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Abolish VAT: Brexit dream or reality?

Should VAT become a sales tax now that the UK has left the EU? Neil Warren considers this suggestion, alongside the downsides.

11th Mar 2021
Independent VAT Consultant
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Abolish VAT: Toy plastic forklift holding VAT
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Imagine John and Marie check into a posh hotel for a luxury weekend break to celebrate their wedding anniversary. John runs his own business which is registered for VAT, so he shows proof of his VAT number to the hotel receptionist. 

“Don’t charge me VAT,” he says, “this is a business trip.”

“No problem,” replies the receptionist, “that means your bill will be £1,000 and not £1,200. I’ll put your VAT number on the system so it takes off the 20% tax. Enjoy your stay.” 

Manipulation

The idea of a sales tax instead of a value added tax is very attractive in many ways because all the tax paid to HMRC will then be what we used to call ‘sticking tax’ ie it is paid by consumers and not claimed back by the buyer of goods or services. But how would it work to avoid massive fraud and manipulation, as this example shows? 

What about practical challenges? Would the hotel have to charge John VAT on part of the cost if his business was partly exempt?

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Replies (57)

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Hallerud at Easter
By DJKL
11th Mar 2021 20:25

Part of the misunderstandings within construction , and the complexity, arises because some supplies follow one path and others a different path, the contractor gets confused and a lot of the difficulties then arising are him/her dealing with which path a supply he /she makes ought to take, if all supplies to all customers are treated precisely the same way then for the entity making supplies understanding the rules to follow becomes simpler, there are only one set of rules.

As end users are targeted by the system as the eventual payer there is a logic with the more generally used current system.

Any system where the status of the end user varies the invoice raised to them seems to be a recipe for disaster for smaller entities, changing the system to one that is more complex may certainly prevent some existing vat leakage but will also almost certainly create new and different forms of leakage and frictional costs.

Tax has become increasingly complicated, from my start in 1985 to now the extant legislation has doubled, one's Yellow and Orange handbooks seem to have double the number of volumes and take twice the shelf space.

Governments of all hues seem to forget that all taxes they raise are driven in one way or another by business or the tax monies charged to business, and business sits as an unpaid collector on their behalf, accordingly imho less is more, stop changing things, stop thinking of changing things, let business draw breath and have a period of constancy re having to understand the next cunning wheeze some think tank believes is a good idea.

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By djbrown
12th Mar 2021 09:51

Way back in the 80s or 90s, HMRC did a consultation on precisely this - not charging VAT between VAT registered businesses and the overwhelming conclusion was that it was not a good idea. From memory, cash flow was the main reason for it not being attractive to businesses.

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Replying to djbrown:
ghm
By TaxTeddy
12th Mar 2021 13:10

Didn't the German's float this as an idea at one time? From memory the idea was that any VAT registered business would not account for VAT and it would only hit the unregistered end user. I'm sure nothing ever came of it.

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Replying to TaxTeddy:
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By johnjenkins
12th Mar 2021 14:27

You're spot on. VAT was sold on the premise that it wasn't a tax on business, now we know otherwise. Setting a turnover limit was the first indication of taxing business on the premise that it would save small business a lot of paperwork and red tape.

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By Rgab1947
12th Mar 2021 10:00

Having lived in a jurisdiction both of GST and VAT, GST was simpler but so open to fraud that a change was mooted to VAT which in theory was less able to be "crooked".

It was the UK IR (At the time) who introduced it into that country. The word amongst accountants was that the biggest secret UK IR and the loacl tax authorities had with VAT was the GP% per industry. That could pick out VAT manipulation. Examples were discussed and yes much more difficult but not impossible.

I leave it to experts to decide what is best for tax or the economy.

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Nigel Harris
By Nigel Harris
12th Mar 2021 10:02

There seems to be a misconception that VAT is an EU tax, and maybe that's where it started, but it has become a standard across much of the developed world now - well, apart from the USA - and probably for the simple reason that it works pretty well. Purchase Tax, VAT's predecessor in the UK was well before my time so I have no idea how it worked but I get the impression the Government would rather expand VAT. not abolish it.

