50th anniversary a ‘golden opportunity’ to modernise VAT

Value Added Tax (VAT) should be simplified to reduce confusion for individuals and businesses, says the Chartered Institute of Taxation (CIOT), as the tax celebrates its 50th anniversary on Saturday.
VAT was introduced into the UK on April 1 1973, with then Chancellor, Anthony Barber, famously describing it as “a simple tax”. In its first year it was set at 10 per cent and raised £1.5 billion. It is now set at 20 per cent and is expected to raise £187 billion in the year ahead.

However, complications around the number of exemptions and reliefs create a confusing network of rules. The CIOT is calling for a modernised system to provide certainty.

Gabby Donald, Chair of CIOT’s Indirect Taxes Committee, said:

“VAT came in in 1973 as a requirement of our membership of the then European Economic Community. Since then it has grown steadily to become one of the central pillars of UK government revenue-raising, bringing in more than a fifth of the money HMRC collects.

“However, today’s VAT system is in need of modernisation. There is a case for reducing the number of exemptions and exceptions, on a case-by-case basis, provided this is linked with a meaningful review of the welfare system to compensate low income consumers who need protection and would otherwise be worse off because of the change.”

The CIOT has suggested streamlining VAT administration and recently wrote to HMRC recommending that the ability to use Postponed Import VAT Accounting be extended to organisations which have non-business activity, such as universities. This would allow them to declare import VAT in their VAT return, instead of having to administer two import methods.

The Institute has also warned that any changes to the system should involve thorough consultation with those affected, as well as considering how VAT will operate alongside likely future policies around net zero, cyptocurrency and digitalisation.

Gabby Donald said:

“As previous attempts at reform have shown, even small changes to VAT can be controversial. Therefore the approach to this area should be strategic and consultative, involving those in affected industries, and over a proper timescale to allow the implications to be debated.

“It should be mindful of how policies across the country may develop in coming years, especially those centred around climate change and the increasing digitalisation of markets and the tax landscape.

“There are also real opportunities to simplify VAT accounting and administration, which could be achieved on a tax neutral basis. In 2017 the Office of Tax Simplification highlighted opportunities to simplify partial exemption and the capital goods scheme, as these are tremendously complex VAT accounting calculations that commonly yield small adjustments.

“Although HMRC consulted on this in 2019, their conclusions were limited and there has been no change beyond a redesigned HMRC application form that will only be relevant to a small number of the taxpayers affected.”