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VAT review: Complex and burdensom – but can it be changed?

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28th Mar 2018
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The Treasury Committee has launched a sweeping inquiry into the “complex and burdensome” VAT regime.

The review will cover four aspects: The UK’s £12.6bn VAT tax gap, Brexit, the issues faced by businesses, and how the tax measures up against good tax policy.

As AccountingWEB has covered previously, the implications of Brexit on the VAT regime are particularly worrisome. If the UK leaves the EU’s VAT regime, thousands of small businesses face a sudden 20% upfront VAT bill on goods imported from the EU.

The Treasury Committee will consult on solutions to this problem. Commenting on the matter, Committee chair Nicky Morgan said “Brexit may provide both opportunities and challenges to the UK’s approach to VAT”.

She added, “The government may choose to stick to a broadly similar structure to what currently exists, change it, or abolish it completely.” But Morgan’s words elicited a bemused response from Neil Warren, a VAT lecturer and author.

“It sounds good, it’s good words,” Warren said. “But the VAT system will remain after we leave the EU. The government at the moment struggles to put through minor tax changes. It’s reviewing the VAT threshold at the moment, and that won’t have any effect.”

Instead, Warren mooted a return to postponed accounting as a solution. “VAT isn’t paid when the goods come in. Instead, a business declares it on their normal quarterly vat return and can then deduct VAT through the same return.”

Tax gap

Another chief concern for the Treasury Committee is the £12.6bn VAT tax gap.

“HMRC collected around £124bn in VAT last year – over a fifth of the UK’s total tax take – and failed to collect around £12.6bn in VAT,” Morgan said. “The reasons for why VAT is so vulnerable are somewhat opaque, so the Committee will examine how this might be addressed.”

Ecommerce platforms are a likely place to start. Many sellers based outside the EU aren’t applying VAT to sales on goods sold through marketplaces like eBay and Amazon. Non-UK business holding goods and selling them in the UK having a zero VAT registration threshold.

New proposed legislation states that if the online marketplace “knew or should have known” that a business should pay VAT, it can be held jointly and severally liable for the unpaid VAT. The platforms have 60 days to take action to correct the problem.

“It’s optimistic,” said Warren. “HMRC are asking the online marketplaces to do the detective work for them, which rarely works.

“Then there’s this phrase, ‘Knew or should’ve known’. History tends to suggest when this phrase becomes part of the equation, it doesn’t produce the best results.” For Warren, the tax gap is an issue of resources. He doubts whether HMRC has the required staff numbers to cut into the tax gap.

The inquiry will also delve into what aspects of VAT (either process or design) cause the biggest problems for businesses. In 2015/16, over £3.5bn was lost due to mistakes in VAT returns according to HMRC figures. The jury is out as to whether MTD for VAT will help ameliorate this issue.

Have your say

The Treasury is now soliciting evidence and the deadline for written submissions is Thursday 31 May 2018. You can make a written submission here.

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Replies (4)

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By Trethi Teg
29th Mar 2018 08:47

Precisely how have HMRC identified £3.5 billion mistakes which (presumably) means that businesses have made genuine mistakes in either underdeclaring VAT payable or over declaring VAT recoverable?

Have HMRC given examples of these mistakes?

I can well imagine that businesses have deliberately understated sales and increased purchases, but that doesn't seem to be what is being said.

What is the tax gap for deliberate evasion?

Has HMRC clarified this point or have any of our (useless) politicians had the brains to ask them that?

Finally, MTD will not solve any of the problems that HMRC say are there.

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By Wiganer Elaine
29th Mar 2018 11:54

Why not use this as a chance to simplify the system?
Vat is supposed to be a tax ultimately paid by the consumer. In that case just charge vat on sales. Don't mess about with reclaiming vat on purchases - the gross will simply be a cost against profit instead of the net. All prices will be shown as NET + VAT so the consumers (members of the public) will know how much of the price they are paying is going directly to HMRC!

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Replying to Wiganer Elaine:
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By johnjenkins
29th Mar 2018 12:28

I'm nearly with you.
I would like to see all business VAT registered. No VAT payable between registered business. There is to be a register (similar to Companies House) where all registration numbers and business they belong to are registered. Registration numbers of seller and purchaser to be put on invoices. This includes the EU. So as Elaine says only the consumer (that was the original intention of VAT) pays and that is what only goes to HMRC.
This will also help with MTD. Because of location, broadband etc. there has to be a period of "grace" until the system runs smoothly.

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Replying to johnjenkins:
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By SJH-ADVDIPMA
29th Mar 2018 13:49

Interesting , on investopedia under sales tax (as in use in the USA) they describe VAT incorrectly as a tax born partly by the company.

https://www.investopedia.com/terms/s/salestax.asp

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