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Replying to nigel:
Jason Croke
By Jason Croke
12th Mar 2021 10:25

France were the first to introduce VAT, based on a concept proposed by Germany some years previously.

As you say, many Countries operate VAT and many of them use the EU system as the basis because its the most established system with case law to support it, so if USA adopted VAT tomorrow, they don't have to reinvent the wheel as to what "an establishment" is or what "hot food" is, its already there.

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By mhkay
12th Mar 2021 10:07

The area that most needs a total overhaul is digital sales, which is a rapidly increasing part of the overall economy; and it's hard to see how to do that without international agreement, because the "place of supply" rules just don't work in a digital world. (The current EU system where I have to collect VAT from EU consumers on behalf of their own tax authorities, where the EU has no possible way of ensuring that I comply, is clearly ridiculous).

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Replying to mhkay:
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By flightdeck
12th Mar 2021 15:26

I was thinking of exactly this - digital stuff. THIS is surely the elephant in the room?

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By NeilW
12th Mar 2021 10:16

The VAT system is unnecessarily complex and leads to precisely the problems we see with the construction industry and also from imports from abroad where the reverse charge procedure applies.

When you look at the tax gap you find that VAT has a 7% loss over what it ought to be taking compared to about 1% for PAYE.

Which leads to the way to solve the problem - scrap VAT completely and require all businesses to run a PAYE system on their employee drawings and salaries - incorporated or not. I doubt anybody would miss class 2 and class 4 NI.

Moving the VAT take to the same slot as Employers' National Insurance would have the same effect on end prices but reward those firms that are more efficient in their use of labour power - which is where productivity comes from.

No more arguing about whether Jaffa Cakes ought to be biscuits, or if a particular chunk of land really is exempt.

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By North East Accountant
12th Mar 2021 10:18

Here's a simple system.

Scrap VAT entirely.

Every business with turnover over £10K must register for Sales Tax.

One Sales Tax % set at the rate required to raise the same amount of revenue from Sales Tax as raised from VAT.

No reclaiming anything.

Monthly return by the end of the following month with two boxes and direct debit payment to HMRC.

Box 1 - Amount of Sales Tax due
Box 2 - Nett turnover

Anyone found fiddling their Sales Tax returns £10K fine in the first instance or 1 year in jail if they have no money with increasing scale depending on how serious.

Anyone paying tradesmen in cash (and colluding with them to avoid paying Sales Tax) £10K fine or 1 year in jail too.

HMRC actually enforce this, advertise it and publically bang some people in jail and HMRC receipts will soar.

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Replying to North East Accountant:
By Duggimon
12th Mar 2021 10:33

By my workings, if a business is VATable on it's ins and outs, anything over 4% sales tax leaves them worse off under this proposal.

It's definitely simple but I'm not sure it's better.

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By Duggimon
12th Mar 2021 10:23

Your proposals seem to hinge on this:

"There is a big incentive to do things properly. How could that happen when the decision to not charge VAT with a sales tax system has been taken by, in my example, a junior member of staff in a hotel?"

The decision was not taken by the junior employee but by the fraudulent idiot, and he ought to be just as liable under a sales tax system as under the current VAT system.

Scrap the whole lot, make it a tax on consumers, fix MTD so HMRC receive the actual data including which businesses made business trips and you're most of the way to sorting the problems without introducing the ridiculous reverse charge system.

A tax return where you aren't charged by submitting the same figures in two boxes to balance out is so obvious an unnecessary complexity that there must always be a better solution.

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Replying to Duggimon:
Jason Croke
By Jason Croke
12th Mar 2021 10:36

I've mentioned elsewhere that Italy and some other EU member states already have real-time reporting for VAT, similar to PAYE RTI. Sales and purchases are uploaded to the Italian tax office in detail for the tax office to scrutinise.

I'm sure frauds still take place but the mere idea that the taxman is watching your every transaction is likely to put off most of the chancers. If a UK business knew their claim for 15x bottles of Bollinger or that new hot tub for the "garden office" were to be seen by someone at HMRC, then chances are they'd not reclaim the VAT or even put it in the business accounts.

