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VAT review: Are big changes a possibility or a pipe dream?

5th Apr 2018
Independent VAT Consultant
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Red tape
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Neil Warren shares some radical ideas to improve the VAT system but thinks the Treasury Committee’s forthcoming review will be strong on words and short on action.

Here we go again! Just a few months after the OTS published its review of the VAT system, the Treasury Committee is getting in on the act as well prompted by the failure of HMRC to “collect around £12.6bn in VAT in 2015/16,” according to Committee chair Nicky Morgan. She also commented that, post-Brexit, there would be the option to “change” or “abolish” the VAT system completely. 

Let’s be honest: there is as much chance of VAT being abolished as there is of National Insurance being merged with income tax.

The biggest problems

But seriously, what aspects of the VAT system cause the biggest headaches for businesses?

Partial exemption is always a nightmare for many entities, which applies when a business has both exempt and taxable income and needs to apportion input tax.

There is often mess and muddle when a business has some zero-rated and standard rated supplies. For example, a catering business selling hot and cold take-away food or a builder who has to know when the lower rates of 0% and 5% apply to his services, as well as 20%.

As an opening radical measure, why don’t we abolish all exempt, reduced rated and zero-rated supplies but bring the standard rate down to 10%. In other words, charge a low level of some VAT on everything! I understand that the Australians have a similar system with their GST.

VAT errors

The Treasury Committee commented that £3.5bn of VAT was lost in 2015/16 due to mistakes on VAT returns. The detail is a bit vague: were these deliberate mistakes or careless mistakes, or mistakes caused by a lack of knowledge about some of the finer points of VAT?

If mistakes are being made, why does HMRC assume these errors to be under rather than overpayments? HMRC seem to think that the introduction of MTD for VAT next April will be the answer to all of their problems, but this view is as optimistic as tennis fans thinking that British players will win every Wimbledon title for the next ten years.

More enquiry staff

My second radical solution is for HMRC to recruit an extra 1,000 VAT enquiry officers. It should also set a target that telephone calls from business owners with VAT queries should be answered within five rings.

HMRC officers should be encouraged to give full and complete written replies to emails or letters (no ducking out of the question by telling the taxpayer to go and read the HMRC guidance). This would give the business owner some legal certainty that he can adopt the recommended advice without fear of comeback in the future. HMRC officers would also be given an educational role within their jobs, so that future VAT returns submitted by ‘customers’ would be more accurate.

Resolving disputes

HMRC has made significant progress in recent years to resolve disputes about the amounts of VAT due by a business, with specially trained officers, eg through the alternative dispute resolution (ADR) service. But the only long-term solution to the problem is to simplify the legislation so that there is not a dispute in the first place.

I also question whether HMRC is striking the right balance between dealing with big and small traders? Are HMRC still a bit hesitant to challenge a planning arrangement put forward by a well-trained and professional VAT team, when a small builder making a mess of his input tax claim is an easier option for investigation? I recently saw a VAT planning proposal from a big accountancy firm about a property deal, which in my mind was as artificial as the face of an aging movie star who spends a fortune on plastic surgery.

So as my final radical suggestion, why don’t HMRC offer big salaries to recruit some star VAT players from the private sector? I’m not talking about £70,000 a year plus London weighting – how about £200,000 as a starting figure, plus a performance related bonus?

Fantasy world

In reality, we all know that none of my proposals will see the light of day. There would be an outcry if 10% VAT was added to food and new houses. We all remember the fiasco of the pasty budget back in 2012.

HMRC would find it very difficult to justify spending on additional enquiry officers, despite the tax saving arguments. And as for the £200,000 salaries, would a VAT inspector ever be paid a higher wage than the Prime Minister? Or perhaps she should get a big increase as well.

In summary, I suspect the Treasury Committee’s review might be full of strong words and ideas but in ten, twenty or thirty years’ time, I predict that our current VAT system will largely be unchanged. And perhaps that’s not a bad thing.

 

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Replies (16)

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By johnjenkins
09th Apr 2018 10:27

Good article Neil. I would go much further. Every business should be registered for VAT with no schemes, vat on everything but at a lower rate. No money exchanges between vat registered business. Both vat numbers to be put on the invoices. So only the VAT paid by Joe public (the original intention of vat) goes to HMRC.
Yes, of course there would be some "mistakes" to start with, but they would be easy to find and control.
Too simple? It'll never happen

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By JohnB
09th Apr 2018 10:30

I wonder has Neil anyone in mind when he suggests recruiting star staff at £200k?

