Tag Archives: vat-registration

VAT – Top 10 Tips for small businesses and start ups

By Marcus Ward 5 July 2018

VAT Basics

Small business and start ups have a lot of things to think about – VAT being just one. However, failure to consider VAT can lead to difficulties and penalties. So here are some pointers for new and/or growing bushiness:

Plan ahead and know when to register for VAT
Make contact with your advisers
Monitor your turnover so that you know when you are approaching the VAT registration threshold
Keep your records up-to-date and check accounting documents
Speak to us if things go wrong or there’s something you don’t understand
Deal with VAT enquiries or HMRC’s requests for information promptly
Manage the VAT within your business cashflow
Don’t worry if Customs make contact with you
Right tax – right time
If you are not happy with Customs’ behaviour or have received an unhelpful or incorrect ruling; challenge it.

The overall message is; talk to a professional at an early stage. Timing is very important for VAT and you usually only have one chance to get it right.

Finally, regarding the first point – it may benefit a business to VAT register before it is required to (a so-called voluntary registration). I shall look at that in more depth in my next article.

VAT: Fulfilment Businesses – HMRC announce new rules

By Marcus Ward 12 March 2018

The Fulfilment Businesses (Approval Scheme) Regulations 2018

New regulations come into place on 1 April 2019 which will affect fulfilment businesses (entities which carry out the process of taking an order and executing it by making it ready for delivery to its intended customer, usually involving warehouse pickup, packaging, labelling, etc). These are known as The Fulfilment Businesses (Approval Scheme) Regulations 2018 and apply to businesses distributing goods to customers in the UK on behalf of suppliers based in countries outside the EU (third countries). The regulations set out that such businesses will be required to be approved by HMRC in order to carry on its activities. Voluntary registration will begin from 1 April 2018.

The rules cover:

how to register
how and when to make an application for approval
the obligations under the scheme (which include the requirement to carry out due diligence in respect of the third party suppliers and verifying a third country customer’s VAT registration number)
and, as always with VAT; the penalties for breaches of the regulations

The Finance (No. 2) Act 2017, section 49(1) provides that a person may not carry on a third country goods fulfilment business otherwise than in accordance with an approval given by the HMRC. A person carries on a third country goods fulfilment business if they meet the test set out in section 48 of the Finance (No. 2) Act 2017 . This test may be summarised as:

a person carries on a third country goods fulfilment business if the person, by way of business;
- stores third country goods which are owned by a person who is not established in a Member State, or
- stores third country goods on behalf of a person who is not established in a Member State,

at a time when the conditions below are met in relation to the goods.

The conditions are that:

there has been no supply of the goods in the United Kingdom for the purposes of VATA 1994, and
the goods are being offered for sale in the United Kingdom or elsewhere

Usually, but not always, these are goods purchased online. Goods are “third country” goods if they have been imported from a place outside the EU.

These regulations follow on from measures announced in 2016 which state that HMRC will direct certain representatives for overseas businesses to appoint a VAT representative with joint and several liability for online marketplaces. The measures enable HMRC to hold an online marketplace jointly and severally liable for the unpaid VAT of an overseas business that sells goods in the UK via that online marketplace.

These measures further strengthen HMRC’s hand in an area which they consider a substantial amount of VAT is lost to them.

Please contact us if these new rules affect you or your clients.

VAT: Making Tax Digital (MTD) New Regulations

By Marcus Ward 5 March 2018

The regulations for MTD have been published. These are known as The Value Added Tax (Amendment) Regulations 2018 and full details are available here

The Regulations set out that businesses to which the Regulations apply (see below) will be required to retain electronic records using functional compatible software and submit VAT returns via an Application Programming Interface (API) platform. HMRC has previously announced that acceptable software will include spreadsheets, but these will be required to be used in specific ways.

We are yet to see precise details of the relevant software and API platform, but it makes sense for VAT registered businesses to consider the implications of MTD and to plan for its introduction. 1 April 2109 seems a way off, but as always, it’s best not to wait until the last minute. We expect more information in the coming months and we will endeavour to keep you up to date.

