Hang on to your VAT, possible sliding ahead
A private member’s bill seeking to raise the VAT registration threshold and increase the number of exemptions was debated by MPs last week but will not become law.
The Value Added Tax Bill had its second reading debate last Friday (Feb 8th) but due to a lack of parliamentary time, the Bill’s sponsor, Sir Christopher Chope, withdrew the Bill at the end of the debate.
The aim of the Bill was to enable the maximum turnover threshold for exemption from the requirement to register for VAT to be raised and to make provision for the exemption of certain goods and services from liability to VAT. Sir Christopher believes reducing or eliminating VAT on various goods and services would be an effective way of creating a dynamic effect in the economy, and would be fair and equitable at the same time. Very few private members' bills become law but, by creating publicity around an issue, they may affect legislation indirectly.
The wider context is the belief of Sir Christopher, an ardent Brexiteer, that a big dividend in the form of the £10 billion to £20 billion a year that we currently pay to the EU can compensate in part for his suggestions. He suggest that we would benefit from not having a Brexit transition period because we would be able to vary VAT.
In the summing up, the Treasury minister said the government may consider a sliding scale to the VAT threshold, something that went beyond what was put down in this Bill.
Clause 1 - enable the government to raise the maximum turnover thresholds for exemption from the requirement to register for VAT.
Sir Christopher Chope said reducing VAT, as the Bill proposes, will reduce the cost of living for consumers and the burdens on business, and will reduce significantly the cost of living for people living in fuel poverty. The Bill would take us back to the time before 1994 when there was no VAT on domestic fuel and power. An ONS report has shown that in 2009-10 the poorest 20 per cent spent 8.7 per cent of their gross income on VAT while the richest 20 per cent spent only four per cent. A modest initial increase in the threshold to £104,000 and a threshold for deregistration of £100,000 (government policy is to freeze the threshold until March 2022) were advocated. The consequence would be that many small businesses would be taken out of VAT and consumers would be saved the cost of VAT on the services provided by them. He sees the merit of raising the threshold to something like £500,000 at a cost of between £3 billion and £6 billion a year (half the budget for the entire police force of England, as pointed out later by Conservative Neil O’Brien). The problem of productivity centres around this bunching issue under the VAT threshold, said Sir Christopher.
Following the OTS paper, a statistics table in a government consultation on VAT showed that the £81,000 threshold in 2014-15 had deterred 50 per cent of sole proprietor and partnership businesses from increasing their economic activity for fear of passing the threshold.
Clause 2 - to make provision for the exemption of certain goods and services from liability to VAT and for connected purposes.
The goods and services that are subject to VAT are set out in the Value Added Tax Act 1994 and this clause would ensure that domestic fuel or power in group 17, fitness items in group 18, goods subject to excise duties in group 19, insulating materials for home improvement in group 20, repairs and improvements to historic buildings in group 21 and women’s sanitary products in group 22 would be made exempt from VAT because of the Bill.
Sir Christopher said the government’s figures say that the reduced rate—five per cent instead of 20 per cent—for domestic fuel and power, currently costs the Exchequer £4.8 billion. He believes the cost was more than justified by the social and economic benefit of introducing such a policy, such as less burden on the health service and social services because people are not unnecessarily cold in their own homes.
He is concerned about current disincentives for people to repair and improve historic buildings. He went on to wonder how charging VAT on a whole range of fitness services is consistent with the public policy objective of encouraging people to get fit and thereby improve their quality of life. He also suggests that supermarkets provide VAT receipts.
His Bill would exempt from VAT goods that are already subject to excise duties, because we should not have double taxation. This would not cost the Exchequer money because the VAT due can just be charged as excise duty, he said.
He went on to suggest a way to protect and encourage British manufacturing after 29 March 2019 would be to remove VAT on all cars, or any other product, manufactured 100 per cent in the UK. This cannot be done at the moment because of the VAT rules and the EU’s state aid rules.
Partly agreeing with the sentiment of Sir Christopher, Conservative Neil O’Brien said the Treasury has produced a paper showing that a third of the cuts in corporation tax are made up for by dynamic gains but he is sceptical about the proportion of the £4 billion or £6 billion loss to the Exchequer that Sir Christopher is talking about being made up by dynamic effects.