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Replying to JohnB:
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By johnjenkins
09th Apr 2018 10:46

I've already put my name down.

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By chatman
09th Apr 2018 12:19

I'd like to abolish VAT altogether and make up the shortfall with a land and property tax, a financial transaction tax, 100% inheritance tax and higher rates of income tax, especially on unearned income.

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Replying to chatman:
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By johnjenkins
09th Apr 2018 12:45

Better still why not let the Government decide how much pocket money we should have for the work we do. No tax, as my mates' number plate says.

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Replying to chatman:
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By North East Accountant
10th Apr 2018 08:50

chatman wrote:

I'd like to abolish VAT altogether and make up the shortfall with a land and property tax, a financial transaction tax, 100% inheritance tax and higher rates of income tax, especially on unearned income.

I assume that you are joking about the 100% Inheritance Tax.

Why would anyone bother if this is the case?

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Replying to North East Accountant:
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By chatman
10th Apr 2018 10:58

Why would anyone bother with what?

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Replying to chatman:
Hallerud at Easter
By DJKL
11th Apr 2018 17:02

Well, other half would like the consequences of 100% IHT, we would end up keeping all our worldy goods in gold, diamonds etc- small, portable and untraceable.

So stuff putting money into ISAs, Pensions, Whole of Life policies, savings plans etc, on her Birthday and at Christmas just blow the money on yet another sparkly adornment- I now need to buy some shares in some safe installers, oops, no I don't, they will be traceable so subject to IHT.

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Replying to chatman:
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By North East Accountant
13th Apr 2018 08:46

Working hard and long hours, taking risks, employing people, making the most of what skills you have etc etc in the hope that when the time comes to shuffle off you can pass on the fruits of your labour to your nearest and dearest

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Replying to North East Accountant:
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By chatman
13th Apr 2018 09:12

To make a living? Because they prefer doing that to being employed?

I doubt everyone would give up work just because they couldn't leave their wealth to their children.

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Replying to chatman:
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By farrcorfe
13th Apr 2018 09:36

Ah, I have just the job for you in the old USSR or Cuba. Your salary will be exactly the same as doctors, dentists, lavatory cleaners and shop assistants so total (theoretical) equality

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Replying to farrcorfe:
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By chatman
13th Apr 2018 09:52

Ah, the old "If you don't like it, go and live in Russia argument" beloved of intellectuals everywhere.

I believe this type of logical fallacy is known as "whataboutery".

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Replying to farrcorfe:
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By johnjenkins
13th Apr 2018 10:04

Hate to tell you this but the old USSR doesn't exist anymore. As for Cuba - have you been lately -. If not try Airb&b. However I'm sure Mr putin would welcome a new Engel.
How did you get your name past the eagle aweb censorship regime?

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By Anthony G Thorne
09th Apr 2018 14:19

To be really radical how about no VAT but a 0.5% turnover tax on everything sold (this would include rents, property sales but remove stamp duty, insurance remove IPT etc) which would be simple to understand and easy to police. No recovery of input tax, no partial exemption, no zero rated, no outside the scope plus no change to the rate so that the take is based on the bouyancy of the economy.

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Replying to Anthony G Thorne:
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By Ian_mcdonald
09th Apr 2018 14:49

Anthony G Thorne wrote:

To be really radical how about no VAT but a 0.5% turnover tax on everything sold (this would include rents, property sales but remove stamp duty, insurance remove IPT etc) which would be simple to understand and easy to police. No recovery of input tax, no partial exemption, no zero rated, no outside the scope plus no change to the rate so that the take is based on the bouyancy of the economy.


Totaly agree in principle.
I would also increase the percentage and remove CT this has the advantage of taxing Amazon, eBay Facebook, Google and all the other offshore entities.
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Replying to Anthony G Thorne:
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By johnjenkins
09th Apr 2018 15:40

Know where you're coming from, but if we are going down that route we should abolish all tax and start from scratch as to how we finance our health and welfare.

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