Background

MTD for VAT will come into effect from 1 April 2019. From that date, businesses with a turnover above the VAT threshold (currently £85,000) will have to:

keep their records digitally (for VAT purposes only), and;
provide their VAT return information to HMRC through MTD functional compatible software

What is compatible software?

The VAT Notice defines “functional compatible software” as “a software program or set of compatible software programs the functions of
which include—recording and preserving electronic records in an electronic form; providing to HMRC information from the electronic
records and returns in an electronic form and by using the API platform; and receiving information from HMRC using the API platform in
relation to a person’s compliance with obligations under these Regulations which are required to be met by use of the software”.

Submission to HMRC may be either through linking/bridging software or via API enabling the spreadsheets to access HMRC APIs and report data to HMRC systems.

What HMRC say about MTD

MTD was introduced with the following comments:

“The government recognises that the majority of businesses want to get their tax right, but the latest tax gap figures published by HMRC show that too many otherwise compliant businesses find this hard, even some who use an agent to help them. As a result over £8 billion a year in tax is lost from avoidable taxpayer errors. This not only costs the public purse, it also causes businesses cost, uncertainty and worry when HMRC is forced to intervene to put things right.

HMRC wants to do more to help businesses get their tax right and MTD is a very important step in that direction. It will help businesses steer clear of avoidable errors, and give them a clearer view of their tax position in-year.

Businesses (including self-employed and landlords) will keep records of their income and expenditure digitally, and send summary updates quarterly to HMRC from their software (or app).

MTD will bring the tax system into line with what businesses and individuals now expect from other online service providers: a modern digital experience

MTD will help businesses get their tax and NICs right first time. That will reduce the likelihood of errors, giving businesses greater certainty

MTD is anticipated to take out around 10% of error on an ongoing basis, and give businesses a clearer view of their tax position in-year, enabling them to plan to meet their tax obligations at minimum cost and minimum disruption…”

Please contact us if you have any queries or would like to discuss MTD.

VAT: Doctors and healthcare professionals

By Marcus Ward 29 January 2018

VAT and Doctors

I have noticed that I am receiving more and more queries in this area and HMRC does appear to be taking an increased interest in healthcare entities. This is hardly surprising as it can be complex and there are some big numbers involved.

(This article refers to doctors, but applies equally to most healthcare professional entities.)

The majority of the services provided by doctors’ practices are VAT free. Good news one would think; no need to charge VAT and no need to deal with VAT records, returns and inspections.

However, there is one often repeated question from practices; “How can we reclaim the VAT we are charged?”

The first point to make is that if a practice only makes exempt supplies (of medical services) it is not permitted to register for VAT and consequently cannot recover any input tax. Therefore we must look at the types of supplies that a practice may make that are taxable (at the standard or zero rate). If any of these supplies are made it is possible to VAT register regardless of the value of them. Of course, if taxable supplies are made, the value of which exceeds the current turnover limit of £85,000 in a rolling 12-month period, registration is mandatory.

Examples of services and goods which may be taxable are:

Drugs, medicines or appliances that are dispensed by doctors to patients for self-administration
Dispensing drugs against an NHS prescription (zero-rated)
Drugs dispensed against private prescriptions (standard-rated)
Medico legal services that are predominately legal rather than medical – for example negotiating on behalf of a client or appearing in court in the capacity of an advocate
Clinical trials or market research services for drug companies that do not involve the care or assessment of a patient
Paternity testing
Certain rental of rooms/spaces
Car parking
Signing passport applications
Providing professional witness evidence
Any services which are not in respect of; the protection, maintenance or restoration of health of a patient.

So what does VAT registration mean?

