OTS to review VAT

Simplification of VAT to be explored

Once described as being a simple tax and easy to administer, VAT has, since its introduction in 1973, evolved and changed into a tax that is complex to administer. This in turn creates challenges and difficulties for all types of businesses from sole proprietors to large companies.

Like many other taxes, simplification of VAT is desirable. On this basis, the Office of Tax Simplification (OTS) has agreed with the Chancellor and the Financial Secretary to carry out a review of a range of aspects of VAT.  The review will consider whether the VAT system is working appropriately in today’s economy and to identify simplification opportunities.

The overall aim of the review will be to develop recommendations for the Chancellor and the Financial Secretary as to how to reform and simplify aspects of the VAT system from both a technical and administrative stand point.

The review will consider how to help ensure that the VAT system works properly in today’s and in the future economy and will consider:

• The issues and impacts which would be involved if the VAT registration threshold were either higher or lower than present; currently £83,000;
• The extent to which the definitions of the types of supply which are currently exempt, subjected to a reduced rate or are zero-rated, fit the modern environment, create complexity for businesses and administration;
• The level of demand and practical challenges arising from having a more widely available formal ruling system for businesses uncertain of a particular VAT treatment;
• The potential for simplifying the operation of partial exemption methodologies, the option to tax and the Capital Goods Scheme with a focus on the impact on smaller businesses;
• Special Accounting Schemes;
• The general administration of VAT including the penalty regime and the appeals process;
• The opportunities available to align VAT more with other taxes or vice-versa, as part of the Making Tax Digital plans; and
• The relative significance and impact of the issues identified with businesses of different sizes or in different sectors.

In the main, the review will not be concerned with the VAT rate structure nor issues likely to be significant in the Government’s consideration of Brexit. On the issue of Brexit, however, the OTS will actively bear this in mind in looking at opportunities to simplify VAT for the future.

In conducting the review the OTS will provide a report next autumn that:

• Provides analysis and evidence of the main areas where simplification could be achieved and the benefits that could result for businesses and in the administration of VAT;
• Recommends specific steps that could be taken to ensure simplification; and
• Considers and offers an initial evaluation of the impacts for businesses, HMRC and the Exchequer.

An update will be provided on the OTS’s work in the spring of 2017 together with a call for evidence.