I'm all for scrapping VAT but the only reason why its so complicated is because there's no such thing as a simple tax. lets go with a sales tax but then people will say those on low incomes can't afford food so we give an exception for food, but define food, is champagne to be treated the same as milk and then before you know it we have exceptions and then it gets complicated.

We only need to look at PAYE or Corporation tax to realise none of these are simple taxes either with their exemptions and exceptions.

If we keep VAT, I'd prefer the full MTD scrutiny route alongside more use of reverse charge and also for HMRC to revisit the whole framework of VAT and look to simplify it, removing exemptions and exceptions, get rid of cash accounting, flat rate, annual accounting...all very useful for the handful who use it but merely allow more confusion and more opportunity to commit fraud.

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Replying to Jason Croke:
By Kentwillumsen
12th Mar 2021 11:06

I would never use Italy as a good example as their legal reporting system, from VAT to Libro Giornale, is a nightmare and still open to fraud; only result is a complex system that catches small businesses out and punish them with high fines.

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By exceljockey
12th Mar 2021 10:24

According to the Bank of England, the average daily RTGS values for 2020 were £752,532m. That gives a yearly total of approx £275 trillion in electronic transactions. HMRC's tax take is £640b p.a. approximately.

Therefore a 0.2% transaction tax on every electronic transaction would cover HMRC's tax take. Shopping, wages, loan payments, cash with drawals etc all taxed at 0.2%. Levy applied by banks and credit card companies. It would solve the issue of online retail. It would be a negligible cost that no one would notice except traders doing very high volumes and minuscule margins.

Do away with all taxes and HMRC.

I'm sure someone with a bigger brain than mine would be able to pick holes in my argument. But the tax system more or less was designed in an age of cash payments. Now that we have moved on from that why not change the system to match modern reality?

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Replying to exceljockey:
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By richards1
12th Mar 2021 10:36

How does that work with Crypto currency?

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Replying to richards1:
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By exceljockey
12th Mar 2021 11:03

It doesn't but a 0.2% transaction tax would reduce the appeal of cryptocurrencies because why bother unless you are doing something illegal.

Anyway, the current tax system isn't exactly set up to effectively tax cryptocurrencies.

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Replying to exceljockey:
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By miike
12th Mar 2021 11:05

Good angle. I would vote for this.

However, it encorporates too much common sense for the parasitical, political class to understand.

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Replying to exceljockey:
Hallerud at Easter
By DJKL
12th Mar 2021 11:57

Define electronic transaction- if you mean a transfer of funds one just does not transfer funds where entities trade back and forward with one another, you just run a ledger with less frequent settlement e.g. City of London transactions just get settled less frequently (no longer daily) and reduce the tax take. A lot of this is of course very small margin high volume trades currently settled at the end of each day, 0.2% is pretty significant re these margins.

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Replying to DJKL:
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By exceljockey
12th Mar 2021 17:03

That's a good point and I am not sure if these types of transactions in the City of London fall under the real-time gross settlement (RTGS) transactions.
FWIW I got my figures from this page: https://www.bankofengland.co.uk/payment-and-settlement/payment-and-settl...

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By RogerMT
12th Mar 2021 10:24

"HMRC needs to resist its strategy of adding complexity" - good luck with that!

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Replying to RogerMT:
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By flightdeck
12th Mar 2021 15:33

Yes! I loved this bit in the article "...it was an urgent measure and the policy team didn’t have time to overcomplicate things".

My immediate thought was "I've always wondered how we won the war and things kept moving, now I know: expediency made simplicity possible".

Way too many cooks spoiling the broth in government, they justify their jobs by creating complexity which then requires more of them to manage it.

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By evildrome
12th Mar 2021 10:49

Just scrap VAT.

If you look at tax collected as a % of GDP, its roughly the same back through history (Hauser's Law).

The percentage doesn't change, only the composition does which means that the money being collected now as VAT used to come from somewhere else.

It serves no purpose other than to move tax that was collected from the 1% onto the 99%.

Its cobblers anyway, all tax collected is destroyed on receipt.

When you hand money to the state it just disappears. The state has infinite money.

Infinity + any real number = infinity.