Once you join the “VAT Club” you will be required to file a VAT return on a monthly of quarterly basis. You may have to issue certain documentation to patients/organisations to whom you make VATable supplies. You may need to charge VAT at 20% on some services. You will be able to reclaim VAT charged to you on purchases and other expenditure subject to partial exemption rules (see below). You will have to keep records in a certain way and your accounting system needs to be able to process specific information.

Because doctors usually provide services which attract varying VAT treatment, a practice will be required to attribute VAT incurred on expenditure (input tax) to each of these categories. Generally speaking, only VAT incurred in respect of zero-rated and standard-rated services may be recovered. In addition, there will always be input tax which is not attributable to any specific service and is “overhead” eg; property costs, professional fees, telephones etc. There is a set way in which the recoverable portion of this VAT is calculated. VAT registered entities which make both taxable and exempt supplies are deemed “partly exempt” and must carry out calculations on every VAT return.

Partial Exemption

Once the calculations described above have been carried out, the resultant amount of input tax which relates to exempt supplies is compared to the de-minimis limits (broadly; £625 per month VAT and not more than 50% of all input tax). If the figure is below these limits, all VAT incurred is recoverable regardless of what activities the practice is involved in.

VAT registration in summary

Benefits

Recovery of input tax; the cost of which is not claimable in any other way
Potentially, recovery of VAT on items such as property, refurbishment and other expenditure that would have been unavailable prior to VAT registration
Only a small amount of VAT is likely to be chargeable by a practice
May provide opportunities for pre-registration VAT claims

Drawbacks

Increased administration, paperwork and staff time
Exposure to VAT penalties and interest
May require VAT to be added to some services provided which were hitherto VAT free
Likely that only an element of input tax is recoverable as a result of partial exemption
Uncertainty on the VAT position of certain services due to current EU cases
Potential increased costs to the practice in respect of professional fees.

Please contact us if any of the above affects you or your clients.

VAT – What records must be kept by a business?

By Marcus Ward 9 January 2018

Requirements for VAT records by taxable persons

I thought that it may be useful to round-up all the record-keeping requirements in one place and focus on what HMRC want to see. It is a good time to review record-keeping requirements as Making Tax Digital (MTD) is on the horizon. More on MTD in a later article.

General requirements

Every taxable person must keep such records as HMRC may require. Specifically, every taxable person must, for the purposes of accounting for VAT, keep the following records:

business and accounting records
VAT account
copies of all VAT invoices issued
VAT invoices received
certificates issued under provisions relating to fiscal or other warehouse regimes
documentation relating to acquisitions of any goods from other EC countries
copy documentation issued, and documentation received, relating to the transfer, dispatch or transport of goods by him to other EU countries
documentation relating to imports and exports
credit notes, debit notes and other documents which evidence an increase or decrease in consideration that are received, and copies of such documents issued
copy of any self-billing agreement to which the business is a party
where the business is the customer party to a self-billing agreement, the name, address and VAT registration number of each supplier with whom the business has entered into a self-billing agreement

Additionally

HMRC may supplement the above provisions by a Notice published by them for that purpose. They supplement the statutory requirements and have legal force.

Business records include, in addition to specific items listed above, orders and delivery notes, relevant business correspondence, purchases and sales books, cash books and other account books, records of daily takings such as till rolls, annual accounts, including trading and profit and loss accounts and bank statements and paying-in slips.

Unless the business mainly involves the supply of goods and services direct to the public and less detailed VAT invoices are issued, all VAT invoices must also be retained. Cash and carry wholesalers must keep all till rolls and product code lists.

Records must be kept of all taxable goods and services received or supplied in the course of business (standard and zero-rated), together with any exempt supplies, gifts or loans of goods, taxable self-supplies and any goods acquired or produced in the course of business which are put to private or other non-business use.

All records must be kept up to date and be in sufficient detail to allow calculation of VAT. They do not have to be kept in any set way but must be in a form which will enable HMRC officers to check easily the figures on the VAT return. Records must be readily available to HMRC officers on request. If a taxable person has more than one place of business, a list of all branches must be kept at the principal place of business.

