Last month the Office for Tax Simplification (OTS) published a report, following feedback from trade associations, businesses, professional bodies and individuals, which made recommendations for the simplification of Value Added Tax (VAT).

Many of the proposals outlined in the report stem from the belief that what was supposed to be a simple tax has now become much too complicated and is not aligned with how society currently operates.

Here we summarise some of the key recommendations that can be found in the OTS’s report:

The VAT registration threshold –

The UK currently has the highest VAT threshold in the world. Any business whose turnover exceeds £85,000 must charge VAT on sales. The OTS argue that this was a means of simplification whereby smaller businesses would not be caught up in the regime, but also acknowledged that it is a significant cost to the Government at £2bn a year. The OTS, after setting out various strategies for increasing or reducing the threshold, recommends that the Government examine the current threshold and consider the implementation of some form of ‘smoothing mechanism’ such as:

• smoothing the cash impact of becoming registered
• smoothing the administrative impact
• smoothing both cash and administration
• a time-limited reduction in the VAT Flat Rate Scheme rate for newly-registered businesses and a financial taper

Any such mechanism could offer businesses a way to pass more easily across the threshold.

Administration and guidance from HMRC –

Taking feedback from respondents on board, the OTS recommend that HMRC take steps to improve the clarity and comprehensiveness of its guidance on VAT and the associated administrative processes.

VAT rates –

As it stands, where goods and services are not subject to the standard VAT rate, a reduced rate, zero rate, or exemption may apply. The OTS recommend a comprehensive review of the rates structure to eliminate unnecessary complexities and ensure that the rates system is flexible to meet Government objectives, as well as able to keep up with developments in the market and in technology.

In light of these suggestions the Government should now grab the opportunity to begin to address the many anomalies of VAT and notably improve the efficiency, simplicity and fairness of the system in the long-term. However, in the Autumn Budget, delivered not long after the OTS published its report, the Chancellor failed to implement any measures that would bring the recommendations into effect.

In a letter from the Chancellor to the OTS, in response to the recommendations, he acknowledges the valuable insight into the current VAT system and its complexities offered by the report. Rather than propose measures to be introduced, however, he states that the recommendations and issues raised will be considered further and that the Government will continue to engage with the relevant organisations in order to continue to make progress in respect of achieving a simpler tax system.

It seems therefore, that there is a long road ahead if we are to reach a simpler VAT system and for now, at least, its complexities remain. Often, businesses can find it extremely difficult to get their heads around the abundance of associated rules and regulations and indeed how to apply these correctly without the need for professional assistance.

As is the case with any tax there is always the opportunity for planning to ensure that VAT liabilities are minimised. We can help businesses to recognise opportunities to plan and minimise liabilities, we can discuss the various VAT schemes that exist and whether they might be beneficial and we can help businesses to identify any potentially costly mistakes, before it’s too late.

The full OTS report can be found here

If you’d like to discuss tax planning with one of our team, call 01767 315010 or email biggleswade@georgehay.co.uk

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