OTS proposes VAT simplification review

The Office of Tax Simplification (OTS) has set out plans to produce a review of VAT – a tax which many call too complicated and an obstacle to expansion.

The review will come before VAT is due to go digital in 2019, as part of HM Revenue & Customs’ (HMRC) ‘Making Tax Digital’ scheme. Under the scheme, all businesses will have to report VAT digitally using cloud accounting software.

The proposed review of VAT – which raises around £120 billion each year – will look at the issues and impacts involved if the VAT registration threshold (currently £85,000) was either higher or lower.

It will also consider how administrative changes could help businesses, their advisors, and HMRC better achieve a common aim of “easing friction points in the system”.

The extent to which the definitions of the types of supply which are currently relieved from VAT create complexity for businesses and administration will also come under the radar.

In terms of the threshold, the OTS warns of a significant disadvantage for largely labour-based sole proprietors who hover above it, compared to those not registered. A registered plumber, for example, will be forced to charge 20 per cent more in VAT decreasing his or her competiveness.

It said this disadvantage can stifle expansion by not taking on an extra employee or stopping work for a period of time solely to avoid hitting the VAT threshold.

It can also lead to illegal practices, such as supressing income, the OTS added.

Commenting on the review, Mike Cherry, chairman of the Federation of Small Businesses (FSB), said: “This fundamental review of our vastly complex VAT system is long overdue.

“The OTS is right to address the issue of ‘thresholditis’. It’s equally right to suggest that a smoothing mechanism which doesn’t force any more small firms into the VAT system could encourage more businesses to grow beyond the £85,000 cliff edge.”

Frank Haskew, head of ICAEW Tax Faculty, added: “Although the current VAT registration threshold of £85,000 is high, it is in practice a major simplification measure for smaller businesses. We believe it should be retained at its current level or consideration be given to increasing it further, perhaps with measures to ease businesses into VAT to avoid the ‘cliff edge’ effect.”