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Is VAT simplification still on the government agenda?

Neil Warren examines the OTS status update on its ‘route to VAT simplification’ report and asks what, if anything, has changed in the two years since the paper was published?

17th Oct 2019
Independent VAT Consultant
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A distant relative who lives on the south coast is a town councillor. He is also very straight-talking. When he learned that my two main business activities are consultancy and writing, he commented: “You should see our council offices. There’s a whole room full of written reports from consultants – they just sit there gathering dust – forgotten about almost as soon as the ink was dry.”

Is the same outcome likely with the Treasury, HMRC and the October 2017 report produced by the OTS about VAT and routes to simplification? Or is there a genuine desire to simplify the UK’s VAT system within both the Treasury and HMRC, which will perhaps be made more feasible when we leave the EU?

Progress report

The OTS recently produced a progress report, two years after the initial review.

There is no doubt that the 2017 report was well received and committee members put in a great deal of hard work to consider so many complex aspects of the VAT system that needed to be reformed.

But the reality seems to be that the only change we have seen is that the registration threshold of £85,000 has been frozen until at least April 2022. And is this measure actually a ‘route to simplification’ or a token attempt to gradually bring in more businesses to the VAT net?

More changes to come?

The OTS points to the fact that HMRC recently announced a review of partial exemption and the capital goods scheme, two topics that were rightly given priority in the original report.

There are comments about HMRC reviewing and updating its VAT manuals and public notices but this should be an ongoing process anyway.

I have reservations about whether HMRC’s partial exemption and capital goods scheme review will produce any radical simplifications: the opposite could easily happen, and I will explain why.

Less, not more

Previous attempts to simplify VAT have not been successful. They have actually made things more complicated in many cases by increasing rather than decreasing options. Here are three examples:

  • Partial exemption – from 1973 to 2009, we had one de minimis test to determine whether a business with a small amount of exempt activity could fully claim input tax. From 1 April 2010, in the interests of simplicity, we went from one to three. I challenge subscribers to write down the two simplified tests now without any help from Google!
  • Caravans – George Osborne trumpeted simplified rules on whether caravans were zero or standard-rated in his famous 2012 ‘pasty tax’ budget. The end result is that we now have three rather than two rates of VAT for caravans: 0%, 5% and 20%.
  • Food – in the same budget, Osborne spectacularly failed to provide fairness and certainty about whether takeaway food was hot or cold (hot food being standard rated and cold food is mainly zero-rated). Catering businesses now have an extra hurdle to consider ie the phrase ‘ambient room temperature’ is in the mix!

Wield the axe

I return to my personal view that simplification should mean fewer procedures and legislation and not more. So, on this basis, here are my three personal recommendations:

  • Flat rate scheme – to be abolished. Since the introduction of the ‘limited cost trader’ category in 2017 with its draconian 17.5% rate, the FRS has largely become a no-go area.
  • Capital goods scheme – abolish the scheme for computers ie there is no need for a five-year adjustment period for computer spending that exceeds £50,000.
  • Partial exemption – abolish the two simplified de minimis tests mentioned above and just have the main test: exempt input tax must be less than 50% of total input tax and also less than £625 per month on average. And perhaps increase it to £1,000 per month at the same time.

Replies (8)

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By dgilmour51
18th Oct 2019 11:27

You raise what seems to me to be the nub of all this 'OTS' stuff.
I was peripherally involved with OTS in its early days - and my distinct impression was that all the effort was into streamlining the flow of cash into the coffers by looking at the collection processes as opposed to actually engendering a sensible and consistent set of tax rules.
The OTS is populated by 'experts', whose bread and butter depends on the inscrutability - what we need is dullards - and when they can operate it then simplification will have occurred.

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By Brads.Kings
18th Oct 2019 10:37

Typo? FRS, I think you mean draconian 16.5%.

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Replying to Brads.Kings:
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By rmillaree
18th Oct 2019 11:06

I think even 16.5% shouldn't really be allowed to be used without a mandatory *(really 19.8% folks) comment afterwards.

I guess that would be a simple way to kill the flat rate immediately by introducing a 17.5% flat rate *(really 21% folks) for all business categories.

The only businesses that would then continue to use the flat rate are the ones that have wrongly applied the flat rate to the net sales figure for the last 10-15 years - giving hmrc a brucie bonus of the easy identification of those numpties with the ability to get some nice backdated vat and associated penalties and interest.

Question for the day without checking or doing calculations can anyone actually remember the vat fraction for the old 17.5% vat rate- clue it's not 3/23 !

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Replying to rmillaree:
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By acceje
18th Oct 2019 11:31

7/47 like the plane !

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Replying to acceje:
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By rmillaree
18th Oct 2019 11:43

well done we have a winner - lets hope they never max it out at 7/37

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Replying to Brads.Kings:
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By memyself-eye
18th Oct 2019 11:09

I hope it is 16.5%.....

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By tedbuck
21st Oct 2019 11:05

What must be appreciated is that in Treasury speak simplification means make it more complicated so that no-one can understand it. It is a sort of reverse language game.
Simplify regulations - translates to 'make more regulations'
Simplify VAT returns - translates to 'make it more difficult for all the little people so that the VAT office can do nothing and wait to be able to interrogate the taxpayers records'
Big Brother will definitely be watching you.
Only consolation is that if they are delving into cloud based bookkeeping systems many clients are so confused by the wealth of choices that they get a lot wrong so HMRC will have their time cut out understanding what is going on. Isn't progress absolutely wonderful?
Retirement is really beginning to look good - preferably before MTD for Income Tax appears. Given the b***s ups with MTD for VAT and the waste of time trying to get people to work effective systems I should think that the wasted time on MTD for IT will achieve a recession all on its own.
What did they used to say - If it ain't broke - don't fix it!
But it's useless trying to talk to Politicians and Civil Servants as most of them are so insulated from the real world that they just cannot see reality under their noses.
Sorry for the rant!

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Replying to tedbuck:
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By paul.gloverstanbury
22nd Oct 2019 09:27

Amen to all that, brother!

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