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Replying to evildrome:
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By a_q
12th Mar 2021 11:10

... and we are still paying for the Napoleonic War(s)....

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Replying to a_q:
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By evildrome
12th Mar 2021 11:32

Take a fiver out of your pocket.

Look at it.

That's £5 of the national debt.

If we paid off the "debt" there would be no money.

The "National Debt" is simply all the pounds created by the BOE and not yet taxed back.

The vast majority of it is private savings at the BOE in the form of bonds.

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Replying to evildrome:
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By a_q
12th Mar 2021 11:10

... and we are still paying for the Napoleonic War(s)....

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Replying to evildrome:
By Kentwillumsen
12th Mar 2021 11:41

True as long as you look at domestic taxation; however a tax reforms could improve receipts from foreign companies selling in the UK.
Especially large internationals utilise a complex set of inter-company charges and transfer pricing schemes to move taxes to the cheapest place; which is not the UK.
Starbucks use transfer pricing to move revenue to Switzerland.
Amazon sales end-up in Luxenbourg.

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Replying to Kentwillumsen:
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By NeilW
12th Mar 2021 13:21

"True as long as you look at domestic taxation; however a tax reforms could improve receipts from foreign companies selling in the UK."

It can't. They don't use Sterling anywhere else. You're assuming a fixed exchange rate, not a floating rate one.

Economically all taxation ends up on the consumer or whoever undertakes 'final consumption'. Shuffling it around the participants in the Sterling currency area is just politics.

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Replying to NeilW:
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By evildrome
12th Mar 2021 14:32

Is that really true?

I get that sellers want to maintain their profit levels but just slapping 100% of any new tax onto the sales price is not an option.

Sellers always sell at whatever price the market will bear.

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Replying to NeilW:
By Kentwillumsen
13th Mar 2021 11:59

You would only pay sales tax on domestic sales, which is always Sterling; export is not taxable - just like in VAT.

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By miike
12th Mar 2021 11:01

VAT should be abolished. It has always been ridiculous.

Register for VAT and become an unpaid agent of the bureaucrats.

Your 'VAT colleague' sounds like a cult member, or at least a communist.

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By Springfield
12th Mar 2021 11:19

I assume this was meant as a tongue-in-cheek comment although probably hoped for by some, but a possibility of re-joining the EU in about 2040 is the least compelling argument for not overhauling the current VAT system.

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By RayM55
12th Mar 2021 11:21

Good article by Neil, the idea of abolishing VAT has always been a Brexit falsehood. Even if we move to a sales tax, it will still be 20% or thereabouts. The USA has levels of sales tax that vary from state to state but if we had their rates we would need to increase income tax back to 1970s levels.

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By Kentwillumsen
12th Mar 2021 11:35

VAT, business rates and corporation tax, should be abolished together and replaced with a simple sales tax.
Only salaries should be deductible from the sales tax in my mind to support domestic business.
Rather than looking at GST and similar; rather look at Japan on how to simplify for instance.
1. This will equalise high-street (business rates) and on-line business (nothing); hence no need for digital or delivery tax either
2. This will equalise domestic (corporation tax) and international sales (nothing); hence big business like Amazon would have to pay full tax for sales in the UK
3. This will equalise small and big business; self-employed pay same tax as limited company for same sale; and big business cannot use transfer-prising to shift revenue to a low tax region and other supply chain loopholes and dubious inter-company charges
4. Ease of administration; just pay a % of your revenue. Reverse charge, allowable and non-allowable deductions, different rates on pasty, triangulation are all redundant then.

The downside is that it is unlikely to happen as large companies enjoy complexity as a protection against small business hence lobby for more regulation and complexity. Keep in mind large companies also donates the most to the party in government.

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Replying to Kentwillumsen:
Hallerud at Easter
By DJKL
12th Mar 2021 12:02

How does this work for really thin margin, automatic trading systems within say the City of London, what is a sale?

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Replying to DJKL:
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By flightdeck
12th Mar 2021 15:38

Yes, it is sale.

Their margins may be wafer thin but these are margins are on millions and billions so wafer-thin tiny slices of that will add-up.

I think I get what you are saying (sorry if I am not) but how are they different to any other low margin business?

