VAT is an efficient and effective form of taxation and, as a result, many countries have put VAT systems in place in the past half century or so. UK VAT has features in common with many other countries, including rules to ensure the right amount of tax accrues to the relevant country from cross-border trade. It is a tax on consumption – the final consumer ultimately pays the tax – but businesses play an important part in the VAT collection process.

Any potential reform of the UK VAT system needs to be clear on how it would address a perceived need or problem, set against an understanding of the political and fiscal aspects and of the perspectives of the different stakeholders, which are often diverse.

Although there are several areas where UK VAT reform could make a lasting difference, far-reaching change, though technically possible, could be difficult to achieve. 

For example, the UK has a very complex regime of VAT rates. In addition to the standard rate, it applies a variety of zero rates, reduced rates and exemptions. Reducing or removing these could help to greatly simplify the tax and that might also enable a lower standard rate overall. However, those that benefit from such VAT rates are keen to retain them; as shown by the so-called ‘pasty tax’ and the current debate on applying VAT to private education. There are also frequent calls for more, so maintaining the status quo itself can be challenging.

The alternative to wholesale or revolutionary reform, is an evolutionary approach. Policymakers might review specific areas, such as the VAT exemption applied to insurance. Another area could be to review the threshold at which SMEs start paying VAT. This simplifies things for businesses that fall below that threshold but it can give them a competitive advantage over some businesses that exceed it. Policymakers will also focus on closing the ‘VAT gap’; the difference between expected VAT revenue and the actual amount collected.

Working with ministers

A key challenge is managing the array of stakeholders involved in any reform. This includes the relevant government ministers. The role of the policy adviser is to present the facts to ministers and to implement decisions made. As part of the decision-making process, policy advisers need to keep ministers informed of the latest developments. They also need to understand the goals that ministers have in mind for their time in office. A change in ministers or government will likely mean changes in policy approaches, ranging from smaller adjustments to the introduction of entirely new agendas.

What ministers always, and understandably, prioritise is how to mitigate the negative impact of any reforms on certain groups in the electorate. While, in aggregate terms, a well-run VAT system should benefit everyone, there are always – at least in the short term – winners and losers of any given reform. And when there are losers, this can act as a brake on decision-making.

Other stakeholders – at home and abroad

The concepts for reform may seem simple, but the practicalities of implementation may not be. Treasury officials work closely with HMRC and other government departments to understand the operational practicalities, such as technological capability, and timelines for implementing new policies. Departments may also collaborate to analyse the effects of proposed reforms. Treasury and HMRC also work closely with UK businesses to understand the business perspective.

There is also an international element. In addition to drawing inspiration from fellow policymakers in other countries, there are some areas where it’s beneficial to push for a more joined-up international approach; for example, taking a coherent approach to e-invoicing and to the role of marketplaces and other intermediaries in VAT collection. Organisations, such as the Organisation for Economic Co-operation and Development, therefore, have an important role to play.