The Office of Tax Simplification (OTS) recommendations for the VAT system and concludes that reform is needed, but the Chancellor must proceed with care.
There has been conversation that the Chancellor could slash the VAT registration threshold from £85,000 to £26,000 in his November Budget, bringing an extra one million businesses into the VAT net. This was following the publication of the OTS report “VAT: routes to simplification” though it is unlikely happen as the report shows that this is not what the OTS has recommended.
The OTS report considered many of the thresholds which exist in the VAT world. For instance, the Capital Goods Scheme (CGS) threshold of £250,000 for land and buildings had not been increased since 1990. An increase of threshold would reflect the movement in property prices over the last 27 years and take out smaller projects from the CGS.
Under the CGS the input tax originally claimed on either buying a non-residential building or improving, refurbishing or extending it, must be adjusted over a ten-year period to reflect the potential change in the use of the building between exempt and taxable activities.
The OTS recommendation states, “The government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism”.
The reason why there won’t be a sudden announcement by Philip Hammond to drop the threshold from £85,000 to a much lower figure is that the Government doesn’t have a strong enough majority for such a bold measure.
Zero rating and exemptions
The OTS recommends a comprehensive review of the goods and services that are exempt or zero-rated in the VAT Act schedules 8 and 9. The main concern of advisers at the time was that the proposed measures seemed to make things more complicated rather than simpler.
The OTS report has focused on the major problems in the VAT system which is well known. The underlying issue with VAT is that a tax invented in 1973 is not particularly well suited in a lot of cases to the modern global economy we now have in 2017.