureate Sir James Mirrlees.

Other recommendations include:

• Linking council tax to up-to-date values of homes, rather than a 1991 valuation, and abolishing stamp duty

• Merging income tax and National Insurance. Confusion of the system was clear when many basic rate taxpayers paid more in National Insurance contributions than income tax

• Making all savings tax free if they do not involve any risk, to avoid saving being discouraged by the tax system

• Changing corporation tax in order for businesses to avoid an excess reliance on debt

IFS director Paul Johnson said: "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."