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Fantasy Budget: Neil Warren’s dream to simplify VAT

With the Spring Budget less than a month away, Neil Warren has drafted a Budget speech for Chancellor Sunak that reduces opportunities for unfair profit and rights some wrongs.

4th Feb 2021
Independent VAT Consultant
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Madame Deputy Speaker – I now turn my attention to VAT, described by some commentators as ‘the nation’s favourite tax.’

Now that we have left the EU, we have, for the first time since 1973, the chance to make our own VAT laws, without reference to the EU VAT Directive. This means that we can now extend our zero-rates to give important concessions and tax savings to areas where it is needed most.

A situation where many people are faced with uncertainty, worry and a large financial cost relates to cladding replacement work needed on blocks of flats following the Grenfell Tower disaster in 2017. This has meant that many leaseholders are currently unable to sell or remortgage their apartments until the corrective work has been carried out, and the building can be issued with form EWF1 by an architect.

I propose two measures to help this situation.

First, I will double from £1bn to £2bn the grant fund that has been set aside to provide support to leaseholders where cladding work is needed.

Second, I propose to zero-rate the supply of builder services and materials used as part of the corrective work that is needed on the structure of residential buildings.

This measure will give a welcome boost to the construction industry as it recovers from the coronavirus crisis, but it will also ease the burden on apartment owners who, when they purchased their flats, had no idea about the cladding problem in the structures of the building.

Madame Deputy Speaker – to continue with VAT issues, I have been concerned at the way that VAT has been allowed to evolve from a simple tax as it was first envisaged, to one that has many loopholes that need to be re-evaluated. The basic principle of VAT is that you charge VAT on your sales and claim VAT back on your related costs.

One part of the legislation that has produced unjustified VAT savings relates to the partial exemption de minimis rules. These rules mean that a VAT registered business can claim up to £7,500 a year of VAT on costs that relate to its VAT exempt activities.

For example, a VAT registered business renovating a residential property for rent or sale, could spend up to £37,500 on building work in a tax year, and claim VAT on these costs in many cases. This cannot be right – and I therefore propose to abolish the partial exemption de minimis thresholds from 31 March 2021.

This will also produce a simplification of the tax because there are three different de-minimis tests that a business must consider.

The flat rate scheme was introduced by Labour in 2003, with the intention of simplifying VAT accounting for small businesses.

In those days, many small businesses used manual bookkeeping systems to complete their VAT returns and the time saving benefits of the flat rate scheme were worthwhile.

However, times change and from 1 April 2022, all businesses must submit their VAT returns using MTD-compatible software and keep VAT records in a digital form. It has become clear that the main reason why businesses remain in the flat rate scheme is that it produces a reduced VAT bill compared to normal VAT accounting. I have therefore decided to abolish the flat rate scheme from 31 March 2022.

Madame Deputy Speaker, I also want to announce two changes to builder services where VAT is charged at 5%.

This reduced rate was introduced to increase the number of habitable homes in the country. For example, the reduced rate applies to conversions of commercial properties into dwellings. It also applies when work is carried out on a dwelling that has not been lived in for at least two years.

There are many cases where investors buy properties on a speculative basis and keep them empty in anticipation of capital appreciation. The building work then qualifies for 5% VAT after two years. To discourage this investor strategy (we want all homes to be occupied), I will increase the empty period requirement from two to five years from 1 September 2021.

The 5% VAT rate also applies when a project results in a changed number of homes after the work has been completed. This is logical for projects that produce an increase in the number of homes in a building, for example a house converted into four flats.

But it is not right that the rate also applies when a project results in fewer homes being created, for example, two semi-detached houses being converted into one big detached property. The legislation will therefore be amended so that the 5% rate only applies when a project produces an increased number of homes.  

Finally, with a view to VAT simplification, I have asked HMRC to review whether the number of retail schemes in the legislation can be reduced, with a view to all retailers accounting for VAT on a ‘point of sale’ basis. This review should take into account the technological advancements that have been made in recent years.

I commend this Statement to the House.

Neil’s Budget wish-list:

  • New zero VAT rate for cladding replacement work on high rise residential buildings
  • Partial exemption de minimis threshold abolished
  • Flat rate scheme abolished
  • Homes must be empty for five years rather than two to qualify for 5% VAT on building work
  • 5% VAT rate restricted to work where number of dwellings is increased when the work has been completed
  • HMRC to review all retail schemes and consider ‘point of sale’ accounting for all retailers.
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Replies (19)

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By tom123
04th Feb 2021 15:30

Thanks

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Tornado
By Tornado
04th Feb 2021 18:18

Abolishing VAT altogether would be a better idea or at least just charge VAT to the final user. HMRC could then concentrate its limited resources to just policing the smaller range of people who charge VAT and probably reduce fraud significantly, or at least, do not require any business to business transactions to include a VAT charge.

