N EWS E XTRA Help make VAT simpler
VAT is a tax that, from the government’s point of view, is very successful. It raised some £117bn last year – 22% of government revenues. And it’s cheap to collect – the VAT-registered trader does most of the work and HMRC just polices it. Adam Bernstein reports.
THE PROBLEM IS that VAT is an admin burden, is complex and even with help from accounting systems, creates lots of worries. Could it all be simpler? Could that burden be reduced? The government is thinking it could and through a review being undertaken by an independent department, you have a chance to contribute to simplify VAT.
Background As Paul Morton, tax department running the review, points out, the UK adopted VAT when it joined the EEC, the EU’s forerunner, in 1973. Since then, the business environment has changed dramatically and VAT has grown in size, complexity and importance. And with the UK planning to leave the EU, VAT is going to be affected by Brexit. Recently, the Chancellor of the Exchequer asked the OTS review of VAT. The OTS are independent advisers to government on matters as Morton says, “brings together public and private sector experts to look at areas of the tax system and develop recommendations for making it simpler.”
Surely VAT is simple? Those old enough may remember that when VAT was coming in, the then Chancellor, Anthony Barber MP, declared that “VAT will be a simple tax”. But it’s not and lots of areas cause often in deciding whether to charge VAT on something or not.”
Morton understands that that products and services keep changing and evolving. “Commerce now is light years away from 1973. VAT
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hasn’t really kept up and that’s what we are looking for: examples of where the tax is causing problems because of the way business operates today.”
Under the microscope areas that are particularly complex and so offer scope discussed in Progress report and call for evidence it published on its website at the end of February*.
Four are particularly in- teresting to the OTS: The VAT registration threshold: this is when a business has to sign up for VAT and start charging it. Morton points out that the UK’s level is £83,000; most others countries are around £20,000: “This can encourage traders to stay below the current £83,000 annual level. We’re told that distorts competition with someone who can stay below the VAT limit gaining a price advantage compared with the VAT-registered trader.” Morton poses questions - would it be better to raise the UK’s registration level further, which would cut out more businesses, but costs the government money?
Or should it be lowered? – perhaps to the £20,000 average? But as Morton points out – “that would level but means more small businesses have to deal with it – how would they cope?” Rates of VAT: changing tax rates is outside the OTS’s remit but what it’s interested in are boundary issues that cause problems in to decide what rate to apply? Is that down to product development where VAT hasn’t kept up?
There are of course some famous examples here says Morton. “Some may recall the case over whether a Jaffa Cake was a chocolate- case was decided by a VAT tribunal as it being a cake - they start soft and go hard with age whereas biscuits are the reverse.”
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Some may recall the case over whether a Jaffa Cake was a chocolate-covered biscuit (that would be subject to VAT) or a cake (zero- rated and so no carried no VAT).
Partial exemption: Morton says this is a more technical issue, but it’s not the obscure area it once was. The idea is that a trader claims back VAT they have paid on goods and services purchased. The catch is that the purchases have to be linked to supplies they make that are subject to VAT, at the 20%, 5% or 0% rate. If the purchase links to a supply that is exempt or just can’t be reclaimed. Morton says “these circumstances are ‘partial exemption’ and seem to catch far more businesses than it used to. A classic example: the farmer who now rents out surplus buildings.”
Special accounting
schemes: there are a range of schemes which were designed to simplify VAT accounting. Morton lists
schemes, annual accounting, and retail schemes. The OTS wants to know if they are still working properly and Morton asks: “Do they still simplify – do they need amending? Are some no longer needed?” There are other areas listed in its report that the OTS will be examining - VAT administration, penalties and appeals; Capital Goods scheme; Option to Tax; a rulings system; and whether particular business sectors need to be taken into account. “But as well as what we have set out, people will no doubt have their own issues that cause complexity.”
The OTS needs your help The OTS gathers evidence from those who deal with the tax system – businesses, advisers – anyone with an interest. “We’ll do some of our own analysis,” says Morton, “but we need people – especially small businesses – to tell us what and so what would make life simpler.”
“We welcome all
submissions and comments, however short or long and whether they answer some or all of the questions we pose in our progress report. Please email us at ots@ots.
gsi.gov.uk.” Morton says that comments would be most useful if they were received by July as the OTS has to prepare a report for the Chancellor in the Autumn.
Remember – the OTS wants to set out practical ideas that will make a difference and which can be developed as VAT is reviewed in the Brexit context. Do help the OTS; you may not get such a good chance as this.
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https://www.gov.uk/ government/collections/ots- review-of-value-added-tax
April 2017 BMJ
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