In a series of papers* published over the last few months, the Chartered Institute of Taxation (CIOT) has expressed its concerns about the complexity of the tax system. This article is an edited version of the latest paper, which deals with value added tax (VAT). It incorporates a number of suggestions from Chartered Tax Advisers which are gratefully acknowledged.
Article by Charles Barcroft, a CIOT Technical Officer, published in the March 2002 issue of Tax Adviser.
Simplification does not necessarily involve major change. Much can be achieved by doing no more than removing grit from the system – small irritations which waste time and increase compliance costs for no good reason. With this in mind, our series of papers has suggested a number of simplifications. They have been described as ‘Quick Wins’ because they meet four important criteria:
(1) Helping business: default surcharge
- they are revenue neutral;
- they create few winners and losers;
- they are easy to implement; and
- they would simplify administration or eliminate unnecessary technicalities.
Small businesses sometimes face an awkward dilemma, e.g. whether to file a VAT return on time (in order to avoid surcharge) or to complete an important contract (in order to avoid losing a valued customer). Although the law does not afford a reasonable excuse in this sort of situation, it provides taxpayers with three ways of avoiding a surcharge:
- they can pay the proper amount of tax on time without submitting a return – Value Added Tax Act 1994 (VATA 1994), s. 59(4);
- they can request Customs & Excise to vary the due date for making the return (Value Added Tax Regulations 1995, (SI 1995/2518), reg. 25(1)(c));
- they can request Customs to allow input tax or output tax to be estimated (SI 1995/2518, reg. 28, 29(3)).
The practical difficulty lies in making use of these provisions. There is no formal procedure for making payments on account (the first point) and little evidence of extensions being granted, or estimation being allowed, when requests are made at the last moment (the time when the need becomes apparent) or in circumstances where reasonable excuse does not apply (the reason why the need arises).
It is better to help taxpayers than to penalise them. Internal procedures need to be modified to allow these reliefs to function effectively. The discretionary nature of the last two provisions is sufficient safeguard against abuse.
(2) Helping business: warnings on tax returns and surcharge liability notices
Surcharge liability notices are currently combined with an assessment for tax on form VAT 165. This form contains a warning that ‘defaults’ during the notified ‘surcharge period’ may attract a surcharge. The clarity of form VAT 165 could be improved. First, the warning should be printed in bold capitals so that it stands out from the other information given. Secondly, it should use everyday language (e.g. by spelling out exactly what a ‘default’ comprises and by specifying the period concerned rather than using the term ‘surcharge period’).
All VAT returns contain a standard warning that late returns and payments ‘may’ attract a surcharge. This warning loses its force by being given to everyone. It should be confined to returns affected by a surcharge liability notice.
(3) Helping business: VAT incurred before registration or incorporation
At present, a taxpayer claims reimbursement of pre-registration/pre-incorporation VAT by treating it as input tax for his first prescribed accounting period. In consequence, relief is given by set-off (in the case of a payment return) or by way of a repayment of VAT credit (in other cases). In the latter case, the delay between registering and receiving the relevant sum can be about four and a half months.
The cash flow of new businesses would be improved by reconstituting this relief as a claim for refund of tax. Taxpayers could then make a claim as soon as they registered and receive a refund as soon as the claim had been processed. Taxpayers should be entitled to repayment supplement if refunds are unreasonably delayed.
(4) Helping business: partial exemption
As a matter of good practice, Customs should accept or reject applications for a special partial exemption method within a reasonable period. At present, taxpayers have no means of hastening the process because the right of appeal (VATA 1994, s. 83(e)) applies to the refusal of an application rather than to a delay in granting one. Taxpayers could be protected from unreasonable delay by providing that an application is deemed to have been refused unless a decision is notified within (say) 45 days. This would enable the appeal process to start.
Taxpayers are effectively denied relief for the delay period if an application made in one tax year is accepted in a later year. This could be avoided by providing that a special method normally takes effect from the date of notification rather than the date of acceptance in the same way as for voluntary registration.
(5) Helping business: re-attribution of input tax
A re-attribution of input tax following a change of intended use can give rise to a claim for repayment. Although the legislation requires Customs to ‘pay’ the amount concerned (Value Added Tax Regulations 1995 (SI 1995/2518), reg. 109(2)), relief is actually given by claiming that amount as a deduction on the taxpayer’s next VAT return (Notice No. 706, para. 8.1). This procedure keeps taxpayers out of pocket in a like manner to claims for VAT incurred prior to registration (see point (3) above).
The cash flow of businesses would be improved by reconstituting this relief as a claim for refund of tax so that the relevant amount is physically paid. Moreover, taxpayers should be entitled to repayment supplement if refunds are unreasonably delayed.
