Value-added tax (or VAT as it is more commonly known as) was initially introduced back in 1973 when the UK entered the European Union. With the official Brexit date now set in stone, changes to the current VAT system, that hasn’t altered much since its inception some 40 plus years ago, could be afoot.
The UK VAT threshold of £85,000 is currently the highest in the European Union, where the average is just £20,000. As the third largest source of tax revenue – some £120 billion was collected in the 2016/17 tax year alone – changes will no doubt alter the UK economy as we know it, but what do the changes mean for the businesses currently paying VAT? Here we take a closer look at the impact VAT changes could have a little closer to home so you can prepare your company for the future.
Why is change needed?
As we mentioned VAT hasn’t altered much since its first introduction in the 1970s, and with that this key legislation is showing its age. The complexity of the current VAT system is one thing every business can comment on, and one that leaves so many dreading VAT Return time. From the Jaffa Cake debate (cakes are zero rated for VAT whilst chocolate covered biscuits are taxable) to the fast food eat in (taxable), eat out (like cakes this is zero rated for VAT) debacle, the current VAT system means uncertainty and a bevy of administrative burdens for various businesses.
A report published by the Office of Tax Simplification (OTS) could however finally provide a light at the end of the tunnel when it comes to streamlining the system. Containing 23 recommendations in total, the report details changes that could make a major difference to how you process VAT Returns in the future.
What does the OTS report recommend?
Overall the report recommends a complete overall of the VAT system, including examining the level and design of the current VAT registration threshold; ensuring the clarity of guidance regarding further improvement; conducting a comprehensive review of exemption, zero rate and reduced rate schedules; revising record keeping and auditing requirements; and introducing ways in which uncertainty and costs can be reduced for VAT registered businesses.
If recommendations are implemented, the partial exemption calculations will be simplified, whilst capital goods scheme categories will also be reviewed. The changes could also mean an increase in the partial exemption de minimis limits, which will be brought in line with inflation.
How will the current VAT threshold be affected?
As the highest in the EU, the VAT threshold may also be altered. Whilst the OTS report does not make a consummate recommendation for its increase or reduction, the consequences of both are considered.
Should the VAT threshold increase as part of the changes to £500,000, some 800,000 UK businesses will be affected. While for the 400,000 to 600,000 businesses that may choose to deregister, the increase will mean simplified tax obligations, it will also result in a cut in public funds of up to £6 billion. If on the other hand, the threshold was reduced to £43,000, between 400,000 and 600,000 businesses will be impacted. Public funding may increase by £1-1.5 billion as a result but the costs of compliance for businesses and HMRC will be increased. Alternatively, the threshold may be frozen meaning an extra 4,000 businesses may be required to register.
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