At the time of writing this blog, several members of the Office of Tax Simplification (OTS) are feverishly working on the final report on the UK VAT system. The report, which is expected to be laid in Parliament before the Budget in November 2017, is the culmination of a review which has been taking place over the last twelve months. It is intended that the Chancellor will subsequently make a formal response to the proposals made by the OTS.
As readers will be aware, it was announced in the 2016 Autumn Statement that the Chancellor and Financial Secretary recognised the challenges being faced by businesses in relation to VAT. Consequently, they asked the OTS to carry out a VAT General Simplification Review of a range of aspects of the UK VAT system.
This review is the first wide ranging review of the VAT system in over forty years to focus on simplification and therefore the scope includes some fundamental aspects to test whether long established policy positions or practical approaches are still valid in today’s economy. The review essentially has two phases. The first phase was completed on 28 February 2017 when the OTS published an update on its work to date and a request for further evidence from interested parties. This interim report was the product of over 30 meetings held throughout the UK with professional bodies (including the CIoT), businesses, trade and industry groups and representatives from HM Treasury, HMRC and other government departments. The second phase consisted of analysing the representations made by stakeholders, further meetings with over forty additional parties as well as conducting research and analysis of the findings. This is then being used to develop recommendations for Ministers to consider.
As the report has not yet been finalised, I have restricted my comments to what we currently anticipate will be the main areas of focus in the final report.
This is likely to be the first area to be covered in the report as it is the first point at which any business encounters the complexities of the VAT system. Historically, the UK has always considered that having one of the highest thresholds is of itself a simplification. Under the Terms of Reference for the review, the OTS has given consideration to what the impacts would be if the registration limit were to be increased, decreased or remain the same. During the second phase of the review, we have been able to draw on both academic evidence, data extracted from HMRC’s databank and additional research provided economists from the HMRC Knowledge, Analysis and Information team. The results are interesting from in terms of the distortive behavioural economic impact and the effect on the informal economy that may result from the current £85,000 threshold. As well as looking at the impact of the current threshold, the review will also consider whether a smoothing mechanism may be worth considering, to ease the cliff edge effect of the current limit.
Capital Goods Scheme, Partial Exemption and the Option to Tax
The CGS and PE now seem to be having an impact on businesses which, when the tax was first introduced, would not have been affected by them. A good example of this is the CGS threshold, which was set at £250,000 twenty-six years ago and has never been updated. Similarly, the partial exemption de minimis limits have not been revised for many years. During our review, we also received many examples of Partial Exemption Special Methods (and Retail Scheme Bespoke Methods) taking years to negotiate with HMRC. In addition, many representatives from many different industries told us that because of the way in which their industry has diversified, partial exemption is now a major issue for them in terms of the administration and complexity which it causes.
Multiple Rates and Special Accounting Schemes
The review is considering the extent to which the types of supply which are currently exempt from VAT, subject to a reduced rate or are zero-rated, fit the modern context and create complexity for both businesses and tax administration. I think it is fair to say that all stakeholders were aware of how complex the multiple rates issue has become and we are expecting to make several recommendations with regards to potential reforms in this area. The review did not specifically look at the financial sector exemptions as they will be very much on the Brexit agenda but we did receive several representations from trade bodies in this area.
At present, there are several special accounting schemes which have been introduced and are in varying degrees of use such as the Flat Rate Scheme, Retail Schemes, the Tour Operators Margin Scheme, Cash Accounting and Annual Accounting Schemes. The review will consider the level of take up and usefulness of these schemes given the more widespread use of technology and changes in business models.
Administration of VAT
An issue which has frequently been raised with the OTS in the past is a rulings system for VAT. It is interesting to note that many countries which operate a common-law system have successfully introduced such ruling systems which are either free or on a pay as you go basis. We have considered this as well as well as several other what we describe as friction points within the VAT system which includes user experience of HMRC guidance.
Making Tax Digital
When we started this review, we were expecting to be making recommendations in this area. However, given events in this area over the summer, I think it is fair to say that we will avoid making too many specific recommendations at this stage.
In conclusion, I am hoping that the final report will generate a lot of comment and we trust you, as well as we, will await the Chancellor’s formal response to it with eager anticipation.
Blog by Nigel Mellor, Policy Advisor on VAT simplification at OTS