A Domestic Reverse Charge type of system would work well without having to account for the reverse charge!

Oh but I forget, this would probably make tens of thousands of people redundant and No Government would do that.

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By Paul Crowley
04th Feb 2021 21:47

Agree all
Not one single trader joined flat rate and paid more tax
complete tosh from day one

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Jason Croke
By Jason Croke
05th Feb 2021 08:05

Good article Neil, if only it could be true.

VAT law struggles to keep up with the speed of industry and business, for every pasty or jaffa cake argument, there are 10 new products made from new ingredients. The whole GIG economy has blind-sided HMRC with the likes of Uber and other technological businesses which leaves HMRC scratching their heads as to what it is being supplied.

Lets see if any of the predictions come true, if they do, then it means Treasury is an avid reader of AccountingWeb :)

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By NeilW
05th Feb 2021 09:37

The one I want to see is that traders' prices can only be quoted ex VAT if they are in receipt of a valid VAT number.

Which would apply worldwide and customers can recover overcharged VAT from the payment method where they can show the price was initially advertised ex VAT.

Nobody needs to see VAT or think about it - unless they have a VAT number.

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By johnjenkins
05th Feb 2021 09:40

Neil, I'm afraid you have done what all the others do and that is to tinker.
VAT is not a tax on business. This was made very clear at the outset . So you either abolish vat for business with only the end user paying or you have every business vat registered with no actual vat changing hands between business. There will be a bit of fraud to start with but by having a business vat card and a national register, those problems would soon be ironed out.

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Replying to johnjenkins:
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By BlueNose1812
05th Feb 2021 10:14

johnjenkins wrote:

Neil, I'm afraid you have done what all the others do and that is to tinker.
VAT is not a tax on business.....

Speak to anyone making exempt supplies and you will find that it is a tax on business. My healthcare worker agency constantly moans about having to pay VAT. I am sure the tax take from banking, health etc is many billions.

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Replying to BlueNose1812:
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By johnjenkins
05th Feb 2021 12:20

If you have a look at the original intention of VAT, it is quite clear that it wasn't supposed to be a tax on business. However you are totally correct when you say it has become just that. That's why there shouldn't be any charge between business and those that are exempt (charities and the like). that way there can never be a charge on business.

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By poveyt
05th Feb 2021 09:43

Beware unforeseen consequences. Many sports clubs are able to use the de minimis rules that keep the cost of participation down. You would be taking away from organisations like that at a time when they need every penny to help them survive. Think and consult before suggesting things like this!

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By Accountant101A
05th Feb 2021 10:13

An interesting list - My wishlist would include the the removal of the VAT threshold on holiday rentals businesses that use online marketplaces like Airbnb. Airbnb enables thousands of small businesses to act like a big business and they should therefore pay full taxes. As Jason pointed out HMRC are behind the curve in legislation that fits with current business structures and practices. Hotels are put at a huge price disadvantage and precious residential housing stock is siphoned off for business use.

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By Michael C Feltham
05th Feb 2021 10:53

Value Added Tax is perhaps the very best exemplar of how Governments introduce a tax, usually justified by some party political polemic and eventually some future bunch of political fools just accept and love the tax revenue to support their profligacy.

It is perhaps worth remembering how VAT was first introduced; well, this is thanks to Traitor Heath, since VAT was an EEC now EU tax.

To (try-and fail!) to justify this draconian imposition, Heath waffled on that VAT would replace Purchase Tax: a tax introduced in 1940 to try and limit the sale of luxury goods. It never ever applied to used goods. He espoused Purchase Tax was complicated and high; (In 1973 the top rate was 25%).

Heath's famous words: "One simple tax; one low rate!" When introduced it was charged at 10%.

Simple?? I wish!

The next thing to remember is that as an EEC/EU tax, a percentage of ALL VAT collected was funneled off to the Brussels profligacy machine! Even more onerous was the need to provide stats to Europe, which form part of the VAT 100. still.

One simple tax eh? I bloody wish! It is now perhaps the most complex tax of all. Worse still, it is charged on worker's own labour! Only the failed Selective Employment Tax, ever levied a tax charge on work!

The next and perhaps even more iniquitous tax was Wilson's jealousy- driven CGT.

