Office of Tax Simplification (OTS) Review of VAT
Gareth Bevan 2 March 2017 No comments
At the 2016 Autumn Statement, the Chancellor of the Exchequer and the Financial Secretary to the Treasury asked the Office of Tax Simplification (OTS) to conduct a review of VAT. The objective of the review was to see whether the VAT system was fit for purpose in the modern economy and to identify potential areas for simplification. The terms of reference for the review are available here.
The OTS has now published an interim report paper providing an update on the work carried out so far. The report highlights areas of complexity identified to date, together with a list of questions on each area and a call for evidence.
How you can help
The OTS would like to hear from businesses, advisers and others who deal with VAT about their experiences of the issues raised in the report as well as any other ideas they might have to simplify the system. In particular they are asking for:
- Evidence of how the areas identified cause difficulties and complexities
- Ideas for how to improve matters
- Identification of any other areas for simplification not included in the report.
The areas of complexity identified
The 8 specific aspects of VAT the OTS are reviewing together with the issues they are seeking views on are:
- “The implications of a high registration threshold
The UK VAT registration threshold, at £83,000, is much higher than most other countries’ (generally closer to £20,000 across all countries with a VAT system or equivalent). This influences and distorts business behaviour. Would it be less distortive if the UK’s threshold were lowered to bring in more businesses? If so, how would those small businesses cope? What would be the impact of raising the limit to remove more businesses from VAT? Or could the ‘cliff edge’ of registration be managed better?
- Multiple rates: Causes of complexity
The UK currently has in effect four different VAT rates: the standard 20% rate, the 5% reduced rate, a zero-rating, and exempt goods and services. The definitions—and practical application of definitions—of items within each rate cause a lot of complexity. How might this be simplified?
- Partial exemption, option to tax and capital goods scheme
These have been raised as some of the most complicated areas of VAT. Many more businesses now seem to be affected. Can they be simplified? Or are there ways to amend them to reduce their range and impact?
- Special Accounting Schemes
There are several schemes, including the flat rate scheme, retail schemes, tour operators margin scheme and annual accounting scheme, generally designed to simplify the VAT regime. Business practices and technology have changed significantly since they were designed, so are these schemes working appropriately today? Do they need improving – or are any in fact no longer needed?
- VAT admin, penalty and appeals processes
Many have reported complications ranging from unclear guidance to opaque penalty regimes and resource-consuming appeals processes. We’ve begun identifying specific complexities in the VAT machine and are open to any suggestions on how this might be simplified, increasing certainty for businesses.
- Formal ruling system
We’ve already had suggestions that uncertainties around VAT treatment can delay or prevent many business decisions, especially when bringing a new product to market. A rulings system sounds a possible route but how would it work? Would it provide enough simplification to justify its introduction, given the demands it would place on HMRC?
- VAT and Making Tax Digital (MTD)
HMRC’s MTD plans encompass VAT so that brings opportunities and risks. Which areas of the VAT regime need to be simplified to better fit into MTD? And what simplification could MTD bring to the VAT regime – how would the special accounting schemes be affected?
- Further areas for investigation
We have also identified some further issues including sector specific considerations. What other complexities are out there that we need to address?”
The full list of questions posed in the report on each of these areas can be found in Annex 2.
The OTS are asking for responses by 30th June 2017 with a view to producing a second report in the Autumn with their recommendations for simplification.
Anyone wishing to be involved can either provide written responses or arrange a meeting with the OTS to discuss their views.
If there are particular areas of the UK VAT system that you find problematic then we would urge you not to miss this opportunity to have your say and contribute to the review.