VAT review: Complex and burdensome – but can it be changed?

  1. Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

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    The Treasury Committee has launched a sweeping inquiry into the “complex and burdensome” VAT regime.

    The review will cover four aspects: The UK’s £12.6bn VAT tax gap, Brexit, the issues faced by businesses, and how the tax measures up against good tax policy.

    As we've covered previously, the implications of Brexit on the VAT regime are particularly worrisome. If the UK leaves the EU’s VAT regime, thousands of small businesses face a sudden 20% upfront VAT bill on goods imported from the EU.

    The Treasury Committee will consult on solutions to this problem. Commenting on the matter, Committee chair Nicky Morgan said “Brexit may provide both opportunities and challenges to the UK’s approach to VAT”.

    She added, “The government may choose to stick to a broadly similar structure to what currently exists, change it, or abolish it completely.” But Morgan’s words elicited a bemused response from Neil Warren, a VAT lecturer and author.

    “It sounds good, it’s good words,” Warren said. “But the VAT system will remain after we leave the EU. The government at the moment struggles to put through minor tax changes. It’s reviewing the VAT threshold at the moment, and that won’t have any effect.”

    Instead, Warren mooted a return to postponed accounting as a solution. “VAT isn’t paid when the goods come in. Instead, a business declares it on their normal quarterly vat return and can then deduct VAT through the same return.”

    Tax gap

    Another chief concern for the Treasury Committee is the £12.6bn VAT tax gap.

    “HMRC collected around £124bn in VAT last year – over a fifth of the UK’s total tax take – and failed to collect around £12.6bn in VAT,” Morgan said. “The reasons for why VAT is so vulnerable are somewhat opaque, so the Committee will examine how this might be addressed.”

    Ecommerce platforms are a likely place to start. Many sellers based outside the EU aren’t applying VAT to sales on goods sold through marketplaces like eBay and Amazon. Non-UK business holding goods and selling them in the UK having a zero VAT registration threshold.

    New proposed legislation states that if the online marketplace “knew or should have known” that a business should pay VAT, it can be held jointly and severally liable for the unpaid VAT. The platforms have 60 days to take action to correct the problem.

    “It’s optimistic,” said Warren. “HMRC are asking the online marketplaces to do the detective work for them, which rarely works.

    “Then there’s this phrase, ‘Knew or should’ve known’. History tends to suggest when this phrase becomes part of the equation, it doesn’t produce the best results.” For Warren, the tax gap is an issue of resources. He doubts whether HMRC has the required staff numbers to cut into the tax gap.

    The inquiry will also delve into what aspects of VAT (either process or design) cause the biggest problems for businesses. In 2015/16, over £3.5bn was lost due to mistakes in VAT returns according to HMRC figures. The jury is out as to whether MTD for VAT will help ameliorate this issue.

    Have your say

    The Treasury is now soliciting evidence and the deadline for written submissions is Thursday 31 May 2018. You can make a written submission here.