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ICAEW eyes crucial simplification of VAT

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The ICAEW has launched a renewed push on simplifying the VAT system, with a senior figure at the organisation stressing that it “can’t be ignored any longer”.

29th May 2024
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The “needless complexity” of the UK’s VAT system is at the centre of a “crucial” new venture, with proposals being invited on how to make the process smoother.

The Institute of Chartered Accountants in England and Wales (ICAEW) is seeking “innovative and practical ideas” on how to reform the system to meet the challenges of the coming decade.

It has stressed that the author of the successful proposal – who will receive a £5,000 prize and the opportunity to present their research at a VAT conference to be held at Chartered Accountants’ Hall in London in 2025 – should “identify current challenges within the system and might explore the potential impact of a modernised VAT system on consumer behaviour, economic growth or fiscal stability”.

Can’t be ignored

Speaking to AccountingWEB, Ed Saltmarsh, ICAEW technical manager for VAT and customs, explained that simplifying the VAT system “is very important and can’t be ignored any longer”.

“It’s clear that the current complexity of VAT is undermining HMRC’s ability to provide the efficient, modern service that taxpayers and businesses deserve,” he said. “The needless complexity creates an administrative burden for businesses and ultimately makes it harder for HMRC to digitalise.

“If we want HMRC to better serve us all, and alleviate the burden placed on businesses, simplifying VAT is a crucial first step.”

Saltmarsh believes the biggest challenge for those coming up with ideas is “how to convince policymakers of the need for their proposed reform”.

He said: “Policymakers may fear short-term disruption or how the reform will go down with the general public, so the best proposals will include a compelling case for the change in the long-term or a clear roadmap for a smooth transition to a simpler, more efficient VAT system.”

Tinkering round the edges

Ruth Corkin, principal – VAT and indirect tax advisory at Hillier Hopkins, told AccountingWEB that VAT “still has its footprint in purchase tax, which was introduced in 1948, and has little bearing on today’s consumer trends”.

She said: “The best example of this is that the food legislation is, largely, based on what would have been taxed under purchase Tax, with biscuits and chocolate seen as ‘luxuries’. Therefore, there are the well-publicised cases of ‘cake vs biscuit’ where things are wholly or partly covered in chocolate.

“This distinction is lost on the public and both types of product are unhealthy and full of refined sugars, leading, in part, to the obesity crisis.

“Therefore, my view is that tinkering around the edges of legislation that is, at best, 30 years old and at worst based on legislation from nearly 80 years ago is unlikely to simplify much.”

Single rate of VAT

Corkin said she has “increasingly come round to the idea that there should be a single rate of VAT with support for those likely to be hit most economically”.

“This has its issues because the public would want that to be a low percentage. At the moment, my calculation is that the percentage would need to be at least 12% but that would not leave much leeway for support, so the rate is likely to be closer to 15%.”

She added that “carefully costed and explained to the public, a single low rate of VAT should at least maintain the current status quo but could have the potential to improve the tax take overall to be invested in public services”.

“There may still be some carve-outs, for example, financial services – this happens in Australia but VAT recovery is allowed on certain products and where there is not, there is a threshold where the VAT can still be recovered.

“However, cynically, I doubt that this will happen in my working lifetime. Public and professional views will likely be a barrier and it would take a brave government to implement this.”

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Replies (18)

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By johnthegood
29th May 2024 17:00

One has to agree, however if we "want HMRC to better serve us all, and alleviate the burden placed on businesses" there are many things that are a higher priority that are easier to fix

Thanks (7)
the sea otter
By memyself-eye
29th May 2024 17:33

Simplification?
Fat chance.
The whole tax system needs simplifying, but that won't happen.
Witness proposals for triple lock plus.......

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By FactChecker
29th May 2024 22:57

Shock news: ICAEW have found one of the oldest tricks in the Marketing handbook of VFM ideas.

Coming at no 2, only one place lower than the permanent Top of the Pops ('commission some research and give it a soundbite title'), is the perennial:
* commission a competition and give lots of interviews explaining it all.

Handled well it actually generates more ipd (inches per day) than mere Research (which only has the one set of results) ... the chosen pontificators can preach before its launch and during the receipt of entries and when there's a shortlist and when the winner is announced and then, sporadically, by checking on progress of previous entrants - before cycling round to the next competition. Yippee!

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Replying to FactChecker:
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By lme
30th May 2024 10:08

At least practitioners get a say. They can have more insight on some aspects than researchers.... I welcome the openness.

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Replying to lme:
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By FactChecker
30th May 2024 12:59

Practitioners (and anyone else who chooses to respond as access isn't limited to ICAEW members) "get to have a say" ... but, based on past performance, that doesn't translate into being listened to.

And, unfortunately, it doesn't represent "openness".
With the breadth of collected data, it's easy for the organisers to cherry-pick the 'results' (don't want to frighten the horses, so nothing too radical please).

