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Government ‘runs scared’ of radical VAT overhaul

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Neil Warren was disappointed with the Tax Day announcements about VAT and thinks that the government lacks the courage to make radical changes to the VAT system. It is time for ministers to be honest, he says.

31st Mar 2021
Independent VAT Consultant
Columnist
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There’s a great scene in the 1970s comedy classic Fawlty Towers where an irate guest asks hotel owner Sybil about the delay in the arrival of his fresh fruit salad. Sybil’s reply was very direct: “It’s on the way, sir, we’ve just opened the tin.”

To be honest, I was expecting some decent fresh fruit about VAT on Tax Day, which was trumpeted in advance by the government as being radical, ambitious, visionary. To be honest, as far as VAT is concerned, it was a complete let down – a few soggy peaches and out of date black bananas was as good as it got.

Turning back the clock to 2016, the Chancellor of the day Philip Hammond called upon the Office of Tax Simplification (OTS) to review the operation of VAT and make recommendations to simplify the system. The OTS did the job with great energy and vigour, making twenty-three recommendations in its final report in November 2017 to improve the system.

The report was received with gratitude and praise by Hammond but what has happened since then in terms of worthwhile changes? The answer is that the VAT registration threshold has been frozen at £85,000 and that will continue until at least 2024. Is freezing a threshold a radical change? The answer is ‘no’.

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Replies (17)

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By sculptureofman
31st Mar 2021 14:02

Personally I’d massively simplify it:

- Abolish the concept of exempt supplies and ZR instead.
- Reduced rate all food & drink

Increase the rates of VAT to 7% and 22%.

Bosh, done.

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Tornado
By Tornado
31st Mar 2021 16:03

"It has been confirmed that a centralised application point for partial exemption special methods will be set up soon."

What on earth does this mean?

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By SteveHa
31st Mar 2021 16:52

I'm considering, and may have an opportunity to, studying the detail of VAT with a view to taking a leading role in the business on it.

Honestly, can you have more fun than Jaffa Cakes, cakes and biscuits?

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By Paul Crowley
31st Mar 2021 20:39

The only tax that has mistakes that cannot be rectified and in such big sums
Unless taxpayer is a charity that spent 5 minutes on the phone to VATman
Its an EU tax
I thought we voted no to EU

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blue sheep
By Nigel Henshaw
31st Mar 2021 22:15

Has there ever been a recommendation by the OTS that has actually been implemented?

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Replying to NH:
Ivor Windybottom
By Ivor Windybottom
01st Apr 2021 22:13

I believe it was abolition of Luncheon Vouchers.

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By alanpoole
01st Apr 2021 09:49

Now we have left the EU we can also get rid of VAT. Many readers will be too young to remember purchase tax, which predated VAT. It's not perfect of course, but had the benefit of being simpler. Like Excise taxes, add it once at point of creation or import, then forget it. It's just part of the price. Lots of admin saved in the chain of supply. To keep tax revenues, it's then necessary to tax services. I suggest a flat rate on all turnover of services suppliers, which again, is simply added to the price and then left alone.
BTW. To save the planet I also suggest that taxes be added to all fossil fuels, including domestic energy, to encourage thrift in their use. Some of it would need to be used to add to government support for the poorest, because we don't want people freezing to death, but we need to tackle both government debt and CO2.

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Replying to alanpoole:
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By paul.benny
01st Apr 2021 10:35

alanpoole wrote:
...purchase tax...had the benefit of being simpler... add it once at point of creation or import, then forget it.

Except it's not simpler.

For example, when does flour attract purchase tax? If when sold by the miller, bread is either exempt or double-taxed. And that's before you even think about the farmer or the importer.

You're very quickly into a whole lot of complexity and exemptions, which in turn lead to loopholes, higher compliance costs and deliberate evasion.

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Replying to alanpoole:
Tornado
By Tornado
01st Apr 2021 10:53

Ironically, using a Purchase Tax type of system would radically reduce the amount of paper, electricity, ink and other consumables used, as the number of transactions and human resources involved in the current VAT system would be significantly reduced.

