The Office of Tax Simplification (OTS) has published a report into VAT simplification following feedback from trade associations, businesses, professional bodies and individuals.
VAT revenue accounted for £120bn of revenue in 2016-17 – 22.5% of all taxes – but the OTS has said that the UK’s VAT regime is now “showing its age”, having first been introduced in 1973.
As European Union rules govern much of the UK VAT system, Brexit has presented an opportunity to reform the VAT regime, however, the OTS has not considered in its review VAT rules that are under negotiation or focus on cross-border trade.
The OTS review has centred on three key areas: the VAT registration threshold; administrative changes; and complexity surrounding the types of supply subject to VAT relief.
VAT registration threshold
Currently, businesses with turnover over £85,000 must charge VAT on sales – one of the highest registration thresholds globally. The OTS said that the high threshold was a “form of simplification”, as it allowed smaller businesses to be removed from the VAT regime, but that it was an “expensive relief”, costing the government £2bn revenue each year. The average threshold in the EU is £20,000.
The threshold discourages business expansion, said the OTS, with many businesses “bunching” just below the threshold to avoid VAT liability and increased administrative burden.
The report sets out a number of options for either increasing or reducing the threshold and the potential implications of each strategy. While reducing the threshold would increase tax compliance for many businesses, raising the threshold would result in a depleted revenue intake – impacting funds for public services.
The OTS has recommended that the government review the VAT registration threshold and consider a “smoothing mechanism” by which the government could implement measures to ease businesses over the threshold.
VAT administration
The OTS highlighted that those providing feedback has voiced concern over the “comprehensiveness” of parts of HMRC guidance and the HMRC response to requests for rulings. The OTS recommended that the revenue authority improve the clarity of the guidance provided and improve its responsiveness to requests for rulings on uncertain areas.
Uncertainty was also flagged as being an issue in regard to penalties. In cases where errors occur, businesses are encouraged to voluntarily disclose the inaccuracies, yet they are required to notify HMRC about the error for penalty consideration. While most voluntary disclosures have not resulted in a penalty being issued, businesses said that the process created added uncertainty.
The OTS has called on HMRC to consider ways to relieve the uncertainty and reduce administrative costs for business in relation to penalties.
VAT rates
Where goods and services are not subject to the standard VAT rate, a reduced or zero rate, or exemption may apply. The OTS said that the different treatment resulted in complexity and that a “comprehensive review” of the rates was necessary. The objective of the review would be to simplify the rates structure and ensure that they can better adapt to changes in “government objectives, the market and technology”.
Paul Morton, OTS tax director, said that the report aimed to highlight “where simplification would be beneficial, particularly the complex and often subjective boundaries between those supplies which are standard rated and those which fall within the reduced or zero-rates or which are exempt”.
The report also considered the capital goods scheme and option to tax process.
Industry reaction
Responding to the report, CIOT welcomed the recommendations.
Chair of CIOT’s Indirect Taxes Sub-Committee Alan McLintock, said the accountancy body “support strongly making the rules on VAT less complex and easier to apply, in the expectation that it should lead to less uncertainty among business, and fewer disputes with HMRC”.
“We especially agree that the government should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty. Many areas of guidance are lacking in detail and are updated too slowly. Further, HMRC often decline to give rulings on the basis that the issue is adequately covered in guidance, but if the business or its adviser does not believe the matter is clear this leads to an unwelcome impasse,” he added.
Head of the ICAEW Tax Faculty said that VAT has “vastly more complicated to administer and is a significant burden that falls disproportionately on smaller businesses”.
Speaking on the VAT registration threshold, Haskew set out the argument for maintaining or increasing the current level. He said: “Although the current VAT registration threshold of £85,000 is high, it is in practice a major simplification measure for smaller businesses. We believe it should be retained at its current level or consideration be given to increasing it further, perhaps with measures to ease businesses into VAT to avoid the ‘cliff edge’ effect.”
Last month, the Public Accounts Committee criticised HMRC on its stance towards VAT fraud, calling for urgency in cracking down on overseas companies engaged in illegal tax practice using online trading platforms.
Recently, the Supreme Court has ruled in favour of HMRC in a £1.25bn VAT dispute with Littlewoods.