VAT recommendations backed, but trade-offs inevitable

The Chartered Institute of Taxation (CIOT) has welcomed the Office of Tax Simplification’s report on VAT that makes recommendations on how the tax can be simplified.

After over 40 years, the OTS said, what was meant to be a simple tax has become ‘highly complex’ and it has not kept pace with changes in society.

Alan McLintock, Chair of CIOT’s Indirect Taxes Sub-Committee, said:

“We welcome this study of issues with VAT that have led to challenging and distortive effects on some small businesses. We support strongly making the rules on VAT less complex and easier to apply, in the expectation that it should lead to less uncertainty among business, and fewer disputes with HMRC.

“We especially agree that the Government should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty. Many areas of guidance are lacking in detail and are updated too slowly. Further, HMRC often decline to give rulings on the basis that the issue is adequately covered in guidance, but if the business or its adviser does not believe the matter is clear this leads to an unwelcome impasse.

“Future examinations of the VAT threshold will have to manage a trade-off that while the current threshold can act as a barrier to the growth and activity of a business, many small businesses have spent their lifetimes not dealing with VAT and having correspondingly less regular contact with HMRC. Much will depend on how any change to the threshold is implemented. This may present an opportunity to refresh or extend the VAT Flat Rate Scheme, or consider a smoothing mechanism to mitigate the impact of exceeding the threshold.”

VAT has many quirks. For example, it is well known that a Jaffa cake is a cake (zero-rated) rather than a chocolate-covered biscuit (taxed at 20 per cent). EU law may constrain some of the options for the UK to make changes in this area but there is a longer-term opportunity to streamline rates once the shape of Brexit is clearer, says the OTS. The OTS has said it is keen to work with the Treasury and HMRC to undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules.

Alan McLintock said:

“We welcome attempts to deal with anomalies that complicate the VAT system but any approach must also assess the impact on the lowest earners in the UK, who may be disproportionately impacted by any price rises caused by the withdrawal of zero rating in food, travel or children’s clothing.”

Notes for editors

1. The OTS’s report can be found here. Its core recommendations include:

• that 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 
• that HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty
• that 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

2.  VAT was introduced in 1973 on entry of the UK into what is now the European Union. VAT is the third largest source of tax revenue collected by HMRC after income tax and National Insurance Contributions, raising £120 billion in 2016-17 which amounted to 22.5 per cent of all taxes.