The simplification of VAT

We can all remember the infamous debate on the VAT liability of Jaffa Cakes, which in UK VAT law depended on whether it was a cake or a biscuit, and the ‘omnishambles’ Budget of 2012 where we had the ‘pasty tax’. Indeed, as recently as the Autumn Statement in November 2016, HMRC announced changes to the VAT Flat Rate Scheme which could, theoretically, see a self-employed builder applying six different VAT rates in the first 18 months of his business.

The announcement that the Office of Tax Simplification (OTS) is to undertake a simplification review of the UK VAT system is therefore welcome. The terms of reference will not address the VAT rate structure, or issues likely to arise in the context of Brexit, but it is welcome that the scope is wider than originally anticipated.

RSM is one of only two major accounting firms sitting on the committee which is tasked with considering how to help ensure that the VAT system works appropriately in today's economy. This will include consideration of:

  • the issues and impacts if VAT registration thresholds were higher, or lower;
  • the extent to which definitions of supplies subject to VAT exemptions and reduced rates create complexity and administrative burdens on businesses;
  • the level of demand and challenges of a more widely available formal HMRC rulings system to address uncertainty over the VAT treatment of particular transactions (eg on transfers of going concerns - TOGCs);
  • how to simplify partial exemption calculations, options to tax land and property, and accounting for VAT within the capital goods scheme;
  • special accounting schemes, including cash, annual accounting and flat-rate schemes; penalties and appeals; and
  • the scope for alignment of VAT with other taxes as part of the government’s ‘making tax digital’ proposals.

In looking at VAT registration thresholds for instance, the OTS will consider at what threshold VAT should be applied to turnover, whilst still encouraging growth for small businesses; currently, a business earning just over £83,000 has to increase its business by one-sixth – the VAT fraction – just to stand still.

On reviewing the application of an option to tax land and property (thereby turning what is an exempt supply into a taxable supply), the OTS may find that it would be far simpler to apply VAT at the standard rate to all commercial property transactions. This would not only simplify this particular part of VAT legislation, but would also simplify, and potentially remove, a large chunk of VAT anti-avoidance legislation relating to these provisions.

A challenge will undoubtedly be how the OTS could future-proof definitions of the types of supply which are currently reduced-rated or are zero-rated, when for example; the UK seems intent on continuing anomalies, like applying VAT to e-books when printed books are zero-rated?

Aligning VAT more with other taxes as part of the 'making tax digital' (MTD) plans is certainly a matter which warrants review. VAT is a transactional tax requiring a different type of analysis and reporting from other taxes. The current proposals to implement MTD for VAT at the same time as the UK is expected to leave the EU in the spring of 2019 seem likely to impose an increased administrative burden on VAT registered businesses, at a time when other VAT and customs duty changes are likely.

The OTS is expected to provide a report of its review to the Chancellor and the Treasury in the autumn of 2017; thereafter, we would expect a formal consultation exercise on particular contents of the OTS report to be issued by HMRC.

For more information, please get in touch with Ian Carpenter, or your usual RSM contact.