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A long road to VAT simplification

Last month the Office for Tax Simplification (OTS) published recommendations for the simplification of Value Added Tax (VAT). The long-awaited report followed feedback from trade associations, businesses, professional bodies and individuals.

The consensus is that VAT, a tax invented in 1973, has now become much too complicated. Here we summarise some of the key recommendations that can be found in the OTS’s report:

The VAT registration threshold

The UK currently has the highest VAT threshold in the world at £85,000. Businesses with a turnover exceeding this must charge VAT on sales. This threshold means most smaller businesses are not caught up in the regime. However, the threshold represents a significant cost to the Government of around £2bn a year. Not only this, but many small businesses are discouraged from expanding beyond it.

The OTS recommends an examination of the current approach to the level and design of the VAT registration threshold. The Government should also consider the future direction of the threshold, as well as the implementation of a ‘smoothing mechanism’. Potential smoothing mechanisms include the following:

  • smoothing the cash impact of becoming registered;
  • the administrative impact;
  • both cash and administration or a;
  • time-limited reduction in VAT Flat Rate Scheme rate for newly-registered businesses & a financial taper

Any such mechanism could offer businesses the means to pass more easily across the threshold. Ideally, the ‘cliff edge’ effect would be eliminated. This means there would be less bunching below the threshold and a far less drastic drop-off beyond it. For now, however, the threshold is frozen at £85,000 until 2020 to allow time for further consultation.

VAT administration and guidance from HMRC

Based on feedback from respondents, the OTS makes a couple of recommendations in respect of administration. As outlined in the report, the Government should look to improve the clarity of VAT guidance. It should also consider ways of reducing uncertainty relating to administrative processes. 

As VAT is a transaction tax, it is important to know how to treat individual transactions in real time. This process though, is not without its hurdles and various improvements could be made to make life easier for businesses. To achieve this, the OTS suggests making improvements to the customer experience, but also enhancing the relationship between HMRC and businesses.

VAT rates

The UK has, in effect, four different VAT treatments: the standard rate (20%), the reduced rate (5%), the zero-rate, and exemption, plus some supplies being outside the scope of VAT. Currently, where goods and services are not subject to the standard VAT rate, a reduced rate, zero rate, or exemption may apply. It is also possible for businesses to be using all 4 treatments, as appropriate, across their sales. 

The OTS question whether the current system has kept up with changes to Government policy or society in general. It recommends a comprehensive review of the rates structure to eliminate complexities and ensure that the system can adapt to meet Government objectives going forward.

So, what happens now?

The Government should now grab the opportunity to begin to address the many anomalies of VAT. Going forward, its aim should be to notably improve the efficiency, simplicity and fairness of the system in the long-term. However, in the Autumn Budget, delivered shortly after the OTS published its report, the Chancellor failed to implement measures that would bring the recommendations into effect.

In a letter to the OTS, the Chancellor acknowledges the valuable insight offered by the report. Rather than propose measures to be introduced, however, Hammond states that the issues raised will be ‘considered’ further. He goes on to say that the Government will continue to engage with relevant organisations in the hope of moving towards a simpler tax system.

It seems therefore, that there is a long road ahead if we are to reach a simpler system and for now its complexities remain. Often, businesses find it difficult to understand the abundance of associated rules and regulations and how to apply these correctly, without the need for professional assistance.

As with any tax there are always opportunities for planning to ensure that VAT liabilities are minimised. We can help businesses to recognise opportunities to plan and minimise liabilities, we can discuss the various VAT schemes that exist and whether they might be beneficial and we can help businesses to identify any potentially costly mistakes, before it’s too late.

This is an extended version of the blog we originally produced for the UK200 Group which can be found here. The full OTS report can be found here.

If you’d like to discuss tax planning with one of our team, call 01767 315010 or email biggleswade@georgehay.co.uk

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