VAT is a Simple Tax or perhaps it could be!
Tuesday 7th November saw the publication of the Report from the Office of Tax Simplification (OTS) into potential routes for the simplification of VAT here in the UK. Co-incidentally on the same day Louise Gray and Liz Maher were at the Orca Law VAT Conference where Ruth Corkin from the OTS was speaking and thus we could hear directly from the team about the report.
There is common ground that VAT in the UK has become a complex tax to administer especially in terms of identifying the correct VAT liabilities to apply to transactions. Many people are familiar with the old “Jaffa cake” challenge but we’ve also had “Pastygate” – on the ambient temperature of baked goods to determine VAT liabilities - and whilst these are often light hearted discussion topics they do illustrate the challenge that awaits businesses of all sizes to ensuring they correctly account for VAT on their activities.
A drive towards a simpler VAT system would be welcomed by organisations where VAT is a real cost, for example, the UK Charity sector where the burden of VAT they pay out but cannot recover is estimated to be in the region of £1.5bn each year. To enable that VAT to be recovered would require changes to VAT legislation to either expand the right to recovery of non-business related VAT costs to a wider group of charities than is currently covered by S33 of the VAT Act 1994 and/or changes to move a current VAT Exempt treatment of Charitable activities, such as Health and Welfare Services supplied by the charity, to a Zero Rated (and therefore Taxable) treatment.
The Simplification Report is therefore to be welcomed as it is laid before Parliament for their consideration. The OTS is at pains to be clear that it reporting possible options that could be followed by HM Treasury and HMRC and not making recommendations. Indeed one option that has been creating a lot of press headlines is that the UK VAT registration threshold could be reduced to £26,000 bringing a further 1 million smaller businesses into the VAT arena and a possible increase in revenues over £1.5bn. Many commentators may regard this as hardly a simplification measure. However it should be noted that 44% of all VAT registration are voluntary (ie the business trades under the current registration threshold of £85,000). In addition if an £85,000 registration limit IS perceived as a disincentive for growth in a business then is this feeding into the continuingly reported low levels of productivity in the UK as a business actively chooses to stay below a VAT threshold.
The OTS Report submitted to Parliament is accessible here and it’s 8 core recommendations and 15 administrative and technical recommendations will be of interest to many. The challenge will be implementation of some or indeed any in the context both of impact on revenue generation, resources to manage any changes from HMRC’s perspective and the “perfect storm” of VAT related issues already out there from Brexit, Making Tax Digital and the continuing policy proposal coming out of the EU Action Plan – which you as long as we remain within the Single Market – will have a potential impact on UK VAT policy.
We live – as has been said before – in interesting times.
Value added tax: routes to simplification