This month The Office Of Tax Simplification has published a document called “Value added tax: routes to simplification”. This includes 23 recommendations on how VAT may be simplified in the UK. This is the first Office of Tax Simplification review to focus specifically on VAT and it takes a high level look at areas where simplification of either law or administration would be worthwhile.
The report specifically covers the following areas:
- VAT registration threshold
- VAT administration
- Multiple rates
- Partial exemption
- Capital Goods Scheme
- The option to tax
- Special accounting schemes
The dominant issue that came out of the report is the level of turnover above which a business is required to pay VAT, known as the VAT threshold. At £85,000, the UK has the highest VAT threshold in the EU. The report considered a range of options for reform, in particular setting out the impact of either raising or lowering the threshold to avoid the current “cliff edge” position (many business restrict growth in order to avoid VAT registration, creating a “bunching” effect. For example, lowering the threshold may create less drag on economic growth but would bring a larger number of businesses into the VAT system. Alternatively, a higher threshold could also result in less distortion but it would clearly raise less tax.
It was noted that since the introduction of VAT in the UK, the relevant legislation has grown so that it is now spread across 42 Acts of Parliament and 132 statutory instruments while still retaining some of the complexities of the pre-1973 UK purchase tax system.
The report notes that: unlike income taxes, the VAT system is largely prescribed by European Union rules, so Brexit may present an opportunity to consider areas which could be clarified, simplified, or just made easier. It is not clear at present how Brexit will unfold so this review does not embrace aspects of the VAT system which are part of the Brexit negotiations, such as financial services, or focus specifically on cross-border trade.
The summary of the 23 recommendations are reproduced here:
- 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.
- HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty.
- HMRC should consider ways of reducing the uncertainty and administrative costs for business relating to potential penalties when inaccuracies are voluntarily disclosed.
- 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 government should consider increasing the partial exemption de minimis limits in line with inflation, and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations.
- HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing special method applications.
- The government should consider whether capital goods scheme categories other than for land and property are needed, and review the land and property threshold.
- HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled on-line.
- HMRC should establish a target to update guidance within a short, defined, period after a legal change or new policy takes effect.
- HMRC should explore ways to improve online guidance, making all current information accessible, and to gauge how often queries are answered by online guidance.
- HMRC should review options to reduce the uncertainty caused by the suspended penalty rules.
- HMRC should draw greater attention to the facility for extending statutory review and appeal time limits to enable local discussions to take place where appropriate.
- HMRC should consider ways in which statutory review teams can deepen engagement with business and adviser groups to increase confidence in the process, and for providing greater clarity about the availability and costs of alternative dispute resolution.
- HMRC should consider introducing electronic C79 import certificates.
- HMRC should consider options to streamline communications with businesses, including the process for making payments to non-established taxable persons.
- HMRC should looks at ways of enhancing its support to other parts of government (for example, in guidance) on VAT issues affecting their operations.
- HMRC should review its process for engaging with business and VAT practitioner groups to see if representation and effectiveness can be enhanced.
- HMRC should explore the possibility of listing zero-rated and reduced rate goods by reference to their customs code, drawing on the experience of other countries.
- HMRC should consider ways of ensuring partial exemption special methods are kept up to date, such as giving them a limited lifespan.
- The government should consider introducing a de minimis level for capital goods scheme adjustments to minimise administrative burdens.
- The government should consider the potential for increasing the TOMS de minimis limit and removing MICE businesses from TOMS.
- HMRC should consider updating the DIY House builder scheme to include clearer and more accessible guidance, increased time limits and recovery of VAT on professional services.
- HMRC should consider digitising the process for the recovery of VAT by overseas businesses not registered in the UK.
The Chancellor of the Exchequer must now respond to the advice given.
A lot of the areas identified have long been crying out for changes and the recommendations appear eminently sensible and long overdue. As an example, the partial exemption de minimis limit has been fixed at £7500 pa for 23 years and consequently the value of purchases it covers has reduced significantly with inflation. A complete read of the report with prove rewarding as it confirms a lot of beliefs that advisers have long suspected and highlights areas the certainly do require simplification. I am particularly pleased that the complexities of both partial exemption and TOMS have been addressed. Fingers crossed that these recommendations are taken seriously by the government and the Chancellor takes this advice on-board. I am however, not holding my breath. It is anticipated that the early indications of the government’s thinking may be set out in the next Budget.