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Replying to flightdeck:
Hallerud at Easter
By DJKL
12th Mar 2021 16:03

Their margins could be less than the proposed 0.02% tax is my point.

Edit- the point is that it is their gross sales that would be taxed, so trade sale 6,000,000 purchase 5,999,000, profit is only 1,000, but tax at say 0.02% on sales is 1,200.

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Replying to DJKL:
By Kentwillumsen
13th Mar 2021 12:09

My post above was not meant to cover every eventuality as it would become a book then.
First of all what you refer to is financial transaction, which have never been taxed anyway.
You could argue commission on a financial transaction would be sales hence taxable.
There will be a lot of things to consider when changing a tax system but out current tax system is not fit for purpose in the 21st century with on-line and international sales and distribution.

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Replying to Kentwillumsen:
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By NeilW
12th Mar 2021 13:24

Far better to abolish the sales tax and put the tax on employment - where it belongs since that is what actually needs to be freed up to be used in the public services that tax is supposedly paying for.

We already have a very effective system for that - PAYE.

Taxation has nothing to do with raising money and hasn't had for generations. It's about making things available for the public sector to buy.

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Replying to NeilW:
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By evildrome
12th Mar 2021 16:01

"Far better to abolish the sales tax and put the tax on employment"

.... once full employment has been reached in order to control inflation.

Until full employment and rising inflation (which is not a given even at full employment) there's no need to add more tax on labour.

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Replying to NeilW:
By Kentwillumsen
13th Mar 2021 11:34

That would unfairly tax domestic business compared to foreign business.
With my system a Chinese business would pay same tax for same sale as a UK business.

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Replying to Kentwillumsen:
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By Ian McTernan CTA
12th Mar 2021 14:23

Totally terrible idea. I've never understood how anyone who deals with the real world and businesses can think this would work.
Sales have very little to do with how much a company makes, and salaries aren't the only cost companies have, especially small start ups or companies spending billions on warehousing, distribution systems and operating on very small margins.
Pretty sure some far left loony think tank came up with this idea as it didn't understand how businesses operate either...
Let's say you set the rate at 5%. A business spends a lot on, say, equipment, R&D, premises, etc - all of which aren't allowed as a deduction in your scheme, and then operates on a 'stack them high, sell them cheap' model where their net margin is 4%. You've now forced that business to close or move elsewhere.
In fact, you would strangle every early stage business as sales do not equal profit.

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Replying to Ian McTernan CTA:
By Kentwillumsen
13th Mar 2021 11:45

I do work in the real world just like you do and I'm definitely not left-wing; so please stick to proper arguments and try to understand what I'm writing.
Lots of start-ups runs with a deficit in the early years; that is quite normal and that is an issue for the shareholders/investors - tax is a minor issue in this.
More likely the start-up spends a lot on R&D and therefore not selling a lot, if anything; then they do not pay any tax according to my scheme beyond PAYE.
As a CTA you should understand that?

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By johnjenkins
12th Mar 2021 11:47

VAT is not meant to be a tax on business yet it is on those under £85k not registered. So what about every business has to register for VAT (level playing field). No money changes hands between business so only end user is charged. 6 monthly returns showing only those sales with VAT (nothing to reclaim). To prevent fraud, all business issued with card with details. This is read by a reader which verifies business. Or something like that.

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By raybackler
12th Mar 2021 11:54

Let's take the new reverse charge procedures in construction as an example. At the heart of it was VAT being charged and paid to sub contractors, who then disappeared without paying the VAT over to HMRC.

When this is changed to reverse charge, the next contractor up the chain can't deduct the sub contractor's input tax and so they are paying over just the output VAT on their sales to HMRC. The overall VAT take is the same. As an example, if the sub contractor's VAT was £200 and the main contractor £300, now what happens is the subbie pays nothing and the main contractor pays £500.

The main reason for reverse charge is there will be contractors who have VAT Exempt output tax, for instance if they are also involved in property ownership with VAT Exempt rentals. These contractors won't be able to recover all of the reversed charge VAT, so simply abolishing VAT between contractors won't solve all of the problem.

