U.K. Treasury Tax Adviser Targets Outdated VAT Laws Makeover

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By Ben Stupples

At just 44-years-old, the U.K.’s value-added tax laws are already showing their age and need a facelift, according to the U.K.’s independent tax adviser to Her Majesty’s Treasury.

Since their introduction in 1973 as a result of the U.K. joining the European Economic Community, the U.K.’s VAT laws have changed “dramatically” in size, complexity and importance, the Office for Tax Simplification said in a Feb. 28 progress report on its commissioned review of the legislation.

Technology, products and services have evolved “rapidly” during this period, and these changes have subsequently raised questions over the boundaries of VAT classification, the report added.

The confusion over boundaries of VAT classification is where the regime “most shows its age and which raise questions about how well it is working in today’s environment—or whether it is ready for tomorrow with all its digital possibilities,” the OTS said Feb. 28.


Commissioned by Chancellor Philip Hammond at the 2016 Autumn Statement, the OTS’s progress report comes as the U.K. prepares to trigger Article 50 next month, setting off the legal process for leaving the European Union. The move will heighten scrutiny of how the government will implement VAT once outside the bloc.

The U.K. currently bases its VAT regime on the EU’s VAT Directive, which sets the standard rate at 15 percent and requires courts and tribunals to apply the tax in line with the directive and case law. The U.K. will be free to implement its own regime for VAT laws once it leaves the EU.

“VAT is fundamentally a European tax,” John Whiting, tax director of the OTS, told Bloomberg BNA in a Feb. 28 telephone interview.

“VAT is going to be up for discussion in light of Brexit, so it’s time to take stock and ask how we can make VAT simpler,” Whiting added.

20 Percent

Applied at a standard rate of 20 percent, any U.K. business must register for VAT if its annual taxable turnover exceeds 83,000 pounds ($103,300). The tax is one of the highest-earning for Her Majesty’s Revenue and Customs, raising 22 percent of total tax receipts, or 116 billion pounds, in 2016.

Yet the OTS said the U.K.’s threshold is “significantly higher” than the EU’s average of around 30,000 euros ($32,000), and it questioned whether the U.K. has the tax set at the correct level.

“Would it be less distortive if the U.K.’s threshold were lowered to bring in more businesses?” the OTS asked. “A key part of our assessment will be whether changing the threshold would have an economic impact, tackle any disincentive to grow and potentially create more jobs,” it added.

VAT Rates

The OTS’s remit over the report included consideration of whether the U.K.’s VAT system is working and to identify simplification opportunities.

In general, the U.K. has four types of VAT: a standard, reduced or zero-rate, or a total exemption. But these different rates have resulted in confusion over which one is applicable to certain items, the OTS said Feb. 28.

Local bakers can sell their goods on a zero-rated basis, but consumers today can easily purchase the same items—such as cakes or biscuits—in the U.K.’s supermarket, it added.

In addition, as chocolate is not zero-rated for VAT, the U.K.’s VAT laws mean that local bakers must charge VAT for chocolate-covered gingerbread men unless it amounts to just two dots for their eyes.

“The application of the different rates seems to be heavily influenced by historical accident or legacy decisions rather than a conscious current policy,” the OTS said in its report.

“What we will be concentrating on in this review is looking at the number of definitions and boundaries and seeing if complexities caused can be reduced or better managed,” the OTS said in its report.

Further Review

As well as reviewing the VAT threshold and boundary classifications, the OTS is also looking at:

  •  How HMRC will include VAT as part of its Making Tax Digital plans;
  •  Complications from unclear guidance to the U.K.’s VAT penalty regimes and appeals processes;
  •  Whether existing schemes that aim to simplify the VAT system are working appropriately; and
  •  Simplifications for businesses over VAT exemptions and the possible recovery of VAT.

“We want to go around and talk to everyone and find out what’s causing them difficulties” with VAT, Whiting told Bloomberg BNA Feb. 28. “Why not sort out the boundary classifications, for example, before the government has to sort out new treatments” after the U.K. leaves the European Union.

The OTS has asked for any contributions for its VAT review to be sent before June 30, 2017.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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