Comprehensive records

In addition, we always advise businesses to retain full information of certain calculations such as; partial exemption, the Capital Goods Scheme, margin schemes, TOMS, business/non-business, mileage and subsistence claims, promotional schemes, vouchers, discounts, location of overseas customers, MOSS, and distance selling amongst other records. The aim is to ensure that any inspector is satisfied with the records and that any information required is readily available. This avoids delays, misunderstandings and unnecessary enquiries which may lead to assessments and penalties.

If you have any doubts that your business records are sufficient, please contact us.

Ding Dong – Avon calling (for VAT)

By Marcus Ward 21 December 2017

Latest from the courts

The CJEU case of Avon Cosmetics Limited considered the validity and completeness of a specific UK derogation called a “Retail Sale Direction”.

Background

Avon Cosmetics Limited (‘Avon’) sells its beauty products in the UK to representatives, known colloquially as ‘Avon Ladies’, who in turn make retail sales to their customers (‘direct selling model’). Many of the Avon Ladies are not registered for VAT. As a result, their profit margins would not normally be subject to VAT. As an example; an Avon Lady may buy goods from Avon at £50 and sell them at £70. In HMRC’s eyes, the £20 difference is not taxed.

“Lost VAT” Derogation

That problem of ‘lost VAT’ at the last stage of the supply chain is typical of direct selling models. In order to deal with the problem, the UK sought and obtained a derogation from the standard rule that VAT is charged on the actual sales price. In Avon’s case that derogation allowed HMRC to charge Avon VAT, not on the wholesale price paid by the unregistered Avon Ladies, but instead on the retail price at which the Avon Ladies would go on to sell the products to the final consumer. However, the way the derogation is applied does not take into account the costs incurred by the unregistered representatives in their retail selling activities, and the input tax that they would normally have been able to deduct had they been VAT registered (‘notional input tax’). In particular, where Avon Ladies buy products for demonstration purposes (not to resell but to use as a selling aid) they cannot deduct VAT on those purchases as input tax. The result is that the disregarded notional input tax in relation to such costs ‘sticks’ in the supply chain and increases the overall VAT charged on the direct selling model over that charged on sales through ordinary retail outlets.

Challenge

The appeal by Avon concerns the interpretation and validity of the Derogation.

In particular

whether there is an obligation to take into account the notional input tax of direct resellers such as the Avon Ladies
whether there was an obligation for the UK to bring the issue of notional input tax to the EC’s attention when it requested the Derogation, and
what would be/what are the consequences of failing to comply with either of those obligations?

Result

The CJEU found that neither the derogation authorised by Council Decision 89/534/EEC of 24 May 1989 authorising the UK to apply, in respect of certain supplies to unregistered resellers nor, national measures implementing that decision infringe the principles of proportionality and fiscal neutrality. Therefore, output tax remains due on the ultimate retail sale value, but there is no credit for any VAT incurred by the Avon Ladies.

VAT – A Christmas Tale

By Marcus Ward 12 December 2017

Well, it is Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….

Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities. May I explain what I do and then you can write to me with your advice? If you think a face to face meeting would be better I can be found in most decent sized department stores from mid September to 24 December.

First of all I am based in Greenland but I do bring a stock of goods, mainly toys, to the UK and I distribute them. Am I making supplies in the UK?

If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?

The toys are of course mainly for children and I wonder if zero rating might apply? I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it?

My friend Rudolph has told me that there is a peculiar rule about gifts. He says that if I give them away regularly and they cost more than £150 I might have to account for VAT. Is that right?

My next question concerns barter transactions. Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return. If I’m given Tesco’s own brand sherry I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks. Have I made a supply and what is the value please? My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?

Transport is a big worry for me. Lots of children ask me for a ride on my airborne transport. I suppose I could manage to fit 12 passengers in. Does that mean my services are zero-rated? If I do this free of charge will I need to charge air passenger duty? Does it matter if I stay within the UK, or the EU? My transport is the equivalent of six horse power and if I refuel with fodder in the UK will I be liable for fuel scale charges? After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home. Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT. Please comment.

