The Office for Tax Simplification (OTS) recently published its findings following a review intended to ensure the VAT system remains relevant.
On the basis of its findings, the OTS made eight core recommendations:
- The Government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism.
- HM Revenue & Customs (HMRC) should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty.
- HMRC should consider ways of reducing the uncertainty and administrative costs for businesses relating to potential penalties when inaccuracies are voluntarily disclosed.
- HM Treasury and HMRC should undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS.
- The Government should consider increasing the partial exemption de minimis limits in line with inflation and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations.
- HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing on special method applications.
- The Government should consider whether Capital Goods Scheme categories other than land and property are needed, and review the land and property threshold.
- HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled online.
Several of these points refer to the threshold or exemptions that allow businesses or organisations to remain outside of the current VAT regime or pay less tax.
However, in his Autumn Budget on 22 November, the Chancellor did not announce any measures to bring the OTS recommendations into effect.
The UK has one of the developed world’s highest registration thresholds for value-added tax, which effectively provides the country’s businesses with £2 billion worth of relief, by allowing them to remain outside of the regime.
In comparison to the UK’s £85,000 threshold, the EU has an average VAT threshold of £20,000, while the global average is around £15,000.
It is feared that the UK’s high threshold not only prevents the Revenue from collecting additional tax but also actively discourages businesses from expanding above the threshold.
Many businesses see VAT registration as an obstacle to competitiveness and profitability, as in most cases they will not be able to pass on the increase in their costs to customers, which provides unregistered businesses with an advantage.