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.
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.
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?
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.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.