Sorry if that sounds cynical - it is - but I've experience of running these kinds of marketing exercises for similar bodies in the past, and 'twas ever thus!

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By johnjenkins
30th May 2024 09:54

The only one that wins will be the one that gives HMRC more money.
I've said this too many times. Every business should be registered for VAT with no money changing hands between registered parties. A return only needs to be submitted when Joe Public gets involved. There really is no need for mandatory quarterly returns.

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By anneaccountant
30th May 2024 10:00

The whole VAT system is a farce. Millions of businesses having to account for VAT input and VAT output is ludicrous. Company A charges VAT to Company B and both companies have to report the same amount of VAT one as an output and one as an input. Completely pointless. Far better and more efficient just to have a sales tax when the product or service reaches the end user and which will only have to be reported once.

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Replying to anneaccountant:
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By paul.benny
30th May 2024 10:30

Every OECD country barring USA has a form of VAT. One of the reasons VAT is almost universal is that it is difficult to evade: an honest trader will always charge VAT on their sales.

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By Nebs
30th May 2024 10:08

Government spending is way too high. VAT accounts for about 17% of the tax take. Scrap VAT and tell every department to cut spending by 17%.

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Replying to Nebs:
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By Nygie
30th May 2024 10:39

Absolutely, about time the general public stopped being robbed blind from every angle!

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Danny Kent
By Viciuno
30th May 2024 10:45

Simples.

One VAT rate. No exemptions. Applied to everything. Every business is VAT registered from day one, no deminimis threshold. B2B supplies are reverse charge by default. VAT reviews at least once every 3 years.

VAT fraud punishable by deportation to a Rwandan jail, convicts have to walk rather than be chauffeured by private plane (saving the planet and all that jazz).

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Replying to Viciuno:
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By Rgab1947
30th May 2024 10:59

"VAT fraud punishable by deportation to a Rwandan jail"

Pity Australia is now independant. We could have shipped everyone there.

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Replying to Viciuno:
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By johnjenkins
30th May 2024 11:56

Why not send all prisoners to a Rwandan jail. It would free up our prisons and be cheaper to run.

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By Ian_mcdonald
30th May 2024 10:48

I used to spend ages thinking about and then getting very frustrated about lack of action on tax simplification but gave up when someone here on AccountingWEB pointed out that so long as politicians are calling the shots they will create new complexity by always seeking to gain votes by offering un-simplifying new giveaways.

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By Springfield
30th May 2024 11:24

I'm all for improvements in the tax system and it was all going well until I came across this phrase - "the potential to improve the tax take overall to be invested in public services”.

It is not possible to "invest" in public services. The cost of a public service is always an expense. An investment either involves the purchase of an asset and/or is something with which you hope to see a profit or return. I understand why politicians look to misuse this term as it doesn't sound quite as bad as "spending", but "investment in public services" is a political phrase only.

As far as the point of the exercise is concerned, yes, if it were possible to find a foolproof way to eliminate the unnecessary flow of VAT between VAT registered businesses that would be good, but such a new system would have to have the elimination of fraud as its first building block. Good luck with that.

Before that though, the very real possibility of an incoming government looking to charge VAT on private schools suggests that they haven't explored the complexity of this subject, including why the "Provision of Education" is exempt from VAT in the first place. The law of unintended consequences is waiting in the wings on this one.

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By anneaccountant
30th May 2024 14:36

With a possible majority of over 200 seats Labour can easily overturn the VAT exemption for education! It’s pure spite and won’t raise the revenue anticipated. At best it might help pay for 5,000 new teachers (1% of total number of teachers!) most of whom will be needed to educate the fall out of pupils from the private sector so benefit at all for state education. think we would be the only country in Europe charging VAT on education. What next .. VAT on healthcare?!

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By Wiganer Elaine
30th May 2024 15:26

First of all, is VAT a business tax or a tax on the consumer?

If a tax on the consumer (as originally meant to be), then all businesses and the self employed have to register as trading entities (get a VAT number). Purchases and sales between businesses do not charge VAT on the production of a VAT number - only the end consumer pays VAT.

ALL businesses register from day one:- prices are shown as the NET + VAT, so consumers know what is being paid to the tax man - easily transparent.

You could have a lower and a higher rate based on the value of goods sold: eg. the high end designer type items can be slapped with VAT at say 30%.

ALL real essentials (food, heat &light, medicines, education etc) should NOT be chargeable to VAT.

Everything else can stay at 20%.

Because this is effectively a sales tax - everything is based on when payment of goods/services are made - no need to have rules on invoice tax points.

Debtors & Creditors in accounts are shown NET.

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By listerramjet
30th May 2024 17:33

Why not just scrap it! This was a tax introduced at the behest of the EU. It is a tax on spending with a somewhat arbitrary footprint. The cost of collection falls on business. But it distorts consumer spending. And in some cases is a tax on a tax. We have too many different sorts of tax, with the longest tax code in the world. Time to get serious about reducing the number of taxes and simplifying those that remain.

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