(6) Inconsistency: washroom or lavatory for use by handicapped persons in buildings used by a charity for charitable purposes
The Value Added Tax Act 1994, Sch. 8 Grp. 12, Items 10 and 11 zero rate the service of providing, extending or adapting a ‘bathroom, washroom or lavatory’ for use by handicapped persons. Item 12 zero rates the service of providing, extending or adapting a ‘washroom or lavatory’ for use by handicapped persons. It is unclear why services in connection with a bathroom are excluded from zero-rating under Item 12.
Item 13 of Grp. 12 zero rates goods supplied in connection with a supply of services in Items 10 and 11. However, it does not zero rate goods supplied in connection with a supply of services in Item 12. This appears to be a drafting error.
These anomalies should be corrected by amending Items 12 and 13 of Group 12.
(7) Inconsistency: registration
The Value Added Tax Act 1994, Sch. 2, para. 5(1) provides that a person is required to notify the Commissioners if he ‘ceases to be registrable under this Act.’ However, Sch. 2, para. 6 does not make specific provision for deregistering a person who has ceased to be registrable. This seems to be a drafting error.
The following steps are required to close this gap in the legislation:
(8) Unnecessary complications: children’s clothing
- a provision similar to Sch. 3, para. 6(2) needs to be inserted; and
- the definition of ‘registrable’ (which currently applies only for the purposes of Sch. 2, para. 5) needs to be extended to cover the new provision.
The Value Added Tax Act 1994, Sch. 8, Grp. 16, Item 1 and Note 1 zero rate articles designed as clothing, headgear and footwear for young children. Note 2 makes an exception in relation to clothing made wholly or partly of fur skin. Note 3 defines what is meant by ‘fur skin’.
In practice, it is necessary to take a number of factors into account in order to determine whether or not children’s furs are zero-rated:
- the nature of the garment or accessory;
- the animal from which the fur skin is obtained;
- the extent of the fur trimmings; and
- the cost of the fur trimmings expressed as a proportion of the cost of all components.
These distinctions give rise to considerable difficulty in practice. The revenue yield from children’s fur clothing is likely to be trivial. This being the case, the law would be simplified by repealing Notes 2 and 3 of Grp. 16 so that all children’s clothing is zero-rated.
(9) Unnecessary complications: credit notes
Taxpayers are required to adjust their VAT accounts if:
- the consideration for a supply is decreased after the end of the prescribed accounting period in which the original supply took place;
- the decrease includes an amount of VAT; and
- the decrease is evidenced by a credit note, debit note or document having similar effect (SI 1995/2518 reg. 24, 38(1), (2)).
No adjustment can be made if the value of the supply is unaffected (see C & E Commrs v McMaster Stores
) Ltd  BTC 5,390; The Robinson Group of Companies Ltd
 BVC 2,286). Thus, a VAT-only credit note is ineffective, for example, if it merely adjusts the VAT erroneously charged on an exempt supply, VAT charged at the wrong rate, or arithmetical errors in the amount of VAT charged. Taxpayers must, instead, claim a repayment under VATA 1994, s. 80.
Errors in charging VAT are not infrequent. However, the s. 80 procedure for correcting them is, to say the least, cumbersome. It involves compliance with reg. 37, 43C, 43E and 43G of the 1995 Regulations. The 1995 Regulations should be amended to allow errors to be corrected by way of ‘VAT only’ credit notes.
(10) Unnecessary complications: election to waive exemption
The freehold sale of a commercial property may amount to the transfer of all or part of a business as a going concern. If the vendor’s supply is excluded from exemption (e.g. because he has made an election to waive exemption), the purchaser must make and notify an election to waive exemption on or before the ‘relevant date’ if the supply is to fall outside the scope of tax (Value Added Tax (Special Provisions) Order 1995, (SI 1995/1268) art. 5(2)). An election is notified when it is posted (Chalegrove Properties Ltd  BVC 2,279).
The need to notify an election on or before the ‘relevant date’ gives rise to obvious practical problems in relation to sales by auction if the successful bidder is required to make an immediate payment. In practice, these difficulties can normally be overcome, e.g. by faxing an election following a successful bid. However, the steps taken may give rise to inconvenience (e.g. someone to witness an election being posted after an evening auction) and they may sometimes break down (e.g. if the recipient’s fax machine malfunctions).
Statutory conditions cannot be described as reasonable if it is necessary to take abnormal steps in order to comply with them. Greater flexibility is necessary to avoid hard cases arising.
Not all simplification can be in the form of Quick Wins, and the CIOT also has its eyes fixed firmly on some longer term projects, notably a consolidated indirect taxes management act and a review of the implementation of European Community directives into United Kingdom law.
*The paper referred to in this article is the third in a series of Quick Wins reports from the CIOT. The first two reports in the Quick Wins series were on personal tax and corporate tax. A further report on employment taxation is currently being prepared. The Quick Wins reports are available on the Institute’s website: www.tax.org.uk.
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March 2002 by