Can I also ask about VAT registration? I know the limit is £85,000 per annum but do blips count? If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover. May I be excused from registration? If I do need to register should I use AnNOEL Accounting? At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing. I feel that my red clothing not only protects me from the extreme cold but it is akin to a uniform and should be allowable. These are not clothes that I would choose to wear except for my fairly unusual job. If lady barristers can claim for black skirts I think I should be able to claim for red dress. And what about my annual haircut? That costs a fortune. I only let my hair grow that long because it is expected of me.

Insurance worries me too. You know that I carry some very expensive goods on my transport. Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example. My parent company in Greenland takes out insurance there and they make a charge to me. If I am required to register for VAT in England will I need to apply the reverse charge? This seems to be a daft idea if I understand it correctly. Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

Next you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

Deregistration – When a business leaves the VAT club

By Marcus Ward 11 December 2017

This article considers when and how to deregister from VAT and the consequences of doing so.

General points

Deregistration may be mandatory or voluntary depending on circumstances. Although it may be attractive for certain businesses too deregister if possible, this is not always the case. The main reason to remain registered is to recover input tax on purchases made by a business. This is particularly relevant if that business’ sales are:

to other VAT registered businesses which can recover any VAT charged
supplies are UK VAT free (eg; zero rated)
made to recipients outside the UK and in some cases the EU

Businesses which make sales to the public (B2C) are usually better off leaving the VAT club even if this means not being able to recover input tax incurred.

A business applies for deregistration online through its VAT account, or it can also complete a form VAT7 to deregister by post.

NB: These rules apply to businesses belonging in the UK. There are different rules for overseas business which are outside the scope of this article.

The Rules

Compulsory deregistration

A business must deregister if it ceases to make taxable supplies. This is usually when a business has been sold, but there may be other circumstances, eg; if a business starts to make only exempt supplies, or a charity stops making business supplies and continues with only non-business activities or when an independent body corporate joins a VAT group. In such circumstances there is a requirement to notify HMRC within 30 days of ceasing to make taxable supplies.

We have seen, on a number of occasions, HMRC attempting to compulsorily deregister a business because either; it has not made any taxable supplies (although it has the intention of doing so) or it is only making a small amount of taxable supplies. In the first example, as long as the business can demonstrate that it intends to make taxable supplies in the future it is entitled to remain VAT registered. This is often the position with; speculative property developers, business models where there is a long lead in period, or business such as exploration/exploitation of earth resources.

Voluntary deregistration

A business may apply for deregistration if it expects its taxable turnover in the next twelve to be below the deregistration threshold. This is currently £83,000 which was unchanged in this month’s Budget. It must be able to satisfy HMRC that this is the case. Such an application may be made at any time and the actual date of leaving the club is agreed with HMRC. It should be noted that when calculating taxable income, certain supplies are excluded. These are usually exempt supplies but depending on the facts, other income may also be ignored.

Consequences of deregistration

Final return

A deregistered business is required to submit a final VAT return for the period up to and including the deregistration date. This is called a Period 99/99 return.

Output tax

From the date of deregistration a business must stop charging VAT and is required to keep its VAT records for a minimum of six years. It is an offence to show VAT on invoices when a business is not VAT registered.

Input tax

Once deregistered a business can no longer recover input tax. The sole exception being when purchases relate to the time the business was VAT registered. This tends to be VAT on invoices not received until after deregistration, but were part of the business’ expenses prior to deregistration. Such a claim is made on a form VAT427

Self-supply (Deemed supply)

An often overlooked VAT charge is the self-supply of assets on hand at the date of deregistration. A business must account for VAT on any stock and other assets it has on this date if:

It could reclaim VAT when it bought them (regardless of whether such a claim was made)
the total VAT due on these assets is over £1,000

These assets will include items such as; certain land and property (usually commercial property which is subject to an option to tax or is less than three year old), un-sold stock, plant, furniture, commercial vehicles, computers, equipment, materials, etc, but does not include intangible assets such as patents, copyrights and goodwill. The business accounts for VAT on the market value of these assets but cannot treat this as input tax, thus creating a VAT cost.