There is always the Elephant in the Room, of course, that stops any sort of simplification of the VAT system (and tax system in general) and that is the mass redundancies in the Civil Service and support businesses (such as VAT experts and commentators!) as so many people would no longer be required.

No Government would ever do this of course, but if they did, this could partly be turned to an advantage by using some of those people to more diligently monitor the relatively few people actually collecting the tax, and perhaps this would even completely eliminate fraud. Monitoring millions of people registered for VAT can never be very effective but thorough monitoring of a few hundred thousand would.

'For example, when does flour attract purchase tax? If when sold by the miller, bread is either exempt or double-taxed. And that's before you even think about the farmer or the importer.'

Flour would not attract tax at all, ever, as it is a food.

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Replying to alanpoole:
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By Joseph_odriscoll
01st Apr 2021 11:22

Purchase tax was a nonsense.

It was a per centage of the wholesale price. The nonsense arose when there was no wholesaler.

I worked for a manufacturer of musical instruments: some (not all) were subject to purchase tax. I had to agree with someone from C&E what a wholesaler would charge retailers had the instruments been sold to a retailer (which they weren't)...

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By Stoker
01st Apr 2021 10:20

VAT is a child of the EU, after Brexit VAT should have no place in our system.

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Replying to Stoker:
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By paul.benny
01st Apr 2021 10:27

It's no such thing: every developed nation except USA has a form of value-added tax.

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Replying to paul.benny:
Jason Croke
By Jason Croke
01st Apr 2021 10:43

VAT is originally a French concept, developed further by Germany.

You're right that most Countries have a form of VAT (except the USA), but apart from some differences, they are mainly based on the EU VAT system as it is the most developed in terms of legislation and case law.

VAT isn't going away, its cheap (from government costs perspective and MTD makes it even cheaper as the business takes on the cost of compliance).

It does need a radical overhaul, to match the pace of industry. The EU is too slow, a Brexit UK could re=model what we have into something more dynamic, for example, the domestic reverse charge for construction could be extended to other sectors....i think that will come once MTD is bedded down in a few more years.

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Replying to Jason Croke:
Tornado
By Tornado
01st Apr 2021 11:22

'It does need a radical overhaul, to match the pace of industry. The EU is too slow, a Brexit UK could re=model what we have into something more dynamic, for example, the domestic reverse charge for construction could be extended to other sectors....i think that will come once MTD is bedded down in a few more years.'

The concept of the Domestic Reverse Charge is added complexity itself and is just a way of reducing the chain of cash endlessly flowing through the banks for no particular reason.

You could not have shown a better example of why just charging the final consumer for the tax is such a good idea, which is effectively what the Domestic Reverse Charge does.

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By evildrome
01st Apr 2021 10:22

All Fiat currency governments are money financed.

They spend their own unit of account into existence.

There is no difference between a £50 note, a £50 government bank transfer or cheque.

All are ex nihilo money creation.

Therefore if the purpose of taxation is not the collection of revenue then all taxation is Pigouvian (to make you do something or benefit one group over another) or it pertains to the control of inflation.

With inflation at 0.7% and a looming recession, wouldn't a healthy cut in VAT be warranted?

Even its entire abolition?

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Stuart Walker Yellow Tomato Copy
By winton50
01st Apr 2021 12:27

Frankly I'm surprised that you are surprised.

This government has a knack of promising big and then failing to deliver in the hope that we will all have forgotten what they said they were going to do.

The OTS has been a complete waste of time and money and has made the tax system much more complex. A cynic would say that this was a way of increasing base tax rates by disguising them as fines and penalties!

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By roger brisley
01st Apr 2021 19:35

Omnishambles? The principal omnishambles of our time is dear old Brexit.... absolutely nothing can eclipse this. Frictionless borders my ****! The difficulties do not diminish with time they simply get worse.

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