I have long believed the the system of Partial Exemption is an unnecessarily complex way to run a tax system. If this could be solved then this begs the question as to why bother with reverse charge? Why not just have the main contractor pay over the VAT on their sales and have sub contractors not charge VAT to any contractor who is CIS registered.

On the other hand, why not abolish VAT Exemption for VAT registered businesses and just call it zero rated. This would allow reclamation of all input tax and reduce complexity. VAT Exemption would then apply just to un-registered businesses operating in Exempt sectors. I can't believe the reduction in tax take from abolishing partial exemption would be that great. Anyone seen any statistics on this?

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By mikejlee
12th Mar 2021 12:24

HMRC via Government approval have invested large sums in MTD, so I think it very unlikely that they would want to change!

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Replying to mikejlee:
Hallerud at Easter
By DJKL
12th Mar 2021 12:33

The fact that HMG have spent a fortune on MTD virtually guarantees there will be a change.

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By Michael C Feltham
12th Mar 2021 14:10

Before commenting upon VAT, I would suggest the commentator ought properly to understand how and why the UK was subjected to this pernicious tax and the core details of Purchase Tax.

Purchase Tax. Please read, first.

“Purchase Tax was a tax levied between 1940[1] and 1973[1] on the wholesale value of luxury goods sold in the United Kingdom. Introduced on 21 October 1940, with the stated aim of reducing the wastage of raw materials during World War II, it was initially set at a rate of 33⅓%.
The tax was subsequently set at differing rates dependent upon individual items' degree of "luxury"[2] as determined by the government of the day.[3]
In connection with the accession of the UK to the European Economic Community[4] Purchase Tax was abolished on 2 April 1973 and replaced by Value Added Tax (VAT), initially set at a rate of 10%, which was shortly afterwards reduced to 8%.
Source:( Not the best, perhaps, however saves me from transcribing from a weighty tax reference tome!)
https://en.wikipedia.org/wiki/Purchase_Tax
Traitor Heath was desperate to join the E.E.C. VAT was mandatory; as well as sabotaging Britain’s successful Agri-Industry (CAP) and so foolishly, dumping the beneficial Preferential Tariff Agreement with the Commonwealth, particularly, Australasia, South Africa, Canada et al.
Now, his famous weasel words at the time, were: “One simple tax; one low rate!”. Heath stated that VAT was a replacement for Purchase Tax (PT); nice idea! However, PT, was a tax on LUXURY GOODS only. VAT, applied, gradually, to secondhand goods, LABOUR (A tax on work!) and thereafter, a raft of other goods and services, such as utilities, supposed non-essential foods (Remember the huge battle over Macvitie biscuits? I well do, as I attended a seminar led by the then HM Customs officer in charge of the nonsense).
The core aspects to remember, for myself, are a percentage of ALL VAT collected went straight into the EEC’s (Later EU’s) purse. But also, the statistical bits (Look at a VAT100) were demanded by the EEC/EU rapidly bloating budget, to waste all over the shop.
Ergo; after Brexit, then VAT properly ought to have been immediately reduced by the EU’s share. Was it? I wish!
For me, the very worst aspect of VAT is that it became another tax upon working to try and make a living. Iniquitous!
The Sales Tax levied in the USA, is variable by state of residence. For example, 1.76% in Alaska...
https://en.wikipedia.org/wiki/Purchase_Tax
But no; VAT as with CGT is a wholly pernicious tax, levied by governments out of fiscal control or sanity, to feed their evermore arrant insanity and love of profligacy. How can or could anyone justify giving millions to China (Foreign Aid) when China is successfully destroying Western economies, and has now reached the dizzy point of lending OUR money back to us to build nuclear power stations etc?

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Replying to Michael C Feltham:
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By flightdeck
12th Mar 2021 15:45

What a fantastic post - thank you!

I love the history on things and I had been wondered about many of the things you have brought up. I didn't know pre VAT that purchase tax was just on luxury goods and only there to try and stem frivolity during war and post war recovery. Now we find it at 20% on almost everything. Wow! That is a big move.

Do we give some of our VAT to the EU then? If so I feel a bit daft not knowing that major fact.

Great post, thanks again

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