The Office of Tax Simplification (OTS) will shortly publish a report setting out a range of proposals for simplifying VAT.
After over 40 years, the tax is showing its age. What was meant to be a simple tax has become highly complex and it has not kept pace with changes in society.
Angela Knight CBE, Chair of the OTS board, said:
This report presents an opportunity to start addressing the many anomalies of VAT. The tax is awash with layers of complexity reflecting both its evolution over the last 45 years and aspects of the Purchase Tax that VAT replaced. For small businesses, this report will propose ways of simplifying many irritating administrative technicalities and kick off a debate about the registration threshold.
Paul Morton, OTS Tax Director, said:
This report will flag up the effects of the registration threshold, how entry into the VAT system might be smoothed and many other areas 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. In addition, there will be opportunities to build on the good work of the last few years in improving the administrative aspects of the running of the VAT system.
The OTS’s core recommendations will include:
that the government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism
that HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty
that HM Treasury and HMRC should undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS
The most significant issue identified in the report is the VAT registration threshold - the turnover level above which a business must enter the VAT system and charge VAT on its sales. At £85,000 the UK has one of the highest levels in the world.
By enabling many small businesses to stay out of the VAT system the high threshold is a form of simplification, but it’s an expensive relief, costing around £2bn per annum, and evidence strongly suggests that many growing businesses are discouraged from expanding beyond this point. The report looks at options for reducing the current ‘cliff edge’ effect resulting in a very visible bunching of businesses just before the VAT threshold, and an equally large drop off in the number of businesses with turnovers just above the threshold. Also examined are the advantages and disadvantages of lowering or increasing the threshold.
VAT has many ‘quirks’. For example, it is well known that a Jaffa cake is a cake (zero-rated) rather than a chocolate-covered biscuit (taxed at 20%). Less well known is that while children’s clothes are zero-rated, including many items made from fur skin, items made from Tibetan goat skin are standard-rated. And a ginger bread man with chocolate eyes is zero-rated but if it has chocolate trousers it would be standard rated. VAT zero rates cost over £45bn per annum to maintain. EU law limits options to make changes in this area but there is a longer-term opportunity to significantly improve the efficiency, simplicity and fairness of the UK VAT system.
The report also
makes recommendations for improving the day to day administration of the tax, including better and more accessible guidance and a less uncertain penalty system. This would particularly benefit small businesses
considers specific areas of technical difficulty, including the partial exemption regime, the capital goods scheme, the option to tax and other special schemes
Notes for editors
The OTS is the independent adviser to government on tax simplification, challenging tax complexity to help all users of the tax system; it does not implement changes - these are a matter for government and for Parliament.
This report takes a wide-ranging look at the potential for VAT to be simplified, based on feedback from over 80 trade associations, businesses, professional bodies and individuals.
The report is expected to be published on 7 November.
VAT was introduced in 1973 on entry of the UK into what is now the European Union. VAT is the third largest source of tax revenue collected by HMRC after income tax and National Insurance Contributions, raising £120bn in 2016-17 which amounted to 22.5% of all taxes.
The partial exemption regime covers businesses that make a mixture of taxable and exempt supplies and thus cannot reclaim all VAT that is charged to them.
The capital goods scheme monitors the use of certain capital assets over periods of 5 or 10 years, in case the use changes: changes of use alter the tax that can be reclaimed.
The option to tax regime allows a business to make certain supplies of land taxable, which would otherwise be exempt, thus allowing it to reclaim VAT charged to it.
The £2bn cost for the threshold is an estimation based on the difference between the current threshold of £85,000 and the EU minimum threshold of €10,000.
The OTS team is led by Chairman Angela Knight CBE and Tax Director Paul Morton and has a small staff drawn from HM Treasury, HM Revenue and Customs and the private sector.
The OTS works to improve the experience of all who interact with the tax system. It aims to reduce the administrative burden - which is what people encounter in practice - as well as simplifying the rules. Simplification of the technical and administrative aspects of tax are each important, both to taxpayers and HMRC.
Press enquiries only please contact Ed Rowley, OTS Press Officer - Phone 03000 585 028