Little empirical evidence is available on the effectiveness of such measures. However, a study by Copenhagen Economics (2007) suggests that reduced VAT rates are unlikely to be an effective mechanism to increase low-skilled employment. Using a general equilibrium model for the European economy as a whole, they find that reduced VAT rates can lower structural unemployment in sectors such as hotels and restaurants, without significantly reducing employment in other sectors. However, they find that this provides only a very limited boost to overall employment of low-skilled workers, as such sectors only employ a small fraction of all low-skilled workers. Furthermore, they find that applying the standard VAT rate to all sectors currently benefiting from reduced rates would be likely to create a similar boost in demand for low-skilled workers, but without distorting consumption decisions. They note that direct subsidies may be a better-targeted and more transparent approach, with lower compliance costs. IFS (2011b), meanwhile, argue that alternative mechanisms such as active labor market policies, employment regulation reform, and education investment would be likely to be better targeted ways of addressing structural unemployment of low-skilled workers.

Finally, applying a reduced VAT rate to increase employment is also likely to have broader distributional effects. In particular, restaurant food and hotel accommodation are likely to be consumed disproportionately by better-off households, who would then benefit disproportionately from a reduced rate on these activities (OECD/KIPF, 2014).

# 4.4 Practical implementation issues

Finally, the application of a multi-rate VAT system increases the complexity of the system, thereby increasing administrative and compliance costs, creating opportunities for tax avoidance and evasion, as well as increasing susceptibility to lobbying.

A large number of studies point to the increased compliance and administration costs associated with multi-rate VAT structures (e.g., Ebrill et al., 2001; Copenhagen Economics, 2007; IFS, 2011b; IHS et al., 2015; Abramovsky et al., 2017). In particular, the use of multiple rates requires accounting, invoicing and tax reporting systems to separately record purchases and sales involving different VAT rates. In contrast, a single VAT rate enables simpler reporting systems with less possibility of error. Ebrill et al. (2001) argue further that simple records, invoices and tax forms will in turn support the effective operation of self-assessment systems as well as more effective taxpayer education and staff training. A single rate will also aid audit activity, as verification is not required of the breakdown of purchases and sales between different rates. A single rate will also reduce scope for disputes over classifications (and limit fraud by reducing possibilities for deliberate misclassification). A single rate will also reduce the number of refunds that tax administrations must process.

While there is significant empirical evidence on the overall compliance and administrative costs of the VAT, there is unfortunately only limited evidence specifically on the impact of rate structure. An early study by Sandford et al. (1981) found that the average compliance costs of firms in the United Kingdom with output subject to multiple rates were more than twice those of firms with output only subject to a single rate. Copenhagen Economics (2007), meanwhile, point to practical evidence from Sweden showing roughly 20 percent of all VAT disputes to be linked to arguments about whether a particular product should be subjected to a low or high VAT rate. Abramovsky et al. (2017) provide examples of court cases from the United Kingdom involving disputes over classifications. These include cases considering whether Pringles should be classified as potato crisps (standard-rated) or savory snacks (zero-rated), and whether Jaffa Cakes are chocolate-covered biscuits (standard-rated) or chocolate cakes (zero-rated). Meanwhile, for a sample of OECD countries, Agha and Haughton (1996), find that VAT compliance decreases significantly the greater the number of VAT rates – suggesting these problems manifest in lower compliance.

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