VAT how did the 'fiscal theme park' get so complicated?

21 December 2016

David Wilson

While it would be all too easy to blame the EU for the complexities of VAT – after all, UK VAT follows the European VAT Directive – many of these complexities are of the UK’s own making.

Remember the infamous debate as to the VAT liability of Jaffa Cakes depending on whether it’s classed as a cake or a biscuit? Or the ‘omnishambles’ Budget of 2012 where we had the ‘pasty tax’? And only last month HMRC announced changes to the Flat Rate Scheme which could, theoretically, see a self-employed builder applying six different VAT rates in the first eighteen months of his business.

The announcement that the Office of Tax Simplification is to undertake a simplification review of the UK VAT system is therefore welcome. Although this review will not address the VAT rate structure, or issues likely to arise in the context of Brexit, the Terms of Reference, which have just been published, suggest that the scope is wider than expected. Nobody will envy the task.

In looking at VAT registration thresholds for instance, the OTS will have to 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.

And how will the OTS manage to future-proof definitions of the types of supply which are currently reduced-rate 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?

We should also spare a thought for the OTS in its attempt to align VAT more with other taxes as part of the making tax digital plans. VAT is a transactional tax, requiring a different type of analysis, and reporting, from other taxes.

Lord Justice Sedley famously observed 'Beyond the everyday world, lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted.' Here’s hoping the OTS enjoy the ride.

For more information please get in touch with David Wilson, or your usual RSM contact.