Better VAT collection may fill fiscal gap without politically difficult rate rises
The OECD is recommending as the UK public finances strain and tax rises become unavoidable, VAT should be the first lever to pull.
Its latest assessment of the UK economy argues that increasing VAT would be less damaging than raising income tax or National Insurance. But both are locked under the 2024 Labour Election Manifesto commitments.
The UK is behind much of Europe on plans for live VAT transaction reporting. A limited Making Tax Digital 2019 mandate is as far as it goes; but plans for April 2029 e-invoicing are underway. But what about e-reporting?
VAT has become the tax governments trust
Around the world, governments increasingly favour indirect taxes over direct taxes when budgets come under pressure.
The reasons are simple. VAT generates predictable revenues, is collected throughout the supply chain, and is harder to avoid than many direct taxes. Even relatively modest changes can generate billions in additional receipts.
The OECD therefore describes VAT as the “most prudent” option if additional tax revenues become a last resort.
Collections via digital reporting and e-invoicing a solution
The report dodges talk of a politically fraught VAT rise. Instead, it argues that governments should first improve the VAT system itself by:
- broadening the VAT base;
- reducing exemptions where appropriate;
- tackling non-compliance, particularly amongst smaller businesses.
That mirrors the direction of travel across Europe. Rather than repeatedly increasing VAT rates, governments are investing in technology to close the VAT gap.
Electronic invoicing, digital reporting, real-time transaction controls and AI-driven risk analysis are becoming the preferred way to increase revenues without changing headline tax rates.
The UK’s digital VAT journey is only just beginning
Compared with much of Europe, the UK remains relatively early in its VAT digital transformation.
Making Tax Digital digitised VAT submissions, but not the underlying transaction data.
HM Treasury’s consultation on e-invoicing suggests the next phase will be far more ambitious. Electronic invoices create structured transaction data that allows both businesses and tax authorities to automate compliance and improve accuracy.
International experience shows this is becoming the new model of VAT administration.
The question is no longer whether governments will digitise VAT. It is how quickly they will do it.
VAT is becoming a strategic tax again
For governments, VAT is becoming one of the most important fiscal policy tools available. For businesses, VAT technology is no longer simply about filing returns. It is becoming critical infrastructure for managing tax risk, responding to new digital reporting mandates and adapting quickly as governments reshape their tax systems.
The OECD’s report is another reminder that the future of VAT is unlikely to be defined by a single rate rise. It will be defined by broader tax bases, smarter compliance and digital tax administration.
See more in our UK VAT Guide.
