Introduction
VAT in the UK is 50 years old this month. VAT is one of the highest yielding taxes for the UK government with official government statistics that over £150 billion of UK VAT was collected last year, being around 16% of total tax receipts. This compares to circa £68 billion for corporation tax and £225 billion for income tax. With inflation continuing to raise prices, the amount of VAT being collected is expected to continue to increase, even if consumer spending and confidence remains low.
Background
VAT was introduced as a “simple tax” but it has proven to be anything but that. There are currently three rates of VAT in the UK plus exemption and outside the scope treatments; each with its own consequences not just for what VAT is due on sales, but for what VAT can be reclaimed on purchases.
The broad base of activities to which the standard rate of VAT applies, but with exceptions, or in some circumstances exceptions that override the exceptions, means that the VAT regime was perhaps more accurately described by a UK court as being a “fiscal theme park”. Unfortunately, these complexities appear likely to continue in the future, and not get easier for organizations to manage.
Why It Matters
The addition of VAT can have a significant impact on the selling price and/or profit margin achieved by a seller and getting the VAT treatment wrong can lead to significant and unexpected costs. The possibility of penalties being imposed for careless errors, as well as those where the error was deliberate, is also a concern for organizations.
Something that organizations sometimes overlook is the high amounts of UK VAT they are managing. If their sales and purchases are all subject to the standard VAT rate of 20%, that is a combined figure of 40% and even a small error rate can lead to high-value costs. Many countries have higher VAT rates than the UK, increasing the amounts of VAT under management.
As well as the financial costs of getting it wrong, tax has also become a reputational risk to businesses. Organizations now operate in a world where tax is considered a moral issue and is front page news. Consequently, many leaders focus on ensuring that they do not face negative publicity from their tax affairs. These complexities are compounded when organizations have multi-territory responsibilities as, despite similarities in the systems, VAT is implemented differently in each country.
Future Changes
Technology is changing all areas of life and the same is true for VAT. Technology is enabling the development of new types of products, allowing different ways of delivering existing products and also making the world smaller and so opening-up new markets for businesses. As VAT is a transactional tax there is a need to consider the correct VAT treatment of these new sales offerings. As a very simple example, there was a long running dispute in the UK about whether e-books should be subject to 20% standard-rate VAT (as a download of information) or 0% VAT in the same way as the hardcopy versions, this was settled with a rule change in 2020 allowing zero-rating for both, but it took several years for the authorities to agree to this treatment and the change was also not made retrospectively.
Technology is also fuelling a rise in FinTech and MedicalTech. UK VAT law has exemptions for certain financial and medical services but the role of services of the businesses in the supply chains do not always fall squarely within the wording of those exemptions. An example is the exemption applicable for the provision of medical care; enhancements in technology are allowing the capture of different types of data for the first time, but it is unclear whether the UK exemption extends to services involving the capture and transmission of data even if that data is ultimately used to inform a medical intervention.
Technology is also changing UK VAT compliance processes. The increasing automation of VAT compliance processes should help reduce the risk of human error giving rise to VAT costs, but the increased use of technology brings additional challenges. The UK tax authority has previously announced its vision to be a leading digital tax authority and the introduction of Making Tax Digital for VAT in 2019 is the start of this move. Most organizations in the UK now need to prepare and file VAT returns digitally but there is no change to the data received by HMRC. This is likely to change in the future as we can expect HMRC to require transactional data to be provided; there is no specific timeframe for this development, nor details of what data is likely to be required, but it is the “direction of travel” in the UK.
Another development under consideration is split payments whereby the VAT element of monies paid to suppliers are automatically remitted to the tax authority, and do not get paid into the supplier’s bank account at all. This would reduce the instances of missing trader VAT fraud but would require significant investments in new technologies and processes for all VAT registered organizations subject to the rules. It would also only be applicable to electronic payments.
Conclusion
The VAT regime has evolved considerably over the last 50 years and will need to continue to do so as technology continues to fuel change. As a transactional tax that generates a significant proportion of the UK government’s total tax take, we can expect VAT to continue to impact all aspects of daily life for businesses, non-profit organizations, and consumers.