Chancellor of the Exchequer Anthony Barber delivered the Budget creating the Finance Act 1972 on 21 March that year – just over 50 years ago. That Finance Act contained the original UK VAT legislation. This, together with many subsequent regulations enacted in 1972 and 1973, resulted in the introduction of VAT in the UK on 1 April 1973.

In his Budget speech, Barber said: “From the point of view of industry and commerce, it will be at least as simple to operate as in any of the eight European countries which now have a VAT, and much simpler than in most of those countries.”

As we approach the 50th anniversary of the introduction of UK VAT, ICAEW’s Tax Faculty would like to challenge the current UK government to be bold and consider significant and meaningful simplifications to the VAT system before it reaches its half century. 

To that end, ICAEW’s Tax Faculty believes that there are many areas that could benefit from a major overhaul. Furthermore, following the UK’s departure from the EU, this should now be legally possible and could be hailed as a real benefit of Brexit.

Exemption and input VAT recovery

A problem area since the introduction of VAT has been partial exemption. Where a business makes some exempt supplies, it can only recover a proportion of the input VAT on its costs. 

There are many valid bases for partial exemption calculations, but this choice also represents time, cost and risk for both business and HMRC. After 50 years of problems, a radical move might be to consider how we could abolish this completely and perhaps even the concept of VAT exemption as a whole. This would have the added benefit that the capital goods scheme would, by default, be abolished.

There would be both winners and losers to consider – particularly as VAT is often considered to be a regressive tax – but the exemption does create complexity. 

Another example of the complication that partial exemption creates is that it gets in the way of digital links for some when preparing a Making Tax Digital submission. In fact, partial exemption calculations are specifically not included in the list of VAT records that must be kept digitally. 

One possible solution is that the UK could make better use of zero and positive VAT rates, reducing the supplies not subject to VAT to compensate for the cost of abolishing the exemption.

A further simplification benefit could be achieved by allowing input VAT relating to any business or charitable use to be recovered by all businesses and charities. Why should input VAT recovery be restricted only to certain types of business?

Previous reviews

The Office of Tax Simplification (OTS) published its report Value added tax: routes to simplification in November 2017. In that report, it made eight core recommendations alongside 15 additional administrative and technical recommendations.

One recommendation from the OTS project was to thoroughly review the zero-rate schedule post Brexit. The tests for some of the existing zero rates are highly complex and lead to numerous VAT appeals, often at considerable cost to the government and taxpayers. A great example is Jaffa Cakes – zero rated as they are considered to be cakes. However, a biscuit is standard rated if wholly or partly covered in chocolate.

If simplified, there could be significant administrative savings and, in some cases, an opportunity to raise much-needed revenue.

Know your customer

It is sometimes difficult, and potentially unfair, for a supplier to have to determine the VAT liability of its sales dependent upon the status of its customer. If exemption were abolished and input VAT more widely deductible, it should be possible to abolish many reliefs that are dependent upon the status of the recipient, such as supplies of certain goods and services to charities and sales of charcoal where the rate depends on whether the customer intends to resell or not. 

It would be much easier for the correct VAT liability of a supply to be determined if it was consistent regardless of the status of the customer. One notable exception would remain, for the zero-rating of exports.

There should be only two fundamental VAT systems for outputs, being those for supplies to domestic and international customers. Where the customer is overseas, VAT at the zero rate should always be applied, except where there is a clear place of supply in the UK, such as land-related services.

Further simplification should be possible by the abolition of all domestic reverse charges, limiting this concept to imports of services and postponed accounting for imports of goods.

Land and property

The OTS report also included recommendations for the simplification of the VAT treatment of land and property. On 23 March 2021, the government responded by announcing the launch of a call for evidence to look at potential options and ideas to simplify the land and property VAT exemptions.

The VAT rules surrounding land and property transactions are particularly complex. A start could be made by abolishing the option to tax, making all supplies relating to non-domestic property standard rated. On 30 November 2021, in its consultation outcome, the government said that it would like to discuss further the implications of making most supplies of land subject to VAT, with a limited number of exceptions.

Combined with the abolition of partial exemption, any input VAT incurred on property used for business or charitable purposes should be deductible in full and all supplies of domestic property could continue to be zero rated.

Administration

Reporting requirements have become more onerous over the years. Historically, we had EC Sales Lists and Intrastat returns (and still do in Northern Ireland). There are also reverse charge sales lists. Why not eliminate all such requirements other than quarterly VAT returns?

Widening the tax base

Insurance premium tax (IPT) was introduced on 1 October 1994. Like VAT, it has become subject to increased complexity. Why not abolish IPT and make insurance premiums subject to VAT?

Rather than considering new taxes in the future, why not make the relevant supplies subject to VAT if they are not already, or vary the VAT rate if they are already subject to VAT?

Make it green

One final challenge, which is already being discussed, is to sort out the problem of the VAT rate levied for charging electric vehicles. Charged from home, the consumer pays VAT at the domestic rate of 5%. If charged at an on-street charging point or at a charging point at a place of business, the standard rate of VAT applies.

With privately owned cars or cars owned by a business for business or private journeys all being recharged with varying rates of VAT applied, it’s easy to see the muddle being created. A consistent 5% rate would be simpler.

Perhaps VAT might be a useful tool in the UK’s race to net zero, but if it is to influence behaviour, it needs to be simple so that people have a chance of understanding it.

Food for thought

This article is not intended to show specific recommendations, but to provide food for thought on how VAT might be simplified as it approaches its half century. However, the VAT liability of this particular ‘food’ has not been considered.

About the author

Neil Gaskell, VAT manager, Tax Faculty