Pandle Insights: The OTS Wants to Simplify VAT – For You and Your Clients

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The Office of Tax Simplification (OTS) has proved it can ‘do what it says on the tin’ by issuing its first review of VAT, which contains eight key recommendations for its simplification. That’s good news for you and your clients.

VAT: ‘Showing Its Age’

The OTS admits that after 40 years VAT “is showing its age.”

“What was meant to be a simple tax has become highly complex and it has not kept pace with changes in society,” the organisation states in a press release.

The most significant issue identified in the report is the VAT registration threshold - the turnover level above which a business must enter the VAT system and charge VAT on its sales. At £85,000 the UK has one of the highest VAT thresholds in the world.

By enabling many small businesses to stay out of the VAT system, the high threshold is a form of simplification, but it’s an expensive relief, costing around £2bn per annum, and evidence strongly suggests that many growing businesses are discouraged from expanding beyond this point.

The report looks at options for reducing the current ‘cliff edge’ effect resulting in a very visible bunching of businesses just before the VAT threshold, and an equally large drop off in the number of businesses with turnovers just above the threshold. Also examined are the advantages and disadvantages of lowering or increasing the threshold.

Angela Knight CBE, chair of the OTS board, said: “This report presents an opportunity to start addressing the many anomalies of VAT.

“The tax is awash with layers of complexity reflecting both its evolution over the last 45 years and aspects of the Purchase Tax that VAT replaced.”

She added: “For small businesses, this report will propose ways of simplifying many irritating administrative technicalities and kick off a debate about the registration threshold.”

Recommendations for Removing VAT’s ‘Quirks’

The report lists 23 recommendations to iron out the quirks in the VAT system, including the famous Jaffa Cake quirk - that a Jaffa Cake is a cake (zero-rated) rather than a chocolate-covered biscuit (taxed at 20%). Its lead recommendation on the future level and design of the VAT threshold is already prompting debate.

The eight core recommendations are:

  • 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
  • HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty
  • HMRC should consider ways of reducing the uncertainty and administrative costs for business relating to potential penalties when inaccuracies are voluntarily disclosed
  • 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
  • The government should consider increasing the partial exemption to minimise limits in line with inflation and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations
  • HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing special method applications
  • The government should consider whether capital goods scheme categories other than for land and property are needed, and review the land and property threshold
  • HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled online.

Paul Morton, OTS tax director, said: “This report will flag up the effects of the registration threshold, how entry into the VAT system might be smoothed and many other areas where simplification would be beneficial, particularly the complex and often subjective boundaries between those supplies which are standard-rated and those which fall within the reduced or zero-rates or which are exempt.”

He said: “In addition, there will be opportunities to build on the good work of the last few years in improving the administrative aspects of the running of the VAT system.”

A Cloud with a Silver Lining

VAT is likely to remain one of the more complicated issues for both you and your clients for a while yet. However, ensuring that both you and they have instant, anywhere access to their real-time financial records can make the VAT return process easier – and this is easily achieved if you use cloud accounting.

Pandle is an inexpensive, comprehensive cloud accounting package that’s simple for you and your clients to use. Why not find out how Pandle could help you today – or how you could have your own bespoke package using the while label Brandle package.