Speaking in support of the Bill, Anne-Marie Trevelyan, a chartered accountant, argued her view that if we made VAT payable only on income above the threshold, we would offer a sliding scale of price increases or sales volume that would support the business and encourage the employment of more staff, unlike with the disincentive of the dramatic cliff edge at £85,000. She said it would stimulate growth in the small independent retail sector and might even be a policy that could help to revitalise our empty high street shops. By scrapping VAT on sanitary products and making them exempt, as is the case for food and children’s clothes, this government would be sending a clear message that they understand that the tax system can be an ‘incentiviser or a punisher’, she said.
Maggie Throup said we should not jeopardise the £120 billion VAT collected in 2016-17, which represented 22.5 per cent of all taxes and fears that the removal of one tax would only result in the increase of another tax to balance the nation’s books.
James Cartlidge cautioned that if we make unfunded commitments that do not result in the dynamic behaviour that has been predicted and the Treasury loses revenue, we will stick the balance on the national credit card and, ultimately, the national debt. For most of the larger companies that want to invest, the ability to offset VAT is fundamental, he said. It would be better to target business rates which are an on-cost that directly hits investment in small businesses, he added.
On the topic of fitness, how would he deal with the fact that a computer console can run fitness games that allow for physical movement? People may just buy one to sit in front of a TV and play games, suggested Kevin Foster. Sir Christopher said the Treasury may by regulations define ‘fitness equipment’.
Speaking against the Bill, Lyn Brown remarked that the choice of which goods and services we apply reduced VAT rates to is political, not just technical. Brown added that VAT fraud currently costs the UK about half a billion pounds a year, with an extra £1.5 billion of uncollected debts and around £100 million of avoidance. HMRC, rather than trying to use its existing powers, waited until the introduction of new measures under the Finance Act 2016 before even attempting to hold online marketplaces responsible for the VAT fraudulently evaded by traders. HMRC have been too cautious in using these powers, she added. She believes that small businesses need more support in getting to grips with the tax if we are ever to close the VAT gap. The situation has been worsened by the government’s disaster-struck attempts to transition to making tax digital, she claimed.
As the UK leaves the protection of the EU VAT area, the possibility of VAT fraud will, arguably, rise. It is therefore logical that any new legislation on VAT should consider additional measures to tackle online VAT fraud, she said. The Chartered Institute of Taxation (CIOT) has six recommendations to help address this gap, she said, and she focussed her comments on the CIOT’s recommendation ‘resisting the temptation to introduce widespread changes that are disruptive to the majority of compliant businesses’.
Exempting VAT from items already subject to excise duty, such as alcohol and tobacco, could be counterproductive as it could amount to two policy measures pulling in different directions, with excise duty increases to try to discourage consumption and a VAT exemption in effect reducing the price, she said.
Exchequer Secretary Robert Jenrick said the cost to a small business of meeting its VAT responsibilities is generally around £300 a year. The VAT threshold benefits 3.5 million UK businesses that are not required to account for or pay VAT and the large and growing number of enterprises in the sharing economy providing services that might, in an era before the technology was available, be provided by VAT-registered businesses. The bunching effect is significant, and raising the threshold somewhat, for example to £100,000, would not eliminate it, he said. A sliding scale for VAT registration, as suggested by Anne-Marie Trevelyan, would have significant fiscal implications, and it would mean that any business would be able to take advantage of that; large multinational corporations would benefit, not just small and medium-sized businesses. “However, it is something we might consider in future,” he said.
The government have received in excess of £40 billion of requests for reliefs from VAT using the additional flexibilities that we may have when we leave the EU, he said. VAT on sanitary products is a ridiculous and unfair tax that we want to remove as soon as we have ability, he told MPs.
At the present time, under EU law, we cannot act on many, if not all the measures, Sir Christopher had set out and so the government cannot support the Bill, the minister said.
There were no comments from SNP, Lib Dems or any other party in the debate, which can be read here.