Wilson's infamous words: "A man goes in to the City one morning and buys something; a day or so later he sells it and makes a vast profit. However as this is a capital profit he pays NO INCOME TAX!!"

Think about this for a bit; why do certain prices rise and create a CGT charge? Mainly caused by Government's own serial incompetence in playing party politics with sterling which directly causes Monetary Inflation. So we are paying taxes on governments stupidity and fiscal ignorance... Nice!

And of course, as is the way with taxes, once introduced, they are in place for ever! And abused by juggling in the vain endeavour of trying to achieve fiscal equilibrium.

https://www.dailymail.co.uk/news/article-9209313/Tax-burden-highest-leve...

My final pick for iniquitous taxation is Class IV NIC. What benefits accrue to the payer? Er, none. Again, this is simply a tax on daring to work! How dare you!

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Replying to Michael C Feltham:
Tornado
By Tornado
05th Feb 2021 11:28

"My final pick for iniquitous taxation is Class IV NIC. What benefits accrue to the payer? Er, none. Again, this is simply a tax on daring to work! How dare you!"

The same point applies here as I made in my first post, simplifying taxation would make thousands of people redundant and no Government is going to do that. Instead we work towards something called Making Tax Digital which is nothing of the sort as we cannot even communicate with HMRC by email, surely an essential part of any digitisation programme.

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By simonmann
05th Feb 2021 10:56

The answer is simple

1. Scrap VAT altogether and have a simple sales tax payable on applicable sales (so food, property etc could still be exempt/zero rated) Nobody can recover input tax so it is just a tax paid on sales by every business. Accounting then gets really simple for accountants and traders with no discussion on whether vat can or cannot be recovered, and accounting records much simpler too. So much better than the ridiculous I charge you recover principle at the moment. With the correct sales tax rate of say 5% at every point of the journey from port/factory to consumer, the end user would pay exactly the same price at the till as now so it wouldn't target to raise more money, just save on the mess. Fraud would be cut down because it would be so simple and the amount due provable with till/bank inputs but if a trader was to disappear without paying - the lower 5% tax rate would mean they would disappear owing far less

2. Scrap the registration threshold, or at least make it £1k to match the trading allowance - if you want to be in business be prepared to register, collect and pay your sales tax. That takes away the artificial threshold holding back new traders from expanding turnover, the registration dodges (both legal and otherwise) trying to avoid declaring revenues - and improves the record keeping of all businesses both large and small

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By brinsley1
05th Feb 2021 11:21

Any chance we could revert back to Purchase Tax - it affected hardly anybody!

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By evildrome
05th Feb 2021 12:57

.

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By evildrome
05th Feb 2021 12:56

VAT is horribly regressive, consumes far too much otherwise productive energy to manage and should be scrapped.

The fiscal purpose of ALL taxation is the control of inflation.

Fiat currency governments are "money financed". They spend their own unit of currency into existence. There is mechanically no difference between a £50 note, a £50 government cheque or bank transfer. All are equal liabilities of the state and all are ex nihilo money creation.

As taxation does not finance government spending, there is no need to have a separate tax for income, NIC & VAT.

One tax would suffice for all three as their only purpose is to draw money out of the economy & destroy it.

If you really must have a very much larger tax burden on the poor then be honest about it & scrap NICs, scrap VAT & have a marginal tax rate of 50% on the first £30k of income.

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By tedbuck
05th Feb 2021 16:12

I have had this most brilliant idea.

Throw VAT away completely - it wastes so much time recycling money around businesses to no avail when at the end of the day it is only the end user who pays. So let's have a new tax instead -- POST - Point of Sale Tax and just charge it on the final sale tp the consumer.

Just think of all the time saved and all the HMRC staff that could be put to better use. If you don't like the acronym POST you could always call it Purchase Tax!

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Replying to tedbuck:
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By Paul Crowley
06th Feb 2021 12:04

And put those staff in tax investigation
Are there any staff allocated to investigations?

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By Kentwillumsen
05th Feb 2021 16:52

Replace VAT and business rates with a simple sales tax.
No more registrations, deductions, triagulation or reverse charge.
Sales tax is paid to HMRC like income tax.
Simple to charge and manage also for small business.
No registration, deduction, triangulation and reverse charge; just put it on the invoice or receipt and pay the bill to HMRC.
No business rate to pay if you don't sell anything (would be handy in these Covid times for closed businesses)

This sales tax would:
1. Equalise high-street and on-line sales
2. Equalise small business with multinationals (Amazon, Starbuck etc)
3. Make business pay an affordable tax based on the sales rather than on the "value" of the premise
...and much more

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