We usually advise that, if commercially possible, assets are sold prior to deregistration. This avoids the self-supply hit and if the purchaser is able to recover the VAT charged the position is VAT neutral to all parties, including HMRC. It is worth remembering that the self-supply only applies to assets on which VAT was charged on purchase and that there is a de minimis limit. We counsel that care is taken to ensure planning is in place prior to deregistration as it is not possible to plan retrospectively and once deregistered the position is crystallised.

Re-registration

HMRC will automatically re-register a business if it realises it should not have cancelled (eg; the anticipated turnover exceeds the deregistration threshold). It will be required to account for any VAT it should have paid in the meantime.

Option To Tax

An option to tax remains valid after a registration has been cancelled. A business must monitor its income from an opted property to see whether it exceeds the registration threshold and needs to register again.

Capital Goods Scheme (CGS)

If a business owns any capital items when it cancels its registration, it may, because of the rules about deemed supplies (see self-supply above) have to make a final adjustment in respect of any items which are still within the adjustment period. This adjustment is made on the final return.

Cash Accounting

A business will have two months to submit its final return after it deregisters. On this return the business must account for all outstanding VAT on supplies made and received prior to deregistration. This applies even if it has not been paid. However, it can also reclaim any VAT provided that you have the VAT invoices. If some of the outstanding VAT relates to bad debts a business may claim relief.

Partial exemption

If a business is partly exempt its final adjustment period will run from the day following its last full tax year to the date of deregistration. If a business has not incurred any exempt input tax in its previous tax year, the final adjustment period will run from the first day of the accounting period in the final tax year in which it first incurred exempt input tax to the date of deregistration.

Flat Rate Scheme

If a business deregisters it leaves this scheme the day before its deregistration date. It must, therefore, account for output tax on its final VAT return for sales made on the last day of registration (which must be accounted for outside of the scheme).

Self-Billing

If your customers issue VAT invoices on your behalf under self-billing arrangements (or prepare authenticated receipts for you to issue) a deregistering business must tell them immediately that it is no longer registered. They must not charge VAT on any further supplies you make. There are financial penalties if a business issues a VAT invoice or a VAT-inclusive authenticated receipt for supplies it makes after its registration has been cancelled.

Bad Debt Relief (BDR)

A business can claim relief on bad debts it identifies after it has deregistered, provided it:

has previously accounted for VAT on the supplies
can meet the usual BDR conditions

No claim may be made more than four years from the date when the relief became claimable.

Summary

As may be seen, there is a lot to consider before applying for voluntary deregistration, not all of it good news. Of course, apart from not having to charge output tax, a degree of administration is avoided when leaving the club, so the pros and cons should be weighed up. Planning at an early stage can assist in avoiding in nasty VAT surprises and we would always counsel consulting an adviser before an irrevocable action is taken. As usual in VAT, if a business gets it wrong there may be an unexpected tax bill as well as penalties and interest.

VAT – Autumn 2017 Budget. (No excitement)

By Marcus Ward 23 November 2017

Thankfully there were no VAT surprises in the Budget. The potential reduction of the VAT registration limit considered here did not occur.

There was no change in the VAT registration and deregistration thresholds which will remain at £85,000 and £83,000 respectively.

It is unlikely that these will change before March 2020 at the earliest.

Most of the other VAT measures announced in the budget were already known.

However, as always, the devil may be in the detail.

So, as you were for now.

VAT Simplification (We can but hope)

By Marcus Ward 13 November 2017

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.

Legislation

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.

Brexit

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.

Recomendations

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.

Next Steps

The Chancellor of the Exchequer must now respond to the advice given.

Commentary

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.