Office of Tax Simplification - Significant potential changes to VAT

The Office of Tax Simplification reported on 7 November 2017 on the UK VAT system and made a significant number of recommendations; one of which has already been acted upon, namely potential changes to the VAT registration threshold. The recommendations are significant for a number of reasons. 

Any reduction in the VAT registration threshold is likely to result in many more small businesses coming into the scope of VAT. This is a significant change putting the UK on par with the rest of the EC and other third countries with similar VAT systems.

The other major recommendation relates to considering the scope for zero rate, reduced rate and exemption to apply to supplies. At present the UK cannot change the supplies that qualify for relief, other than making a zero rate or reduced rate supply standard rated as we are constrained by the overarching EC VAT directive. This will change post Brexit where UK VAT is likely to continue to evolve separately to the EC.

It is likely that charities, not for profit organisations and education suppliers may benefit from potential changes. For example, the scope to zero rate supplies to charities is very restrictive currently and could be extended.  In addition,  the exemption for eligible bodies making supplies of education services could be extended to include more profit making bodies supplying education.

The report also considered a number of related areas such as the partial exemption mechanism and capital goods schemes. These are complex areas and the capital goods scheme threshold and partial exemption deminimis limits have not been changed for many years bringing small businesses into their scope, which was not the original intention of the law.

It also gave a welcome look at how HMRC can improve how it administers VAT; including how the department responds to requests rulings, issues penalties for voluntary correction of errors by businesses and administers the option  to tax system for businesses holding land and property.

Some of the changes will potentially help businesses, such as gaining a clear ruling from HMRC, as currently there is a trend for HMRC to send a bland response that does not provide the taxpayer with the certainty that it requires.

It would be sensible for all businesses and their advisors to keep a keen eye out for potential changes to the VAT system as it is likely to have a major impact on many different businesses and entities in the UK.

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